Venture Capital – NBC Institute

AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

Question

UTFM Ltd is experiencing financial difficulties, and management is prepared to undertake a buyout. UTFM Ltd is considering selling the business for GH¢50 million. After an analysis, management concluded that the company requires a capital injection of GH¢30 million. A Venture Capitalist has agreed to raise the required funds, providing GH¢8 million at 10% interest and GH¢7 million in equity. Management will provide the remaining funding as equity.

Forecasted Earnings Before Interest and Tax (EBIT) for the next 5 years are as follows:

Corporation tax is charged at 25%, and dividends are expected to be no more than 10% of profits for the first five years. Management forecasts that the value of equity capital is likely to increase by approximately 15% per annum for the next 5 years.

Required:
On the basis of the above forecasts, determine whether management’s estimate that the value of equity will increase by 15% per annum is a viable one.

Answer

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Tags: Buyout, EBIT, Equity Valuation, Growth Estimation, Venture Capital
Level: Level 3

Topic: Business reorganisation
Series: MAY 2018

FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

Question

a) Sakyiama Poultry Farms is considering purchasing a new incubator that will improve its incubation efficiency to 90% as against the current 50%. The incubator, which is to be purchased immediately, will cost GH¢120,000. The incubator has a useful life of 4 years, after which it would be sold for scrap at GH¢10,000. The current contribution of GH¢3 per day-old chick will not change. The number of day-old chicks sold at 12,000 units per annum will increase by 80%. Fixed cost will be GH¢20,000 per annum. Sakyiama Farms has an after-tax cost of capital of 12.5% and pays tax in the year in which profit is made at a rate of 15% per annum. The farm is also entitled to capital allowance at 25% on a reducing balance.

i) Calculate the Net Present Value (NPV) and the viability of the investment. (7 marks)
ii) Calculate the Internal Rate of Return (IRR). (8 marks)

b) Two blue-chip companies – Abu Ltd and Ada Ltd are seeking to raise funds from venture capital to boost their production in order to satisfy demand for their solar-powered refrigeration and air-conditioning systems, which they developed through a joint venture. They have consulted you for advice.

Required:
Explain FIVE conditions that a venture capitalist will consider in accessing an application for funding. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Allowance, Internal Rate of Return (IRR), Investment Decision, Net Present Value (NPV), Venture Capital
Level: Level 2

Topic: Cost of capital, Introduction to Investment Appraisal
Series: NOV 2016

AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

Question

Forecasted Earnings Before Interest and Tax (EBIT) for the next 5 years are as follows:

Required:
On the basis of the above forecasts, determine whether management’s estimate that the value of equity will increase by 15% per annum is a viable one.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Buyout, EBIT, Equity Valuation, Growth Estimation, Venture Capital
Level: Level 3

Topic: Business reorganisation
Series: MAY 2018

FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

Question

i) Calculate the Net Present Value (NPV) and the viability of the investment. (7 marks)
ii) Calculate the Internal Rate of Return (IRR). (8 marks)

Required:
Explain FIVE conditions that a venture capitalist will consider in accessing an application for funding. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Allowance, Internal Rate of Return (IRR), Investment Decision, Net Present Value (NPV), Venture Capital
Level: Level 2

Topic: Cost of capital, Introduction to Investment Appraisal
Series: NOV 2016

Question Tag: Venture Capital

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AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

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Question Tag: Venture Capital

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AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

You're reporting an error for "AFM – May 2018 – L3 – Q4b – Business reorganisation"

FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

You're reporting an error for "FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal"

AFM – May 2018 – L3 – Q4b – Business reorganisation

Estimating equity growth for a management buyout and determining if the growth target is viable.

You're reporting an error for "AFM – May 2018 – L3 – Q4b – Business reorganisation"

FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

You're reporting an error for "FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal"

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