Financing an Expansion-My Business Venture

Financing an Expansion-My Business Venture
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Financing an Expansion-My Business Venture
After 12 years, My Business Venture Ltd. is wildly successful and is planning to purchase a publicly-held competitor. Therefore, the company needs an additional $100 million capital from either the debt or the equity market. The value of the competitor will be calculated using one of the valuation techniques identified in chapters 11 and 12. An analysis of the various financial tools available will be carried out to determine the most helpful in assessing whether my company can afford the purchase. In addition, this will be followed by an examination of the options available to finance the competitor both through the debt and equity markets. Finally, a cross-comparison of the debt and equity markets will be done to determine the ideal option to obtain the funding.
Value of the Competitor
The assumptions that are made in valuing the competitor, that will be acquired for the next six (6) years, are as follows; Investment amount, I, is $50 million, the venture’s earnings in 6 years, E6 is $45 million, Price-Earnings, P/E is 10x, and expected rate of return, r is 40%.
Acquired % of ownership = IPExE6/1+r6
=50,000,000101x45,000,000/1+0.46 =50,000,00059,764,638.9
=0.83661511 or 83.661511%
Therefore, approximately 84% of the competitor will be acquired.
The assumptions to calculate the new shares, n, to be issued are; the number of existing shares in the competitor company to be acquired, m, is 5 million.
n=m(acquired %)1-acquired %
=5,000,000(0.83661511)1-0.83661511 ; 41830760.163385
=25,602,585
Therefore, My Business Venture will be issued with 25,602,585 shares of the competitor for the company to achieve the annual rate of return of 40%. The value of the competitor is the denominator in the formula for calculating the acquired % of ownership, that is, the earnings multiplied by the P/E, 10x and discounted at the rate of return of 40% for the 6 years to arrive at $59,764,638.90.
Financial Tools
The following are the tools that can be used to determine whether the company can afford to purchase the competitor;
* Book value. This is calculated by subtracting the total liabilities from total assets to arrive at the shareholder’s equity value, which is taken as the value of the company.
* Market value. This is arrived at by multiplying the number of outstanding shares of the company by the market share price.
* Discounted cash flows. It discounts the projected cash flows to the present value. This is calculated by estimating growth rate, which is the percentage of growth and the number of years corresponding to such growth (Ramsinghani, 2014).
* Liquidation value. This is the net value derived if the business sells its assets and pays its liabilities.
From the above techniques, the book value is the most appropriate since it reflects the value of the shareholder’s investment in My Business Venture. It portrays the ability of the company to afford the acquisition.
Financing Options-Debt Market
The debt market is made up of two segments that include the primary and secondary debt markets. Th...