Have a pretty solid handle on Single Round VC and One Period Binomial, would you put extra time into working Multiple for VC and Two Period for Options? Or does anyone have a good tip for keeping everything straight when extending out multiple periods for these? I would hope that they would just ask single period on the test.
For binomial options, 2 period is the same as 1 period, you just have to do an extra round of discounting…not sure if theres anything really else as far as tips. For the VC, once you get the first round down, the second round is easy 1) Find POST2 = Exit value/(1+rate of second round financing)^years from second round to exit 2) Find PRE2 = POST 2 - Investment made at time 2 3) Find POST 1 = PRE2/(1+ rate of first financing round)^years from now till second round of financing 4) Find PRE 1 = POST 1 - Investment. Now you have all the POST and PRE. Next, start at Time 1 to find new shares issued ad time 1 1) First, find F, which is investment/post 2) Multiply shares of owners * (f/(1-f)) to get new shares issed 3) Divide first investment made by new shares issued to get share price From here, you can now solve for the second round number and price of shares 1) Take the shares of teh owners, add the shares issued at the first round of financing. 2) Find the new F for time 2, which is Investment 2/POST2 3) Multiply total shares in part 1 by the (F2/(1-F2)) to get new additional shares for second round of financing 4) Divide Investment 2 by these new shares to get the price. Pretty much, you work backwards to time one, then forwards to get the final amount of shares and value per share issed for the second financing round.
@spanishesk - Have you considered teaching , would be really cool if you could offer a crash course 
Spanishesk Wrote: ------------------------------------------------------- > For binomial options, 2 period is the same as 1 > period, you just have to do an extra round of > discounting…not sure if theres anything really > else as far as tips. > > For the VC, once you get the first round down, the > second round is easy > > 1) Find POST2 = Exit value/(1+rate of second > round financing)^years from second round to exit > 2) Find PRE2 = POST 2 - Investment made at time 2 > 3) Find POST 1 = PRE2/(1+ rate of first financing > round)^years from now till second round of > financing > 4) Find PRE 1 = POST 1 - Investment. > > Now you have all the POST and PRE. Next, start at > Time 1 to find new shares issued ad time 1 > 1) First, find F, which is investment/post > 2) Multiply shares of owners * (f/(1-f)) to get > new shares issed > 3) Divide first investment made by new shares > issued to get share price > > > From here, you can now solve for the second round > number and price of shares > 1) Take the shares of teh owners, add the shares > issued at the first round of financing. > 2) Find the new F for time 2, which is Investment > 2/POST2 > 3) Multiply total shares in part 1 by the > (F2/(1-F2)) to get new additional shares for > second round of financing > 4) Divide Investment 2 by these new shares to get > the price. > > > Pretty much, you work backwards to time one, then > forwards to get the final amount of shares and > value per share issed for the second financing > round.
haha i havent. I find it really useful though for my own studying to answer questions on this board. It shows me whether i actually understand the topic or just think i understand it. When there are questions asked that i cant explain, i go back and study that part to try to understand it. It s nice way to see what you dont know. So that said, ask away haha.
With respect to calculating the IRR on venture capital my prep class provider says: NOTE: As I read through the LOS, it seems you are not responsible for calculating IRR for multiple time periods. The procedure is explained, however there are no numbers associated with it and it would be simply impossible to calculate in an eighteen minute item set. That being said, calculating the IRR for 1 period… looking at original question $3,000,000 investment t=0 that pays off $25,000,000 in t=4 with discount rate of 50% CF0= -30,000,000 CF1= 0 CF2= 0 CF3= 0 CF4= 25,000,000 I=50 CPT -> NPV = 1,938,271 (as we calculated, this is POST1) IRR = 69.90 IRR is higher than our required rate of return 50%, obviously which is why we have a positive NPV. Is this the correct way to calculate IRR for this single stage problem?
mbolzicco Wrote: ------------------------------------------------------- > With respect to calculating the IRR on venture > capital my prep class provider says: > > NOTE: As I read through the LOS, it seems you are > not responsible for calculating IRR for multiple > time periods. The procedure is explained, however > there are no numbers associated with it and it > would be simply impossible to calculate in an > eighteen minute item set. > > That being said, calculating the IRR for 1 > period… > > looking at original question $3,000,000 investment > t=0 that pays off $25,000,000 in t=4 with discount > rate of 50% > > CF0= -30,000,000 > CF1= 0 > CF2= 0 > CF3= 0 > CF4= 25,000,000 > > I=50 > CPT -> NPV = 1,938,271 (as we calculated, this is > POST1) > IRR = 69.90 > > IRR is higher than our required rate of return > 50%, obviously which is why we have a positive > NPV. Is this the correct way to calculate IRR > for this single stage problem? my calculator is giving different answer
mbolzicco Wrote: ------------------------------------------------------- > With respect to calculating the IRR on venture > capital my prep class provider says: > > NOTE: As I read through the LOS, it seems you are > not responsible for calculating IRR for multiple > time periods. The procedure is explained, however > there are no numbers associated with it and it > would be simply impossible to calculate in an > eighteen minute item set. > > That being said, calculating the IRR for 1 > period… > > looking at original question $3,000,000 investment > t=0 that pays off $25,000,000 in t=4 with discount > rate of 50% > > CF0= -30,000,000 > CF1= 0 > CF2= 0 > CF3= 0 > CF4= 25,000,000 > > I=50 > CPT -> NPV = 1,938,271 (as we calculated, this is > POST1) > IRR = 69.90 > > IRR is higher than our required rate of return > 50%, obviously which is why we have a positive > NPV. Is this the correct way to calculate IRR > for this single stage problem? my calculator is giving different answer :-/
sorry CF0 should be -3 million not -30 million