In the present era, in the finance domain field, corporate finance plays a very crucial role as it is most important part of this mentioned field. The corporation is facing the issue related to insufficient finance so it directly affecting the daily operation of business. In order to overcome this financial issue, corporation decided to take the fund from venture capital which is most important source of finance. By this source of fund, company can raise huge amount of fund for business. The following project report provided depth knowledge and understanding about the various finance evaluation methods and its implication within the business enterprise. In addition to this discounted cash flow method has been addressed in this report in order to compute the fair value of share. In addition to this venture capital valuation method has been systematically used in this project so as optimum solution can obtain by the business firm.
1 Seven domain analysis
Target segment benefits and attractiveness:
Greenewit is the one of the firm that is operating in the energy sector and providing services to the multiple entities like customers and government utility firms. Currently, major target group of the business firm is the local utility firms and it is providing consultancy services to same in respect to implementation of the energy efficiency programs. Quick home energy checkup program is one of the campaign that is run by the government in the current time period. Under this Greenewit is installing energy efficiency equipment’s in the homes without taking any additional charge (Dhaliwal and et.al., 2011). Customers or general public are also the target customer of the business firm. Presently, firm is guiding them in respect to changes that can be made in the home in respect to improving energy efficiency. Guidance that is provided by the business firm to the people lead to huge energy efficiency in homes, durability, safety and lower amount of energy bills.
It can be said that Greenewit is reaching to the general public and is providing benefits to them by giving proper guidance. It can be assumed that firm portfolio of services is very huge. Private sector firms are also the main target customers of the business firm. Under this Greenewit is providing energy related services to the buildings and apartments. Under this relevant system is evaluated, lots of things that can be practices by relevant employees at workplace to save energy is communicated to them and operator training program is also conducted to ensure that relevant individuals are properly trained and can save energy where it is possible to do in the business firm (Li, 2010). Separate training programs are conducted for the employees of the utility firm and under this training is given to them about the way in which they can make people understand about the way in which they can manage energy cost and consumption.
Market attractiveness: Market attractiveness is the one of another factor that heavily influence the business firm. On evaluation of the energy sector it can be said that relevant market is attractive in nature. As demand for the energy is increasing in the market and due to this reason related services demand also increased in the market. Currently, one of the major problem that almost all nations of the world faced is that energy is less produced but its consumption is increasing at rapid pace. Population of the nations is increasing and due to this reason consumption of same also elevate but production is not increasing at same pace. Thus, there is a huge need to save energy. Government is running varied campaigns to make people aware about energy efficiency and make them habitual to do same at their home. Thus, there is a huge earning revenue opportunity in the market (Damodaran, 2012). By capitalizing opportunity in the market firm can earn good amount of revenue and due to this reason it can be said that market is very attractive.
Industry attractiveness: In order to measure attractiveness of industry same can be divided in to different segments namely generation of electricity and advisory services in respect to energy to the people and business firms. Currently, there is huge demand of the consultancy services in the market which make industry more attractive. This huge demand make industry more attractive Thus, it can be said that there are ample opportunity in the industry and by capitalizing same firm can earn huge amount of revenue in the business. Interesting fact is that there are few competitors in the market and due to this reason by providing excellent quality services firm can easily enhance its share in the market and can give tough competition to the rival firms. It is observed that most of nations in the current time period are facing serious problems due to recession. Personal disposable income of the people get reduced as there is less employment and employed people are bearing burden of unemployed people. Due to this reason people spending power get reduced. Thus, people are taking more interest in the energy efficiency. Due to efficient use of energy at homes and production place consumption of same declined sharply and due to this reason utility bill value also declined. This is the main reason due to which more and more people and business firms intends to become more energy efficient (Pinto and et.al., 2010). It can be said that there is huge demand of the consultancy services and by providing excellent quality service to the people firm can develop commendable position in the market. It can be said that there are number of areas in which h relevant firm can work and can build solid position.
Sustainable advantage: There is sustainable advantage of working in this industry because energy sector is one of domain whose demand will never decline in the future time period. In the upcoming time period demand for the energy and consultancy services will surely increase. There are number of sources on which currently research and development work is carried out by the firms for power generation. It is anticipated that in the upcoming time period population will increase at rapid pace and due to this reason demand of the services provided by the business firm will continuously remain in demand. It can be said that there will be sustainability in the services that are provided by the business firm in the current time period.
