The ABC Startup has the following expected profits under different scenarios along respective probabilities: Year Best Case Base Case Worst Case…
CA Final · Advanced Financial Management · MTP · November 2024
The ABC Startup has the following expected profits under different scenarios along respective probabilities: Year Best Case Base Case Worst Case Revenue Expenses Revenue Expenses Revenue Expenses 1 100,00,000 80,00,000 100,00,000 90,00,000 100,00,000 95,00,000 2 120,00,000 92,40,000 110,00,000 95,70,000 102,00,000 98,94,000 3 144,00,000 108,00,000 121,00,000 102,85,000 104,04,000 101,95,920 Probability 30% 60% 10% You are required to suggest the value of ABC Startup using First Chicago Method assuming that: (i) Applicable discounting rate is 20%. (ii) Startup is located in Tax-free Zone. (iii) The multiple for Terminal is 10. (iv) No depreciable assets are held by the ABC Startup. Note: 1. Present Value Factor (PVF) Year 1 2 3 PVF@20% 0.8333 0.6944 0.5787 2. Round off the calculation to whole numbers.
Suggested Answer and Working Notes:
Valuation of Startup under different scenarios: (i) Best Case Scenario Year 1 Year 2 Year 3 Revenue 100,00,000 120,00,000 144,00,000 Expenses 80,00,000 92,40,000 108,00,000 Cash Flow/ Earnings 20,00,000 27,60,000 36,00,000 Terminal Value 3,60,00,000 PVF @ 20% 0.8333 0.6944 0.5787 0.5787 PV 16,66,600 19,16,544 20,83,320 2,08,33,200 Value of Startup 2,64,99,664 (ii) Base Case Scenario Year 1 Year 2 Year 3 Revenue 100,00,000 110,00,000 121,00,000 Expenses 90,00,000 95,70,000 102,85,000 Cash Flow/ Earnings 10,00,000 14,30,000 18,15,000 Terminal Value 181,50,000 PVF @ 20% 0.8333 0.6944 0.5787 0.5787 PV 8,33,300 9,92,992 10,50,341 105,03,405 Value of Startup 133,80,038 (iii) Worst Case Scenario Year 1 Year 2 Year 3 Revenue 100,00,000 102,00,000 104,04,000 Expenses 95,00,000 98,94,000 101,95,920 Cash Flow/ Earnings 5,00,000 3,06,000 2,08,080 Terminal Value 20,80,800 PVF @ 20% 0.8333 0.6944 0.5787 0.5787 PV 4,16,650 2,12,486 1,20,416 12,04,159 Value of Startup 19,53,711 Value of ABC Startup as per First Chicago Method = 0.30 x 2,64,99,664 + 0.60 x 133,80,038 + 0.10 x 19,53,711 = 79,49,899 +80,28,023 +1,95,371 = 1,61,73,293
Topics: Business Valuation
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