I’ve got a realistic problem that I could use some help with. I started out knowing exactly what to do, but I seem to have confused myself on the way and now I’m stuck in circular logic and can’t figure out the right answer here. Let’s say I am valuing a startup hydroelectric company that currently owns licenses to several hydro sites, and can begin building power generation plants at each site after it raises $100m in capital. I am trying to value the company and determine the price of equity when raising the capital; and to determine the current value of the current owners shares. The business plans on raising capital using a 70/30 debt/equity capital structure ($30m equity and $70m debt need to be raised). The company is privately held and there are currently 15,000 shares outstanding. I have valued the company using a discounted cash flow model and decided that the equity is worth $145m ($215m FCFF - $70m debt). Here is where my confusion begins. I have valued the company using projections that are assuming that the $100m capital is raised successfully. Without raising the $30m equity and $70m debt the company will not be able to build generation units and will not produce cash flow. Are the current 15,000 shares worth $145m total ($9,666 per share) as per my valuation model? Or should it not be valued that way due to the fact that the projections are post capital raising projections? What is the value of the shares right now, and after the money is raised? How many new shares should the company issue to raise $30m in equity, and how much should they be sold for? I realize there can be many answers because the price depends on the number of shares issued, but if someone can explain the methodology they use I would be eternally grateful. I’ll be glad to clarify further if anyone needs some more info, but this has me stumped and I would appreciate any help.
do your own MBA homework.
I don’t think I’m right because I am not counting tax savings on the interest payments. But I guess it is better than the MBA homework comment (which is hilarious). But what if you were to finance the $100m expansion all with debt? Then let’s say your FCFF is $215m. $100m is debt so $115m is Equity. $115 m / 15 000 shares = $7666/share Now say you will actually finance $100m expansion with $30m Equity. So $30m/7666 = 3913 shares needs to be issued to finance the expansion. When that happens, you have 18913 shares outstanding and the value of equity is $145m or still $7666/share
It’s not MBA homework, but thanks for the help. Next time just say don’t make a post if you don’t know how to help.
kblade Wrote: ------------------------------------------------------- > I don’t think I’m right because I am not counting > tax savings on the interest payments. > But I guess it is better than the MBA homework > comment (which is hilarious). > > But what if you were to finance the $100m > expansion all with debt? > Then let’s say your FCFF is $215m. $100m is debt > so $115m is Equity. > $115 m / 15 000 shares = $7666/share > > Now say you will actually finance $100m expansion > with $30m Equity. > So $30m/7666 = 3913 shares needs to be issued to > finance the expansion. > > When that happens, you have 18913 shares > outstanding and the value of equity is $145m or > still $7666/share The crux of my problem is that I don’t see how the value of the company is anything before they raise the capital. A few million in equity has been invested over the last few years, and that money has been spent developing models and acquiring licenses to build the generation units on the ideal sites. I suppose the licenses acquired to build the hydro generation units can theoretically be worth $145m? And then the $100m can be raised as if the company already has $145m in equity (value of the licenses)? Does that make sense? Or would the few million in book value of equity be the actual value of the licenses, and the 30 million additional raised would dilute the prior ownership down to 10% (30m/3m)? Thusly the 145m value is dispersed so that prior ownership owns 10% of it and the new capital raised comprises 90% of the value?
Greenman you say him to say “don’t make a post.” Why would he say this? Are you to telling him that you agree and that next time he should just tell you not to post anything?
SkipE99 Wrote: ------------------------------------------------------- > Greenman you say him to say “don’t make a post.” > Why would he say this? Are you to telling him > that you agree and that next time he should just > tell you not to post anything? Typo. I am telling him to never post again if he can’t answer the question or contribute to the thread.
I don’t see where the typo is.
It’s there. Look hard. Actually the typo is what is not there.
…are you guys idiots? Just remove “say” from the sentence and it’s perfectly fine. It was a grammatical typo.
If you’re going to chime in just to call us idiots it’d be best if you just didn’t post at alf.
Yeah! Don’t post at Gordon Shumway either.
It’s an issue of whether you value the company on current assets or the present value of the future cash flows to shareholders. I’m intrigued that I can’t answer this question, but speculation really isn’t my thing…
Ali, you are missing the point. There was a typo! But since you insist on keeping the typo alive I can tell you from experience that the act of getting access to capital can be a tipping point for a valuation. There’s no reason that the company can’t be valued 2 ways depending on if the project is funded or just licensed.
Let’s actually try to be helpful here… this is a finance forum after all, not a forum for grammatical debates Your DCF jammed out an equity value of $145mm <=that is your “post-money” valuation of the equity, i.e. the value of equity after a successful capital raise at your assumed capital structure. The “pre-money” value of equity is then = $145mm - $30mm = $115mm, this is the value of the business before capital raise, i.e. license, IP, goodwill, mgmt talent That means someone putting up $30mm should receive shares representing 20.68% (30/145) of the company, assuming they agree with your valuation of $145mm. Look at this another way, someone contributing equity to the business should get in return a share of a business that is worth $145mm equity in total.
Everyone stop being so DUMP.
How did you value the equity?
A little POST = PRE + INV never hurt anyone.
Thanks for the help, Zuran. This is the method I was leaning towards myself because it works out well on paper, but it doesn’t seem realistic that investing 3 million into acquiring some licenses can suddenly be worth 145 million. My next question is… When discounting the cash flows, should I use the target capital structure or the realistic post-capital raising capital structure of the business as a whole. Obviously, the target is 70/30, but the realistic company-wide structure will be 145/70 (actually less because as I adjust the capital structure to include more equity the discount rate will increase and the equity valuation will drop). Zuran Wrote: ------------------------------------------------------- > Let’s actually try to be helpful here… this is a > finance forum after all, not a forum for > grammatical debates > > Your DCF jammed out an equity value of $145mm > <=that is your “post-money” valuation of the > equity, i.e. the value of equity after a > successful capital raise at your assumed capital > structure. > > The “pre-money” value of equity is then = $145mm - > $30mm = $115mm, this is the value of the business > before capital raise, i.e. license, IP, goodwill, > mgmt talent > > That means someone putting up $30mm should receive > shares representing 20.68% (30/145) of the > company, assuming they agree with your valuation > of $145mm. > > Look at this another way, someone contributing > equity to the business should get in return a > share of a business that is worth $145mm equity in > total.
I discounted the projected future cash flows at the target WACC of 70/30. brianr Wrote: ------------------------------------------------------- > How did you value the equity?