Mission, aspirations and propensity for risk: Every business firm have some goals and mission and Greenewit have same. Presently, main mission of the business firm is to provide services at broad level to the customers and other entities. In this regard it added many new services in its portfolio time to time. There are some aspirations of the business firm and under this firm main aim is to expand its business operations at fast rate. Due to this reason it try to increasing number of services provided to the different entities in its portfolio. Moreover, it also make serious efforts to multiple number of customers in its business (Boubakri and et.al., 2012). Propensity of risk is high on the current business because technology is changing at fast pace and due to this reason approach that is followed to perform specific operation also changed significantly over the past time period. In future also same trend will remain continue. Thus, it become very important for the firm to upgrade its technology base.
Ability to execute critical success factors: Firm ability to execute critical success factor also determine its core competency in the market. Critical success factors refers to the areas where firm performance determine its success and failure. Firm ability work effectively on these factors and implementation of same determine whether firm will achieve success or failure in its business. On the basis of analysis of case it can be said that John have long years of experience and same is expert in formulation of strategy for the firm and implementation of the business operation. Apart from this, John also have expertise in the accounting and finance field. Mentioned person is also member of the Mid Atlantic chapter of efficiency first. It can be observed that mentioned entity have experience in the power industry and also possessed knowledge of different domains. It can be said that John is multi-talented person and he can manage varied business operations (Chen and et.al., 2011). Thus, firm is able to implement to critical success factors.
Connectedness up, down across value chain: Organization structure is the one of the important element of an organization. It is the organization structure under which chain of communication is clearly determined. It is ascertained that who will work under whom. Apart from this, who will communicate to whom is also determined in the capital structure. Thus, it can be said that there is huge importance of the organization structure for the business firm. Organization structure in the firm is very strong and chain of command of clearly outline authority and responsibility relationship among the employees. Thus, organization structure facilitate smooth performance of the business operations. It is very important to modify organization structure time to time with change in the business operations. This is because with passage of time many new employees are added in the workforce and new levels of management are prepared. Thus, it is very important to alter organization structure accordingly. By doing so it is ensured that all employees that are in the organization are responsible to same. It can be said that by preparing best organization structure value chain can be improved.
2 Stages of venture capital investing, characteristics of venture capital investing and practical challenges to venture capital valuation
Venture capital is the important source of finance under which from the venture capital firm entire fund is raised and same is received in different stages of the business. It can be said that there is a huge importance of venture capital finance for the business firm. Stages of venture capital investing is given below.
Seed: In the initial stage seed capital is provided by the business firm and under this little amount of fund is made available by the venture capital firm to the company (Chen, Kacperczyk and Ortiz-Molina, 2011). The little amount of money that is provided by the venture capital firm is used for the market research and other purposes that are fulfilled for establishment of the business. Proper performance of the firm at this stage ensured that same will grow in the upcoming time period.
Early stage: This is the stage of the venture capital finance under which huge investment is made by the relevant firm in the business firm in respect to development of the proper infrastructure in the business. Under this stage firm business operations does not commenced but will be started in the future time period. Thus, at this stage proper funding is required for smooth performance of the business operations.
Formative stage: This is the stage where firm start performing business operations. The entire fund that is needed to commence and managing production related activities is made available by the venture capital firm to the company.
Later stage: This is considered as the last stage of the venture capital finance because in this stage firm whose operations are funded launch its IPO in the market (Valuation method, 2017). Through IPO huge amount of fund is raised from the market. Venture capital firm simple sale its shares in the secondary market and exit from the business firm.
There are number of characteristics of the venture capital finance and under this in sequence investment is made by the firm in its business. Venture capital firms usually acquire 30% stake in any company and by doing so it cover moderate shareholding in the business firm and influence its owner’s decisions. It can be said that it is the one of the important characteristic of the venture capital finance. The rate of finance cost is very high in case of venture capital in comparison to other sources of finance and due to this reason it is assumed as dearer source of finance for the business firm (Bhattacharya and et.al., 2011). There are number of challenges that are faced by the firm in the venture capital valuation. This is because in the venture capital valuation model cash flows needs to be estimated. It is possible that one may make wrong estimation of cash flows. If cash flows will be wrongly estimated then in that case valuation model will depict wrong value of the firm. It can be said that there is significant importance of the valuation model for the venture capital firms but same must be used with due care.
3 Role that venture capital play in creating value for the firm
Venture capital firm can play great role in creating value for the business firm. It must be noted that venture capital firm have 30% stack in the company and its members are shareholders in the Greenewit. Thus, they have right to give suggestions to the Board of Directors of the mentioned firm. Venture capital firm make an investment in number of business firms and due to this reason its representatives have vast experience and knowledge. By making use of their intellectual knowledge business firm can grow its rapid pace in the industry. It can be said that venture capital firm play an important role in creating value for the business firm.
Assumptions that are considered for computing weighted average cost of capital is given below.
It is assumed that there is moderate risk on the investment in equity of the firm and due to this reason beta value is 0.50 for the current project.
