The Discounted Cash Flow Method
VC methodology is the popular methods …show more content…
a) Terminal Value: Terminal value is an important step to valuation the start-up firms. VC Methodology valuation is based on estimation of Terminal Value in exit year and ignores the cash flows to get a NPV. Conversely, DCF required projected cash flows and multiples to determine the Terminal value and NPV. VC method is more focused on Net income and multiples but DCF relies on cash flows and multiples.
b) Discount rate: Basically VC required the higher target rate of return of 30% - 70% to discount the future cash flow. It is vary on nature of business and the probability of failure. The higher rate reduced the value of the new firm. Unlikely, DCF used lower discount rate such as cost of equity, cost of debt and WACC for discounting the future cash flows. That gives the higher value to firm and higher return to share holder.
c) Cash Flows: VC method ignores the cash flows for discounting the projected cash flows whether DCF taking accounts for all future cash flows. It including all FCF in the projected …show more content…
And they are typically planned to exit in 3 to 7 years after inject the fund with higher rewards. DCF method is pure valuation methods provides the true value of the firm by starting the net present value of cash flows over the life of the company.
3.2. Distinguish between a target rate under the VC method and a market-adjusted rate
Target Rate: Target rate is the optimistic to achieve the best possible returns from investment. It is the expected rate of return applies to implicit the risk of start-up business. Investors likely to charge higher rates on investment to compensate for hold the specific risk of new firms. The rate should be between 30% to 70% depends on financial performance, management expertise and nature of business.
Market Adjusted Rate: The rate of return in CAPM model that used to discount the cash flows which is adjusted based on risk links with the assets. For example, risk free rate and risk premium are core components to determine the cost of capital on CAPM pricing model where beta measures the systematic risk only which can not be diversified. The discount rate set by investors and market that compensate the risk of