There are 2 main questions.The first main question has two parts A and B.Part A has 2 questions to answer and part B has 3 questions to Answer.
The Second question has only a question to it.
The tables in the assignment have also been provided in Excel format for convenience.
2 QUESTION 1 Nothing Ventured Case Year 0 Alison Newson, an analyst at Allwood Venture Capital Partners (AVCP) examined the projections for Nothing Ventured, an internet start-up that ACVP was considering making an investment in. Having done her market research, she had been working on the market penetration projections for the company. She has come up with three reasonable scenario/forecasts for the future development of the business given the range of uncertainties involved: an optimistic one, with a high number of units sold eac c b 5 each to net income (NI). She judged the likelihood of this as being 0.3. For her second scenario/forecast with a medium income, she estimated a reduced number of units sold and a lower contribution per unit sold to net income. The third, pessimistic scenario/forecast, showed a smaller number of units and contribution again and was the least favourable of her projections, but had the lowest likelihood of occurring with only a probability of 0.2. The details of the alternative projections are given in Exhibit 1. Exhibit 1: Modelling of the scenarios T=0 Scenario/forecast for end of year 6 Probability High outcome 0.3 Number of units sold 25,000,000 Contribution to Net Income per unit sold 5 Medium income 0.5 Number of units sold 18,000,000 Contribution to Net Income per unit sold 4 Low income 0.2 Number of units sold 11,000,000 Contribution to Net Income per unit sold 2 3 She next turned her attention to the financing required. To get to Year 6, which was the anticipated exit year, Nothing Ventured would need the ec 13 e e a ea e e a a d achieve one of the possible scenario/forecasts she had come up with. As an investment, the company presented a lot of risk. The spread of outcomes suggested that there was a lot of uncertainty as to the market acceptance of the new product. AVCP would require a suitably high required rate of return for taking on the risk. The venture capital firm had a hurdle rate 65 e ce e ea e e N Ve ed ca e . A e a a ed AVCP e a e . De e d e e performed and came up with based on comparator firms that were in the public market with the price-earnings ratios (PERs) in Exhibit 2. Exhibit 2: Price-to-Earnings Ratios for the different outcomes Outcome PER High outcome 15 Medium income 8 Low income 4 She noted that, as of the date of the analysis she was just about to sit down and work on, Nothing Ventured had 5 million ordinary shares outstanding. It made her think how many shares AVCP would be asking the company to e a e 13 e c a eeded a ea e ambition. Part A Use the information provided in the case to establish [1] the number of ordinary shares that Nothing Ventured would need to issue, [2] the price at which it would purchase the newly issued shares, [3] the proportion of the ownership that the founders of Nothing Ventured would have to give up from Mohit Agrawal 4 accepting the financing. Provide an analysis of these numbers and explain why the founders would have to accept these conditions for the investment. Comment on the risks involved in the investment. Briefly explain your reasoning (Show your wo a d a a a d a d e ce a e two decimal places. That is, it is not necessary to provide all the analysis to the nearest euro.) [30 marks] Use the result of your calculations to show the return that AVCP will obtain if the high- and low-income scenarios are realised. [10 marks] Mohit Agrawal Mohit Agrawal 5 Nothing Ventured Case Year 3 Three years have passed, and Nothing Ventured is half-way to its goal of becoming a public company. Now there is a second-round financing requirement for the company. A new venture capital company, Berthold Partners, specialising in development capital is proposing to subscribe for new shares to finance the second round. AVCP will retain its shareholding from its initial investment but will not contribute to the new financing. A a e, N Ve ed e e a add a 12 a ce s rapidly expanding facilities. T e c a ec a e c ed e a e a a shows. A new set of scenarios has been produced and these are shown in Exhibit 3. Exhibit 3: Modelling of the scenarios T=3 Scenario for end of year 6 Probability High outcome 0.4 # of units sold 22,000,000 Contribution to Net Income per unit sold 6 Medium income 0.6 # of units sold 19,000,000 Contribution to Net Income per unit sold 5 Since the track record of Nothing Ve ed ce AVCP a d e investment is indicative of a higher likelihood of success and as a result a lower required return. Berthold Partners is seeking a 35 per cent return from its investment. 