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Venture Capital_Carsales Investment Proposal

Extracts from this document...

Introduction

Contents......................................... ( Executive Summary 2 ( Background 1. Business and product description 3 2. Current owners 3 3. Management team, personnel and compensation 5 4. Marketing analysis 7 5. Production and operational strategy 9 ( Financial Analysis and Projections 1. Historical and ratio analysis 11 2. Comparison analysis 12 3. Discounted Cash Flow (DCF) analysis 13 4. Forecasting of future profitability 14 5. Forecasting of future cash flows 15 6. Capital Budgeting Requirements 16 ( The Deal 1. Pricing and justification 18 2. Types of securities and justification 19 3. Proposed future exit strategies 20 ( Term Sheet 21 ( Appendix 23 ( Bibliography 26 ( Executive Summary......................... With the increasing demand of automobiles and increasing use in technology, carsales is the revolutionary way in buying and selling automobiles. Since the registration of carsales.com.au domain in 1997, carsales have grown into a market leading position and have achieved a widespread coverage of the automotive, motorcycle and marine classifieds. By moving away from less flexible paper-print newspapers and magazines, carsales facilitate the sale of cars on-line and provide beneficial information to users and dealers. Furthermore the board of directors and the key management staff encompass superior expertise that is well suited to the automotive telecommunication sector. Although carsales is a growing company and excellent management, however there are a number of factors that may cause changes in carsales objectives and financial performance. The risks and threats that may arise can be seen in the SWOT analysis1. In order to further grow carsales and provide more services, carsales is seeking to raise $250,000,000 from potential Venture Capital Firms. Having meticulously conducted due diligence, it is our recommendation that carsales is a profitable seed company. The attractive propositions carsales has put forward are: * 16% over a 10 year period * 20.50% equity in carsales.com * Convertible preferred shares at a price of $2.88, exercisable any time within the next five years. ...read more.

Middle

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 Net Profit Margin 0.32 0.32 0.32 0.32 0.31 0.31 0.31 0.31 0.32 0.32 3.5 Forecasting Cash Flows Due to the success of the online services industry, carsales has displayed strong cash flows in the past few years. High revenue growth in recent years combined with relatively low operating costs contributes to high cash flows. Further, as an online service, carsales have relatively low capital expenditure and fairly stable assets and liabilities. For this reason, the steady growth in carsales' revenue is almost fully reflected in the growth of the firm's cash flows. Excluding the outlier in 2011, high correlation can be seen between carsales' revenue growth and free cash flow growth. Again, this is a positive sign for investors, as forecasted growth in revenue, will correspondingly produce high cash flows. 3.6 Capital Budgeting for the Investment Proposal Start-up firms usually require external funding to support future growth opportunities of the firm. Accordingly, through technical analysis and consultation with the management at carsales, the optimal investment amount to fund future growth prospects was deemed to be $250 million. Although, this figure may appear arbitrary and large in some respects, with carsales' average enterprise value of $669.58 as at 2009 (refer to table below), it would appear necessary that a large investment amount would be needed. This way, private equity investors and in particular venture capitalists will be able to obtain a reasonable ownership stake in the start-up firm. To determine the funding requirements for carsales' investment proposal, first the value of equity and the share price was calculated using various valuation methodologies. In summary: Valuation Method Assumptions (refer to Appendix A for full list of assumptions) Cost of Capital Enterprise Value ($) Equity Value ($) Price per Share NPV * Declining Sales Growth Rate * Most Balance Sheet and Income Statement move proportional to Revenue WACC = 9.975% 782.8 million 779.8 million $3.37 p/s APV * Declining Sales Growth Rate * Most Balance Sheet and Income ...read more.

Conclusion

Adjusted Present Value Method (APV) > Value of debt (both short term and long term) used in APV analysis found using Additional Funds needed analysis (refer to Appendix B) > Debt interests for the period found by multiplying the cost of debt (6.48%) to the value of debt in the previous period. > The value of unlevered cost of equity found using formula: wdrd + were(L) - Where cost of levered equity is found using CAPM: rf + B.(MRP) - Capital structures used are based on industry target capital structure. > We assumed that the terminal growth rates for FCFF and Tax Shields are both 3% > Calculating the enterprise value of the firm by adding the PV of FCFF and Tax shields, assuming to be growing at a terminal growth rate of 3% after 10 years 4. Ratios Analysis > For justification on the use of P/E ratio and EV/EBIT ratio for valuation analysis please refer to Appendix B - Comparable firms used for P/E and EV/EBIT analysis was based on market capitalisation values, beta values and the firm's time since inception, i.e. all comparable firms have started at around the same period. - Assume share price remains constant at 231.6 million shares despite funding that occurs post 2009. But we find the enterprise value and hence price per share, pre-funding. 5. Venture Capital Method > Calculated post-financing number of shares by first calculating the required final % ownership. > Discounted Terminal Value found by discounting the Terminal Value as per NPV and APV analyses forecasted from 2010 onwards with the WACC and Unlevered Cost of Equity respectively. > Investment amount of $250 million found arbitrarily. Carsales.com's prospectus as at September 2009, seeks to raise 71.1 million x $3.50 = $248 million through equity financing. Although most of those funds will be used to repay existing shareholders, we assume that of the $250 million funds raised, most of the funds will go to support carsales.com's growth opportunities to expand the business and further profitability. ...read more.

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