Entrepreneurship Case Study: REACH Health Valuation and Hotmail

This case study analyzes REACH Health Inc.'s valuation using both multiples and discounted cash flow (DCF) methods, including scenario analysis to assess the impact of varying sales growth rates on equity value. It also examines Hotmail's exit strategy, detailing why the company chose venture capital over bank loans and DFJ over Asian investors, focusing on ownership and trust considerations. The analysis covers the significance of staged investments and the strategic rationale behind Microsoft's acquisition of Hotmail to counter Yahoo's market influence. Desklib provides access to similar solved assignments and study resources for students.

Running head: ENTREPRENEURSHIP
Entrepreneurship
Name of the Student:
Name of the University:
Authors Note:

ENTREPRENEURSHIP
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Table of Contents
Case 9.2: Valuing REACH Health Inc.......................................................................................2
Calculating value of Reach with the help of Multiplies method:...............................................2
Calculating value of Reach with the help of DCF method:.......................................................2
Conducting scenario analysis:....................................................................................................4
Case 10.2: Exit Strategy: The Sale of Hotmail..........................................................................5
Why high growth companies need venture capital and not bank loans:....................................5
Why DFJ was chosen instead of Asian investors by JavaSoft:..................................................5
Stating the clause of father’s investment in the company:.........................................................7
Advantages of investing in stages rather than all at once:.........................................................7
Depicting why Microsoft bought Hotmail:................................................................................7
References:.................................................................................................................................8

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Case 9.2: Valuing REACH Health Inc.
Calculating value of Reach with the help of Multiplies method:
Multiple Valuation
Method
2009 2010 2011 2012 2013
EBITDA (1,180,000) 437,000 4,674,000 9,025,000 14,143,000
Market value of
invested capital
- 6,573,976 70,312,966 135,766,90
6
212,759,152
Particulars Virtual Radiological NightHawk Radiology
Sales 93,280,000.00 166,752,000.00
EBITDA 17,576,000.00 24,824,000.00
MVIC 255,014,704.00 386,698,137.00
MV-to EBITDA 14.51 15.58
Average MV-to EBITDA 15.04
Calculating value of Reach with the help of DCF method:
Enterprise
Valuation
Based on
Free Cash
Flows from
Operations
0 7-Year Competitive Advantage Period (CAP) Post-
CAP
1 2 3 4 5 6

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Revenues $
1,678,3
84
$
3,704,00
0
$
8,917,0
00
$
16,850,
000
$
26,102,
000
$
36,214,00
0
Net
Operating
Profit
$
(1,180,0
00)
$
437,00
0
$
4,674,0
00
$
9,025,0
00
$
14,143,00
0
Income
Taxes
$
(14,278)
$
5,288
$
56,555
$
109,203
$
171,130
Net
Operating
Profit After
Taxes
$
(1,165,7
22)
$
431,71
2
$
4,617,4
45
$
8,915,7
98
$
13,971,87
0
Investments $
240,000
$
240,00
0
$
240,000
$
240,000
$
240,000
Depreciation $
60,000
$
60,000
$
60,000
$
60,000
$
60,000
Change in
Working
Capital
$
321,000
$
823,00
0
$
819,000
$
1,314,0
00
$
1,255,000
Free Cash
Flows to the
Firm
$
(1,666,7
22)
$
(571,28
8)
$
3,618,4
45
$
7,421,7
98
$
12,536,87
0
$
13,790,
557
Residual or
Terminal
$
50,257,13

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Value 0.72
Discounted
Annual Free
Cash Flows
$
(1,307,8
48)
$
(351,75
7)
$
1,748,2
54
$
2,813,7
54
$
18,680,53
6
Present
Value of
Free Cash
Flows to
Equity
$
21,582,
938
Less:
Marketabilit
y Discount
$ 6,474,881.47
Intrinsic
Value of
Equity
$ 15,108,057
Conducting scenario analysis:
Assumptions Box 5-Year Competitive Advantage Period (CAP) Post-
CAPYear 1 Year 2 Year 3 Year 4 5
Sales growth rate 100.0% 100.0% 100.0% 30.0% 15.00% 0.0%
Operating Profit Margin 2.0% 2.0% 22.00% 31.0% 37.0% 44.00%
Intrinsic Value of Equity $7,213,676
Assumptions Box 5-Year Competitive Advantage Period (CAP) Post-
CAPYear 1 Year 2 Year 3 Year 4 5

