Question34-PhucDang

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Seattle University *

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MISC

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Finance

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May 29, 2024

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Uploaded by GeneralScorpionPerson1978

Question 3: By the end of 2017, the predicted final worth of ORN is around $15,586.66. Included in this is a revenue growth rate that starts at 117% in 2012 and averages 45% from 2012 to 2017. The attached "projections" Excel file shows the projected financial statements and the growth rates applied. The presented financial statements are supplemented by these notes. We are making predictions based only on ORN's historical performance when we use this method rather than the relative value. In contrast to the constant growth model, which takes stock market volatility into account when calculating a company's worth, the relative value approach looks at how similar organizations are doing in terms of share price and earnings. Because it relies on comparisons, relative value analysis might produce misleading results if the compared companies' market strategies and goods are significantly different. Also included in the attached Excel file under the "relative value" column are forecast details for the price-to-earnings ratio. This forecast for the price-to-earnings ratio of ORN is derived from the relative values of comparable companies; after applying weights to the p/e ratios of previous competitors, ORN is assigned a p/e ratio of 24.82. As a result of a greater weighting for firms that are 100 percent equity, OutReach Networks should have a marginally higher Forward P/E ratio than the average Forward P/E ratio of comparable firms when the relative value method is applied. Additionally, ORN continues to intend to reinvest the majority of retained earnings in future expansion because of its anticipated growth potential. Due to these two factors, its p/e ratio is quite high. For a more applicable valuation, by using a risk-adjusted discount rate model (RADR), the present value of ORN is $ 178.93 million. To determine the beta used in the model, the given betas for all four relative firms were used and altered based on their relationship between equity and value. Once the new betas for these firms were determined (as shown in the attached Excel under tab “Ex. 2-comparables”), they were then averaged to give a relative beta to be used for ORN which is 1.4. This was then used to calculate the RADR which is shown in the attached Excel on the tab “Discount CF PV & 50% Cut.” The new RADR is 13.27%. This RADR is then used to estimate the present value of the cash flows through 2017 and these cash flows are all added together to give us the projected present value of the firm.

This same Excel tab also shows what would happen if we only got half of the financial flows we expected. A predicted present value of $89.46 million for the firm is generated using the same methodology as before but with half the cash flows. It would be excellent to accept Everest Partner's offer if anticipated cash flows are half of what they were originally predicted since $30 million invested would be worth around 34% ownership of the company in this scenario. Question 4: However, when assessing the firm's potential through the venture capital method, it would be prudent to determine that its value is $83.21 million. A large discount rate, ranging from 40 to 60%, is typically applied when computing the horizon or terminal value of a company via the venture capital method. The utilization of the 50% discount rate was employed in the "Venture Capital Method" tab to calculate the estimated value of OutReach Networks in 2017 at its constant growth terminal value of $948 million. A 50% discount rate was calculated using the means of 40% and 60%. Everest Partners determined their perceived value of the business using 50% of expected cash flows; therefore, the 50% discount rate is also applicable when compared to the discounted cash flow method. Following an assessment of OutReach Networks utilizing the discounted cash flow method and the venture capital method about Everest Partner's offer, the present value of the organization is projected to be $89.46 million and $83.21 million, correspondingly. Everest Partners' stance on the suitability of a 50% discount rate supports the company's demand for a 30% equity stake. In the Excel pane labeled "Justified for 30% Equity Stake," the equity ownership that Everest Partners can anticipate using the discounted cash flow method and the venture capital method for a $30 million investment is 33.53% and 36.05%, respectively. Even though a 30% equity stake is rational in light of these two valuation techniques and a 50% discount rate, the question of whether a 50% discount rate is excessively high must be resolved. In other terms, Perez should negotiate for a higher valuation on Monday at 8:00 a.m. The typical range for growth rate is 3–5%. When a growth rate of 4% is applied, the discount rate calculated using the Capital Asset Pricing Model is 13.3%. By applying this discount rate to the anticipated cash flows (as opposed to applying a 50% discount or reducing the expected cash flows by 50%), the Risk-Adjusted Discount Rate (RADR) Present Value for OutReach Networks

is determined to be $178.93 million. By paying the valuation of $178.93 million, Everest Partners would acquire a 16.77% stake in the company as opposed to the original 30%.

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