what abou tlooking as the pre-investment equitee a call opsion?
Agreed I would also put either an option valuation. Or use a total Decision Tree model, to figure how much the value of the business. Since the company currently owns an option that they will exercise only if they can raise the capital in place. What about the situations where they can not raise the proper capital…etc. Using a simple DCF model in this situation, does not rid of much risk.
Would a call option really be appropriate though? They don’t need to know what their equity is worth if they are unable to raise capital. Only what it will be worth assuming capital is raised.
I am just having a hard time coming to grips with the fact that a 3m investment can suddenly balloon into 115m once capital is successfully raised. It doesn’t seem to be realistic.
I may be mistaken… Your simply using a WACC rate to model the risk in your DCF. When I think of a company that owns a series of licenses and no hard assets, like biotechnology firm, I do not see that being a correct valuation. This company owns real options, all they have is a bunch of licenses right now. Here is a series of slides from the MIT site on real options. http://ocw.mit.edu/NR/rdonlyres/Sloan-School-of-Management/15-431Entrepreneurial-FinanceSpring2002/039A9936-DB37-4EA4-BB61-3CCD39821E64/0/lec5_realoption.pdf Also just google “real option” + hydroelectric power. Tons of academic papers on the issue.
Hmmm…this seems interesting. Albeit too late maybe since I may not have time to evaluate the entire project again using a different method. I am going to take a look at some of the academic papers though. Thanks, adehbone.
i thought that these projects are valued using project IRR Method… after u get the license you can sell the project say at 12%… after you close the project successfully the irr would jump to 18%… reduce ur cost of debt…and everything remaining belongs to equity now if you are not able to raise the required capital would not make ur licenses worthless…u still can sell them…at a discount or premium…depending on their availability and remaining time… there has to be two scenarios…or alternatively u can put an arbit probability to one scenario and take a weighted average of the payoff of two scenarios