Risk free rate of return is also taken in to consideration to compute risk on investment. In the model risk free rate of 0.71% is considered which means that if an investment is made on debt security then in that case return of 0.71% can be earned.
Market return of only 4% is considered because it is assumed that nation economy is not on the growth track and in the upcoming time period also same may be low due to slow economic growth. Hence, it can be said that by considering economic factor low return from market is assumed.
It is usually observed that higher discount rate is used by the venture capital firm in comparison to the rate that is described by capital asset pricing model. This is because in case of venture capital source of finance huge amount of fund is invested by the VC firm on the business firm (Damodaran, 2016). Fund is arranged from the market at the specific interest rate. Thus, main objective of the business firm is to cover that finance cost by charging additional percentage from the client. Thus, cost of capital is high in case of venture capital then the capital asset pricing model.
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Comparison of valuation method
- There are number of positive points of the discounted cash flow model and one of them is that in same cash flows that are expected to be occurred in the future time period are estimated and same is discounted to measure fair value of the firm by considering future cash flows.
- Other main advantage of the discounted cash flow model is that in same capital expenditure value is considered to calculate free cash flow. Thus, in this model all sort of expenses are considered to compute net value of cash flows. It can be said that true value of firm is computed by using DCF model.
- Calculation model is highly complex and on that does not have any background in finance cannot use this model.
- Venture capital valuation model can be used by anyone because its calculation process is very simple.
- Value of the firm is calculated by using venture capital valuation model (Lopes. and de Alencar, 2010).
- Terminal value is taken in to account to do valuation of the firm. In case wrong value will be taken in to consideration then in that case fair value of shares cannot be computed.
- It is assumed that there is moderate risk on the investment and due to this reason 0.50 value of beta is taken in to consideration for calculation purpose.
- Price of the per unit of share is assumed 10 and due to this reason total issued shares are 97939.
It can be seen from the table that cash flow of the firm in starting years is negative and thereafter it become positive. It can be seen from table given above that intrinsic value is 58 which means that shares are valued at 58. WACC is 2.90% which means that overall by considering debt and equity of the firm cost of capital is 2.90%. It can be said that overall cost of capital is 2.90% and by considering same present value of cash flows is computed. In order to compute equity value from enterprise value debt is subtracted and cash is added. Thereafter, equity value is divided by outstanding shares and in this way fair value of shares is computed.
From the results, it is visualized that terminal value is computed to 5,991,186 at an anticipated or targeted return on investment of 30%. However, for deriving the post valuation, TV has been dividend with the ROI and figured to 19,970,619.
Interpretations: From the results, it can be seen that VC firm is expected to generate an estimated return of 16%. At these return, company can recover its cost incurred and generate good return.
8. Finance sources and recommendations
From the outcome of the results, it can be recommended to the business to finance itself from the VC. The reason behind suggesting this source is that the entire funding will be made in varied sequence. By satisfying the capital requirement from the venture capital, it can meet its huge capital need and will not face any funding issues like scarcity and shortfall. Apart from this, there are alternative sources from which business can meet its capital need such as borrowings from the bank and share capital. On the bank borrowing, a fixed rate of interest will be needed to pay whilst on the share capital, investors will require dividend which is the cost of it.
Finance plays a very crucial role in the business venture and in the absence of sufficient fund no firm can survive its business activities and function. From this project report it has been concluded that valuation method is most effective tool in the finance field which aid to firm for compute intrinsic value of share. In addition to this in this project discounted cash flow models and venture capital valuation method has been successfully implemented. These methods has assisted to firm in taking decision related to business activities and functions.
From the above project, I have gained various kinds of knowledge and idea about the financial methods and techniques. From this project I have analyzed that finance plays a very crucial role for every business enterprise which assists in every activities and action of business. Corporation required sufficient quantity of fund to carry out the business in the market. I have learnt that there are various sources of finance like venture capital, bank loan, retained earning etc. From this project, I have gained the effective knowledge about the venture capital and its implication in the business. I have chosen venture capital for obtain the finance for business activities. However, the major issue with venture capital is that growth rate of cash flow. In addition to this from this entire session, my interpretation and calculation skill has also improved because I have used various methods of calculation to attain the right value. In this entire project, various method has calculated such as discounted cash flow, valuation method etc.
Furthermore, I used cash flow at the rate at which I founded this is most suitable and realistic method. But in this manner, growth rate of cash inflows was wrong and modification in same were required. Moreover, I have carried out various stages of dialogue with the venture capital firm. I have to present some valid logic in front of the panel of staff which are working in the venture capital firm. Thus, it can be said that from the entire project of finance, I have successful understand the various method of finance and use the information to solve the issue of the business unit.
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