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Sales growth rate 140.0% 140.0% 140.0% 70.0% 55.00% 40.0%
Operating Profit Margin 7.0% 7.0% 27.00% 36.0% 42.0% 49.00%
Intrinsic Value of Equity $(33,847,790
)
From the decline in sales growth rate the intrinsic value of equity mainly increases,
while the increment in sales growth rate it declines. In addition, the sensitivity analysis
indicates that revenue growth rate needs to be adequate for improving the intrinsic value of
equity.
Case 10.2: Exit Strategy: The Sale of Hotmail
Why high growth companies need venture capital and not bank loans:
Rapid growing companies such as Hotmail seek venture capital rather than bank
loans, as venture capital does not who's the company to pay annual interest on the investment
amount. However, taking a loan from Bank would eventually increase pressure on Rapid
growing business, as the profits will be eroded from the interest payments conducted to the
bank. Moreover, using savings fund in the capital venture is highly risk, as rapid growing
companies would consume the savings capital fast. Therefore, rapid growing companies
relatively use venture capital to support their capital requirements, as they need investor for
the organization who believe in the objective and future scope of the company (Kirzner
2015).
Why DFJ was chosen instead of Asian investors by JavaSoft:
Stock Holder Number of shares Percentage ownership

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Owner 1 4,000,000 32%
Owner 2 4,000,000 32%
Employees 2,490,272 20%
DFJ 1,867,704 15%
Total shares 12,357,976 100%
Stock Holder Number of shares Percentage ownership
Owner 1 4,000,000 26.7%
Owner 2 4,000,000 26.7%
Employees 2,490,272 16.6%
Asia 4,500,000 30.0%
Total shares 14,990,272 100%
From the evaluation of above table, changes in ownership can be identified as the
main reason, which motivated the founders of JavaSoft to accept original investments from
DFJ, while rejecting the proposal of Asian investor. After the inclusion of venture capital
from DFJ, the owners share in the company was at 32%, which was highest in percentage,
while after allowing the investment from Asian investors the change in percentage of
ownership was not favorable for the JavaSoft founders. This was the main reason behind the
selection of DFJ as the venture capital and ignoring the proposal of Asian investors (Dees
2017).

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Stating the clause of father’s investment in the company:
The inclusion of the provision for the founder’s father to invest $15,000 in the
company is proposed by DFJ on the grounds of trust that fathers have on son’s project. This
provision was mainly conducted to increase trust of DFJ on the idea and business of JavaSoft.
Advantages of investing in stages rather than all at once:
The main advantages of funding or a young firm like Hotmail in stages rather than all
at one is to identifying the progress that is made by the organization. The funds provided in
stages would eventually secure investment of venture capitalist, while increasing the number
of ownership portion in organization. Conducting investments all at once is a risky endeavor,
which might backfire if the company is not able to achieve targeted goals (Drucker 2014).
Depicting why Microsoft bought Hotmail:
The main reason behind the buying of Hotmail by Microsoft was to counter the move
of Yahoo one of the leading competitors in the industry. Yahoo had previously bought 11
Corporation which were the biggest competitor of Hotmail that allowed the organization to
acquire the market with additional subscribers (Brenkert 2017). However, Microsoft bought
Hotmail the biggest and foremost performer and market leader in this segment to reduce the
influence of Yahoo on the market. this move mainly costed Microsoft 395 million and
generated 9.5 million subscribers for the organization.

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References:
Kirzner, I.M., 2015. Competition and entrepreneurship. University of Chicago press.
Dees, J.G., 2017. 1 The Meaning of Social Entrepreneurship. In Case Studies in Social
Entrepreneurship and Sustainability(pp. 34-42). Routledge.
Drucker, P., 2014. Innovation and entrepreneurship. Routledge.
Brenkert, G.G., 2017. Entrepreneurship, ethics, and the good society.
In Entrepreneurship (pp. 85-128). Routledge.