Solution Pages: 9
Files that you will download:
Word (.docx) & Excel – 8 Sheets (.xlsx)
Questions Covered in the Solution
- Evaluate the compound return on investments made at “Start up,” Round A, Round B, Round C and Round D if the acquired shares eventually sell at $10 and $5. This will be one number per round per price. (Hint: Use the XIRR function in Excel’s Analysis Toolpack.)
- Evaluate the compound return on the overall portfolio of investments for each existing investor. This will be one number per investor. (Hint: Use the XIRR function in Excel’s Analysis Toolpack.)
- Compare the $5 and $10 IPO prices for Spatial to “comparable firms” and their multiples. (There are some glimpses of multiples in the case materials, but you may wish to use some outside reference material – please state your sources, if any.)
- In a single page, display legible tables for: (i) round prices, investor cash flows and exit payoffs with their associated compound annualized returns at both $5 and $10; (ii) any “comparable firm” valuation data you deem relevant. This single page of two tables will be the only portion of “Part 1” carried into the final report submitted in “Part 2.”
- Using the case-provided financial statements as a starting point:
- Prepare a DCF valuation based on projected financials (IS, BS and SCF) with 5 years of explicit forecasts using an overall revenue growth rate consistent with recent history (say 2-3 years) at Spatial. For the terminal value use a reasonable perpetual growth rate.
- Engineer DCF valuations and pro forma financial statements (5-year explicit period) that justify a $10 and a $5 share price at the IPO. Make sure the ratios embedded in your projections conform to reasonable operating ratio assumptions. (Hint: don’t just change sales growth – vary other parameters of your projections!)
- Prepare your $5 scenario, complete with IS, BS, SCF and DCF valuation, for presentation in the final submission.
4. Prepare a summary comparison (without financial statements) of the drivers and results for all 3 scenarios (recent growth rate, $5 engineer and $10 engineer). Display the $5 financials, valuation and summary comparison legibly in no more than 2 pages of exhibits. With the IRR and comparables summary from Part 1, this completes the 3 pages of exhibits for your final submission.
Sample of Solution
Spatial Technology Inc., initiated its business operations with the target of establishing a distinguished 3D technology company. It is the pioneer of 3D modeling file format (SAT) manipulator protocol to accommodate general 3D modeling and animation. With the extended experience of this 3D tech industry and sophisticated expertise, the founders were able to engage an efficient management team to structure a competitive company. Although, Spatial attained substantial growth in the years of its inception but, soon its diversification by the introduction of new diversified products got stuck due to financial disruptions. The cash causalities are evident from the exhibit 5c, which depicts that the net cash proceeds from the operating activities were negative for the last two years and was only positive in 1995. Even though, the firm adopted the forward-funding strategy which involved the prepaid revenues from the royalties and licenses, even then the company has faced incongruity between its operational revenues and expenses. The company has also undertaken four successful rounds of venture financing to maintain its operational competitiveness. Round A involves the investment of $ 1,000,000 from the renowned venture capitalist Nazem and Co., while the round B included financing of $7300, 000 from the institutional investors and one of its potential customer, Hewlett-Packard. Moreover, round C and D successfully raised $ 3,100,000 and $ 2,742,557 respectively for the company. Apart from this financing source, the company also went for IPO in 1992 which was failed and left the company which expense bill of $ 200,000.