Help with a realistic problem
I've got a realistic problem that I could use some help with. I started out knowing exactly what to do, but I seem to have confused myself on the way and now I'm stuck in circular logic and can't figure out the right answer here.
Let's say I am valuing a startup hydroelectric company that currently owns licenses to several hydro sites, and can begin building power generation plants at each site after it raises $100m in capital. I am trying to value the company and determine the price of equity when raising the capital; and to determine the current value of the current owners shares.
The business plans on raising capital using a 70/30 debt/equity capital structure ($30m equity and $70m debt need to be raised). The company is privately held and there are currently 15,000 shares outstanding. I have valued the company using a discounted cash flow model and decided that the equity is worth $145m ($215m FCFF - $70m debt).
Here is where my confusion begins. I have valued the company using projections that are assuming that the $100m capital is raised successfully. Without raising the $30m equity and $70m debt the company will not be able to build generation units and will not produce cash flow. Are the current 15,000 shares worth $145m total ($9,666 per share) as per my valuation model? Or should it not be valued that way due to the fact that the projections are post capital raising projections?
What is the value of the shares right now, and after the money is raised? How many new shares should the company issue to raise $30m in equity, and how much should they be sold for? I realize there can be many answers because the price depends on the number of shares issued, but if someone can explain the methodology they use I would be eternally grateful.
I'll be glad to clarify further if anyone needs some more info, but this has me stumped and I would appreciate any help.
so let me get this straight. the company does not have any historical financials and is just brand new and currently does not generate any cash flow?
if so, i think the best you can do here is to value the company based on NAV or search for some comps, which God knows would be hard to find for a start up company.
No, but given that it is a series of hydroelectric projects that are going to be started, a set of very reliable and accurate forecasts have been constructed. Companies are always valued using projections anyways, and they don't rely on historicals. The projections are accurate in this case.
The theoretical issue you're having is that you can't figure out how to value the current equity because it's contingent on raising more financing to produce cash flow. If there's no financing, there's no value. But that reasoning isn't really accurate I don't think:
The way I'd look at it is what would a potential acquirer pay to your company. And that's really the relevant issue. The only reason an acquiror would be because your firm has licenses, or exclusive rights to the asset.
Roughly speaking, a potential acquiror should be willing to pay the value of the licenses (which equals cash flows minus additional capital expenditure to make it viable). The current equity value should equal the value of the license (ie which in turn is the discounted value of the project). Further equity raising will just dilute current equity. At least that's the way I'd look at it.
Thanks, xqtrack. That was the way that I was looking at it as well, but the numbers didn't seem to make sense to me very much. For instance, how could an approximately 3 million dollar investment and some time spent acquiring licenses suddenly become worth 145 million?! It makes sense on paper, but realistically I am having trouble with it.
My next question is...
When computing the discount rate for the WACC, should I use the target capital structure for the project (30m equity, 70m debt) or the businesses ending capital structure (which will be around 145m equity, but still only 70m debt)? I am thinking that I should use 70/30 as my D/E ratio since, but I'm not sure if that's realistic considering the actual capital strucutre of the business will be much different. Then again, if I decide that using the 145/70 is the correct capital structure it will also change the valuation and the 145 number will likely decrease.
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