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1. Given the information presented, calculate Company 456’s total free
cash flows.
2. Given the information presented, calculate Company 456’s net present
value.
3. Calculate, using the information presented, the multiple of (i) sales,
(ii) Net Income, and (iii) free cash flows for each of the comparable
public companies and the stock index. Also calculate the median value
for the multiples of the public company comparables as a group.
4. Apply the median multiple and the stock index multiple as calculated
in Question 3 to Company 456 to derive a public company comparable
valuation for Company 456.
5. Calculate, using the information presented, the multiple of (i) sales,
(ii) Net Income, and (iii) Asset values for each of the mergers and acqui-
sitions transactions. Also calculate the median value for the multiples of
the mergers and acquisitions transactions as a group.
6. Apply the median multiples as calculated in Question 5 to Company 456
to derive a mergers and acquisitions comparable valuation for Company
456.
7. Calculate the weighted valuations and total valuation for Company
456 using the DCF valuation, the public company comparables valu-
ation (multiple of sales for competitors method), and the mergers and
acquisitions valuation (multiple of sales for competitors method).
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CHAPTER
14
Capitalization Chart
T
his chapter covers the topic of a Capitalization Chart, which is a sched-
ule that tracks the ownership structure of a company. A Capitalization
Chart (also referred to as a “Cap Chart”) is an important, and decep-
tively complex, schedule that has traditionally received little attention in
finance-oriented books and textbooks. As such, I will cover this subject us-
ing the financial and valuation models developed over the course of this
book.
I address the following specific issues related to Napavale’s Cap Chart
in this chapter: the “founding” Cap Chart, the effect of an equity investment
into Napavale on the Cap Chart and the effect of issuing stock options to
employees on Napavale’s Cap Chart.
F O U N D I N G C A P I T A L I Z A T I O N C H A R T
As discussed in Chapter 2, Napavale was founded and began operations in
the first accounting period (1Q X4) covered by the financial model used in
this book. Upon its formation, the founders of Napavale determined their
initial ownership percentages in Napavale. This initial ownership structure
is captured and described in the founding Cap Chart.
I am assuming that Napavale was founded by three individuals and
that each of these individuals received an identical allocation of stock
in Napavale upon its formation. As such, each of the three founders re-
ceived 33.3 percent of Napavale’s equity upon the formation of the com-
pany. I am also assuming that there was an initial pool of 100,000 shares
of “founder’s stock.” Thus, each of the three founders received 33,333
shares of stock in Napavale. Napavale’s founding Cap Chart is shown in
Figure 14.1.
Figure 14.2 offers a view of the values and formulas underlying
Napavale’s founding Cap Chart. Note that I have included a section in
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ANALYSIS OF A FINANCIAL MODEL
F I G U R E 1 4 . 1
Founding Cap Chart
the founding Cap Chart to account for any issued and outstanding stock
options. While no stock options were issued upon Napavale’s formation,
the inclusion of stock options in Napavale’s capital structure will be cov-
ered later in this chapter. The names of the input and output cells associated
with Napavale’s founding Cap Chart are shown in Figure 14.3.
F I G U R E 1 4 . 2
Alternative View of the Founding Cap Chart
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F I G U R E 1 4 . 3
Names of the Input and Output Cells Underlying the Founding
Cap Chart
E Q U I T Y I N V E S T M E N T ’ S E F F E C T O N
C A P I T A L I Z A T I O N C H A R T
Now that Napavale’s founding Cap Chart is complete, I will cover the effect
of an equity investment into Napavale on Napavale’s Cap Chart. You may
remember that I covered an equity investment into Napavale in Chapter
6 while discussing Napavale’s Cash Budget. Specifically, $1 million was
invested into Napavale in 1Q X4. Figure 14.4 provides a view of Napavale’s
Cash Budget for the sake of reference.
When an equity investment is made into a company, the ownership
structure (and the Cap Chart) changes as well. In order to determine how
Napavale’s Cap Chart will change after the projected equity investment of
$1 million in 1Q X4, I must calculate how much of Napavale as a company
was “sold” to the investor providing this $1 million of equity capital. To do
this, I must know Napavale’s value when this investor will make this equity
investment into Napavale.
Napavale’s value was determined in Chapter 13; Figure 14.5 offers a
view of Napavale’s Valuation worksheet for the sake of reference.
The valuation of Napavale as covered in Chapter 13 incorporated the
assumption that a $1 million investment was made into the company. As
such, the value of Napavale as shown in Figure 14.5 represents what is
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ANALYSIS OF A FINANCIAL MODEL
F I G U R E 1 4 . 4
Cash Budget
known as the “post-money valuation.” In other words, the valuation of
Napavale as covered in Chapter 13 includes the value of the $1 million
equity investment.
Thus, the percentage of Napavale purchased by the $1 million equity
investment is calculated by answering the following question: What percent-
age of Napavale’s post-money valuation does $1 million represent? This
F I G U R E 1 4 . 5
Valuation Worksheet
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F I G U R E 1 4 . 6
Calculation Related to Post-Money Valuation
calculation, in addition to a related calculation that yields the number of
shares issued to the equity investor and Napavale’s updated Cap Chart, are
all shown in Figure 14.6. The values and formulas underlying the calculation
shown in Figure 14.6 are revealed in Figure 14.7. Figure 14.8 offers a view
of the names of the input and output cells underlying the calculation shown
in Figure 14.6.
An algebraic representation of the calculation of the number of shares
issued to the equity investor is:
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