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Small Business Finance…

Small Business Finance…. Spring 2010 URG MBA Program Chapters 9-11. Valuation of Companies. Principles Using the Earnings Ratio – Price to Earnings P/E Examples? Text 1/40, Darlene one to 4 or5 Lodging industry Pitfalls? If the industry standard is not already set??? Incorrect valuation

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Small Business Finance…

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  1. Small Business Finance… Spring 2010 URG MBA Program Chapters 9-11

  2. Valuation of Companies • Principles • Using the Earnings Ratio – Price to Earnings P/E • Examples? • Text 1/40, Darlene one to 4 or5 Lodging industry • Pitfalls? • If the industry standard is not already set??? • Incorrect valuation • Determining Market value – Like appraising realestate • Determine parameters • Allowing for Risk • Multiple comparisons

  3. Customary Multiples • Based on Net Earnings • EBIT based multiple • Book Value • Other Options • Revenue multiples • Other comparable companies

  4. Cash Flows and Residual Income • Capital is weighted according to market value • Estimating value for projected periods. • According to discounted residual Income • Real Options method • Pricing Real options from • Options to switch • Options to abandon • Options to delay • Options to scope and scale • Options to stage

  5. Investor Value • Strategic value is sometimes inflated • VC Discount Rate • Usually higher—why? • Usually lowers as company matures—why? • Issuing Stock • Price per share • Number of stocks issued, based on what? • Employee stock options – Advantages?

  6. Venture Capital Method • Stage 1: Analyze and Identify the Type and Time of Exit • Stage 2: Estimate Terminal Value (TV) • Stage 3: Determine the Discount Rate (r) • See Mini Case Study: Medica – Stage 3 • Page 185/6Stage 3: Determine the Discount Rate ® • Stage 4: Estimate Additional Required Investment • Stage 5: Calculate the Range of Values for Investment

  7. Terms of Measurement • NPV (Net present value) • PV (Present Value) • Rate of Return

  8. Venture Capital Funds • Venture Capital Funds • The massing of funds to be used in up-start company funding • Leveraged buyout and merchant banking funds • Acquiring funds of companies, all or most, in financial distress • Hedge funds • Funds that attempt to minimize risk and thus generate less profit

  9. Venture Capital Investors Profile • Intermediaries between investors and companies • They are an alternative to trading in the stock market with proven companies • Specific services are provided to ensure good returns • Money • Financial Backing • Creditability • Connections to other financing • Strategic connections • Help with recruiting management • Managerial and operating knowhow • Business model assistance • Contributing board of directors

  10. VC Oversite • Investing in several “rounds”/controlled investing • Syndication – in conjunction with other investments • Ongoing control – can be an issue • Compensation of entrepreneurs and managers • Geographic preferences

  11. VC Development • 1980’s • 1990’s • 2000’s • Today???? • Future????

  12. Global Market Impact • Speed of communication • Speed of banking • Differing taxation from global perspective

  13. Exit and Return of VC Funds • Industry is volatile – Why? • Different years of origin yield differing results • Appear to be good but are they?

  14. Other Investor Options • Angles/Private Investors • Companies within the field • Corporate in-house companies • Incubators • Investment Banks • Holding Companies • Pension Funds (PERA) • Insurance Companies • Not-for-Profits • Mutual Funds • Credit Companies • Leasing

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