VC (Mulitple Round) / Two Period Binomial Option Pricing single, everything, multiple, periods, pretty

AndyNZ

Have a pretty solid handle on Single Round VC and One Period Binomial, would you put extra time into working Multiple for VC and Two Period for Options?

Or does anyone have a good tip for keeping everything straight when extending out multiple periods for these?

I would hope that they would just ask single period on the test.

tikfed

@spanishesk - Have you considered teaching , would be really cool if you could offer a crash course :-)

Spanishesk Wrote:
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> For binomial options, 2 period is the same as 1
> period, you just have to do an extra round of
> discounting....not sure if theres anything really
> else as far as tips.
>
> For the VC, once you get the first round down, the
> second round is easy
>
> 1) Find POST2 = Exit value/(1+rate of second
> round financing)^years from second round to exit
> 2) Find PRE2 = POST 2 - Investment made at time 2
> 3) Find POST 1 = PRE2/(1+ rate of first financing
> round)^years from now till second round of
> financing
> 4) Find PRE 1 = POST 1 - Investment.
>
> Now you have all the POST and PRE. Next, start at
> Time 1 to find new shares issued ad time 1
> 1) First, find F, which is investment/post
> 2) Multiply shares of owners * (f/(1-f)) to get
> new shares issed
> 3) Divide first investment made by new shares
> issued to get share price
>
>
> From here, you can now solve for the second round
> number and price of shares
> 1) Take the shares of teh owners, add the shares
> issued at the first round of financing.
> 2) Find the new F for time 2, which is Investment
> 2/POST2
> 3) Multiply total shares in part 1 by the
> (F2/(1-F2)) to get new additional shares for
> second round of financing
> 4) Divide Investment 2 by these new shares to get
> the price.
>
>
> Pretty much, you work backwards to time one, then
> forwards to get the final amount of shares and
> value per share issed for the second financing
> round.

b_sea93

haha i havent. I find it really useful though for my own studying to answer questions on this board. It shows me whether i actually understand the topic or just think i understand it. When there are questions asked that i cant explain, i go back and study that part to try to understand it. It s nice way to see what you dont know.


So that said, ask away haha.

llxx

mbolzicco Wrote:
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> With respect to calculating the IRR on venture
> capital my prep class provider says:
>
> NOTE: As I read through the LOS, it seems you are
> not responsible for calculating IRR for multiple
> time periods. The procedure is explained, however
> there are no numbers associated with it and it
> would be simply impossible to calculate in an
> eighteen minute item set.
>
> That being said, calculating the IRR for 1
> period...
>
> looking at original question $3,000,000 investment
> t=0 that pays off $25,000,000 in t=4 with discount
> rate of 50%
>
> CF0= -30,000,000
> CF1= 0
> CF2= 0
> CF3= 0
> CF4= 25,000,000
>
> I=50
> CPT -> NPV = 1,938,271 (as we calculated, this is
> POST1)
> IRR = 69.90
>
> IRR is higher than our required rate of return
> 50%, obviously which is why we have a positive
> NPV. Is this the correct way to calculate IRR
> for this single stage problem?


my calculator is giving different answer :-/

onelife1

sorry CF0 should be -3 million not -30 million