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Digital Everywhere, Inc. Case Solution

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  • Course
  • Entrepreneurial Finance
  • Institution
  • Universiteit Van Amsterdam (UvA)

Jerome is an entrepreneur and wants to raise finance for Digital Everywhere, Inc. He presents two tables to the potential investors: the expectations over the balance sheet and a list of comparable firms with few financial metrics. Your job is to valuate the firm using - Discounted Cash Flow anal...

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Document information

  • May 9, 2018
  • 9
  • 2017/2018
  • Essay
  • Unknown
  • Unknown

Subjects

  • entrepreneurial finance
  • firm valuation
  • multiples
  • dfc analysis
  • entrepreneurial method
  • digital everywhere
  • finance

Written for

  • Universiteit van Amsterdam (UvA)
  • Business Administration
  • Entrepreneurial Finance
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Discounted Cash Flow (DCF) analysis
When raising external finance, valuating a venture is critical to understand the future cash flows that
will go to investors; and to understand whether the terms that investors propose are acceptable. DCF
analysis of entrepreneurial ventures is done by estimating future cash flows. Since cash flows are
estimated, a few reasonable assumptions about the firm are necessary.
The case assumes the following1:
 The business is financed fully with equity;
 $1 million initial investment;
 A growth rate of 5% per year after 2003;
or a modest growth of 2%;
 10-year government bonds yielding 7% per year.


The starting point for this analysis is to determine the increase in working capital, which is equal to:
Net Working Capital = Current Assets – Current Liabilities
= Cash + Inventory + Receivables – Payables


1998 1999 2000 2001 2002 2003
Current Assets $3.171 $4,825 $13,939 $25,753 $38,045 $52,604
Current $1,140 $2,005 $4,869 $6,302 $7,064 $8,369
Liabilities
Working $2,031 $2,820 $9,070 $19,431 $30,981 $44,235
Capital (WK)
ΔWK $2,031 $789 $6,250 $10,361 $11,550 $13,254



Next, we can proceed to determine the cash flows. The formula is as follows:
FCF = (Revenues – Costs – Depr) * (1 – τc) + Depr – CapEx – ΔNWC


Where
FCF = free cash flow
Depr = depreciation
τ = corporate tax rate
CapEx = capital expenditure
ΔNWC= change in net working capital
1
Gompers & Sahlman, 2002, p. 193.

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