Query regarding Small Enterprise Finance
In calculating terminal value of cash flow we should always use Mature discount rate ???
Ben Toucan, owner of the Aspen Restaurant, wants to determine the present value of his investment. The Aspen Restaurant is currently in the development stage but Toucan hopes to "begin" operations early next year. After-tax cash flows during the next five years are expected to be as follows:
Year 1 0
Year 2 0
Year 3 0
Year 4 $2.5 millions
Year 5 $3 millions
Cash inflows are expected to be $3.18 million in year 6 and are expected to to grow at a 6% annual rate thereafter. Assuming that venture investors often use different discount rates when valuing ventures at various stages of their life cycles. For example, target discount rates by life cycle stage are: development stage 50%, start-up stage 40%, survival stage 35% and early rapid-growth stage 30%. As ventures move from their late rapid-growth stages and into their maturity stages, a 20% discount rate is often used.
a-Determine the Aspen Restaurant's terminal or horizon value at the end of five years, assuming the venture will be entering its maturity stage.
b-What is the present value of the Aspen Restaurant, assuming that it is a development-stage venture? (2 marks)
c-What percent ownership interest should Ben Toucan be willing to give today to a venture investor, Sherri Isitar, for her $1 million investment? d-Let's assume that the Aspen Restaurant was started early last year and, thus, is in its startup stage, and has the same future cash flow expectations as indicated earlier. Using a typical start-up-stage required rate of return or discount rate, calculate the present value of the Aspen Restaurant.
e-Owning a restaurant is often considered to be a risky investment, in that restaurants often are continuously moving into and out of their survival stages. Assume that a typical survival-stage required rate of return is applied to all future cash flows estimated to the Aspen Restaurant. Calculate the Venture's present value.