6 Berthold Partners has indicated that the exit multiples in Exhibit 2 still apply at this stage. If the firm is hugely successful, the exit PER is 15× and if moderately so, 8×. Part B Using information from both parts, undertake an analysis of the second-round financing to establish [1] the number of ordinary shares that Nothing Ventured would need to issue, [2] the price at which it would purchase the newly issued shares, [3] the proportion of the ownership that the founders and AVCP will have from accepting the new financing. Provide an analysis of these numbers and explain why the founders would have to accept these conditions for the investment. [25 marks] What are the consequences for AVCP from this second-round financing? What is the dilution factor and what proportion of the equity of Nothing Ventured would AVCP need to hold at the initial first financing round if it is not to lose out from the second-round financing? Explain your reasoning. Use the initial projections for the value of Nothing Ventured in Part A to show how, by compensating for the dilution inherent in round two, AVCP can maintain its required return on its investment. Explain why this is the case. [20 marks] If instead of undertaking a placing, Nothing Ventured offered a rights issue to raise the money, how much additional finance would AVCP have to provide to maintain its economic interest in the firm? (You will have to round to the nearest share ratio.) Briefly explain your reasoning. [15 marks] Mohit Agrawal Mohit Agrawal Mohit Agrawal 7 (S a d a a a d a d e ce a e two decimal places. That is, it is not necessary to provide all the analysis to the nearest euro.) 8 Question Two The Acquisition of Brazil Energy Mechanics (BEN) He had barely finished his New Year celebrations when Jean Melvieux, CEO of Amérique du Sud, S.A. (ADS), the stockmarket listed French energy equipment supplier, was wondering whether he should acquire Brazil Energy Mechanics (BEN) a San Paolo based company specialising in energy e e . I d be a e ec c e e ADS c e d c portfolio and open-up the all-important South American market to ADS, with its fast growth prospects. Brazil Energy Mechanics was a long-established energy equipment supplier and had numerous customers in Brazil and elsewhere in South America and excellent customer relationships based on the quality and performance of its products. Exhibit 4 shows the last available financial information on BEM. 9 Exhibit 4: Brazil Energy Mechanics Financial Statements 2020 Panel A: Income Statement (BRL millions) Sales BRL 3,310.0 Operating expenses (excluding depreciation) 2,180.0 EBITDA 920.0 Depreciation 300.0 EBIT 620.0 Interest expense 140.0 Profit before taxes 480.0 Corporate income tax 120.0 Net income BRL 360.0 BRL = Brazilian real Panel B: Statement of financial position (BRL millions) Assets Liabilities and Equity Net noncurrent assets BRL 2,080.0 Equity BRL 1,350.0 Noncurrent debt 1,400.0 Current assets Current liabilities Inventories 660.0 Accounts payable 350.0 Accounts receivable 310.0 Cash 50.0 ____ 3,100.0 3,100.0 W e BEM ad d d c , ADS e a e c a prior to making an offer to purchase the business indicated that it had been poorly managed and that significant improvements in performance could be made relatively easily. The ADS team tasked with the analysis of the acquisition prospect had come up with the following information: BEN would grow at an annual rate of 12% for the next two years, 9% for the subsequent two years and then, after the initial growth period, 8% in perpetuity. Given its market position and with ADS involvement, BEN could improve its profitability. The earnings before interest, taxes, 10 depreciation and amortisation (EBITDA) margin could probably be ed be ed be e ABS (c e 30%), a could the operating working capital, the level of which at 20% was higher than the industry average of 14%. Capital expenditures were planned to be around BRL 350 million