Steve wants to know the present value of his investment. The security company is currently in the development stage but hopes to “begin” operations early next year. After-tax cash flows during the next five years are expected to be as follows: Year 1 = -$1.5 million, Year 2 = 0, Year 3 = $3 million, Year 4 = $2.5 million, and Year 5 = $3 million. Cash inflows are expected to grow at 5% annual rate thereafter. The discount rate is assumed at 30% for year 1-5 and 20% after year 5.
1) Determine the terminal or horizon value at the end of five years.= ?
2) What is the present value of the security company?
(3) What percent ownership interest should Steve be willing to give to a venture investor, Paul, for her $1,000,000 investment on pre-money base?
(4)What percent ownership interest should Steve be willing to give to a venture investor, Paul, for her $1,000,000 investment on post-money base?