Accuflow Incorporation Harvard Case Solution & Analysis

Q4. What enterprise value is the company worth to Cunningham? At that enterprise value, what would the VC stake be worth? What price should Cunningham offer to Greylock? What price will Greylock accept? Will they be able to negotiate a deal?

The enterprise value of the company is evaluated over a loan amount of $133 million at a cost of debt of 13%, which is a combination of senior debt of $108 million at a rate of 15% and mezzanine dent of $25 million at a rate of 10%.

The CAPM model is used to determine the cost of equity for which 6% is considered risk free rate and 5.5% market risk premium making 11.5% the market risk rate beta of AccuFlow was calculated by ungearing the beta of competitor companies the average is considered the beta asset of the industry which is re geared with the debt of AccuFlow to give its beta equity, with the use of these figure cost of equity was calculated as 37%.

Since the loan offered by HPC was of 7 years this debt is too considered to be of 7 years therefore a forecast of free cash flows of 7 years was required, the forecast is made on the basis of as a percentage of revenue, whereas the terminal value is calculated with growth rate assumed to be 8%.

The corporate tax rate is given as 34% and $1 million is charged each year as capital expenditure, considering all the above data WACC of the company was calculated as 13.43%, which led the enterprise value to be $395million after $133 million of debt the enterprise value stands as $262million, which gives venture capitalist a proportion of $162.7 million.

Since the enterprise value of the company stands at $395 million Cunningham has to determine and negotiate an offer price with Greylock which would offer a value not greater than the enterprise value, since Cunningham has been associated with the company over a long period of his life and a big part and reason of the company’s success surely Greylock won't deny the offer made by Cunningham since he himself is ready for retirement, as of today stands at the age of 78 years and is no position to continue his role in the company, he knows he wont to able to continue for long and who else to leave the company with then the person who has brought it to the height it stands today.

Q5. Will Cunningham accept the deal that you expect HPC to propose?

Cunningham is desperate need of finance, he is willing and motivated to step up and the take the driving seat of this company as it is because of him the company stands at such a strong position and is showing promising future results. The deal which is assumed for the working of these question is $35million at 14% coupon rate this deal gives HPC a NPV of $4million and IRR of 14% which is more than satisfying.

HPC is more likely going to produce a deal which would be similar to this, if not so then Cunningham will be able to negotiate a deal closer to this because as much Cunningham wants this deal at the same point HPC wants to finance it.

Since deals already offered to Cunningham are not as satisfying as the one proposed by HPC it is very likely Cunningham will accept this expected deal.

Q6. What should Greylock do? Should Greylock accept the deal that you have come up with? Should Greylock push for an IPO?

Greylock is no longer in a position to continue to operate at his role he would be looking to sell off his holding either through the deal proposed by Cunningham or through pursuing an IPO for the company.

An IPO is not the most attractive option at the moment since the market is not operating very efficiently due to which it will perceived very poorly in the market and will not generate enough equity for the company nor it will provide the existing holders value for money on their investment, but most importantly the company is still not accomplished enough to be listed on the stock exchange making the option of the IPO not viable for the company.

Whereas Cunningham is the person who has put his heart and soul in this company and dreams to take it to new height sand is backed by the management, Greylock would not only receive a good offer through Cunningham but also would be leaving the company in good hands, the offer from Cunningham should be accepted................................

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