1) Your management team recognizes security software firm, DigiVault, which has developed 256-bit data encryption key is licensed by Fortune hundred companies and governments to save sensitive database information from interfering eyes. Firm’s founders are out of money and wish to sell their technology. As you and your team do not have sufficient money to obtain firm outright on your own, you turn to outside sources of funding. Venture bank is eager to put up= $3.5 million, 5-year loan at 11% per year, that only has interest payments due in its life; principal balance will be paid off at liquidity event. Your team puts up= $750,000 of its own capital. One of your friends from MBA program is the venture capitalist, and his firm agrees to invest= $3.5 million at the expected 60% annual return for 5 years, at which time they are expecting a liquidity event to get their money and the return back. Include all your computations to support every answer. Replies should be completed in sequence.
a) Suppose that in 5 years, DigiVault will have the expected exit enterprise value of= $48 million, based on the EBITDA multiple of= 5.0 from similar exit transactions. What does this point to firm’s expected EBITDA will be at that time?
b) Provided future value computed in (a), determine the equity value at that time?
(c) As VC firm expects a 60% compound return on its investment, what would be dollar value of its portion of equity value you computed in (b)?
(d) Based on your reply in (c), what would be amount of equity up front which you would have to give up getting DigiVault’s original venture capital investment?
(e) What will be dollar value of management team’s original= $750,000 equity investment at time of the liquidity event?