1. [Venture Capital (VC) Method Valuation Concepts] Benito Gonzalez, founded and grew the BioSystems Manufacturing Corporation over a several year period. However, Benito has decided to exit BioSystems as of the end of 2010 with the intention of starting a new entrepreneurial venture. The Fuji Electronics Company is considering acquiring BioSystems which is 60 percent owned by Benito Gonzalez with the other 40 percent of the equity being held by venture investors who also desire to exit the venture. BioSystems' sales are expected to grow from the 2010 level at a 20 percent annual compound rate over each of the next three (2011, 2012, 2013) years. Cost of goods sold, marketing, depreciation, and interest expenses are expected to move or vary with sales (i.e., they are variable expenses). General and administrative (G&A) expenses are expected to remain constant each year (i.e., are fixed expenses). The income tax rate is expected to be 35 percent.
BIOSYSTEMS MANUFACTURING CORPORATION
Income Statement for 2010 ($ Thousands)
Net Sales $10,000
Cost of Goods Sold 6,000
Gross Profit 4,000
Marketing Expenses 1,000
G&A Expenses 2,000
Depreciation 200
Interest 100
Income Before Taxes 700
Taxes (35%) 245
Net Income $455
A. Prepare BioSystems' income statements for 2013.
B. Fuji Electronics has examined other recent acquisitions in BioSystems' industry and believes that a 17 times price-earnings multiple would be appropriate for determining BioSystems value in the future. Calculate the value of BioSystems as of the end of 2013.
C. How much should Fuji Electronics be willing to pay for BioSystems Manufacturing at the end of 2010 if Fuji's management believes the appropriate discount rate is 25 percent?
D. What is Gonzalez's portion of the exit proceeds? What is the venture investors' portion of the exit proceeds?
E. Benito Gonzalez invested $50,000 of his own funds in BioSystems at the end of 2005. What would be the compound rate of return on his investment when the exit (sale to Fuji Electronics) from BioSystems occurs at the end of 2010?
F. The venture investors contributed $500,000 at the end of 2006. What would be their compound rate of return on their investment if BioSystems is sold at the end of 2010?