Question

CP Venture Partners is looking at the possible investment of $1 million in an early-stage company (Startco). Given the stage of the investment, CP requires a 40% annual rate of return. The company earned $750,000 in EBITDA last year, and this amount is expected to grow at a rate of 30% per year over the next five years. Companies like Startco are currently being valued at five times EBITDA, and CP Venture Partners thinks this is a reasonable multiple for the valuation of the firm in five years. a. Assuming that Startco currently has no debt and does not plan to borrow over the next five years, what do you estimate the enterprise value of the company will be at the end of five years?

Answer 1

Using the compound growth formula to calculate EBITDA growth at a rate of 30% annually over five years and a valuation multiple of five, the estimated enterprise value of Startco at the end of five years would be approximately $13,923,485.

Step-by-step explanation:

To estimate the enterprise value (EV) of Startco at the end of five years, we first need to calculate the projected EBITDA after five years. Given that the EBITDA is expected to grow at a rate of 30% per year, we can apply the compound growth formula to find the EBITDA in Year 5:

EBITDAYear 5 = EBITDAcurrent × (1 + growth rate)n

EBITDAYear 5 = $750,000 × (1 + 0.30)5

EBITDAYear 5 = $750,000 × 1.305

EBITDAYear 5 = $750,000 × 3.71293

EBITDAYear 5 = $2,784,697 (approximately)

Given that companies similar to Startco are valued at five times their EBITDA, we calculate the enterprise value as follows:

EV = EBITDAYear 5 × Valuation Multiple

EV = $2,784,697 × 5

EV = $13,923,485 (approximately)