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==Valuation== ===What's the expected return of an investment in Stockhub?=== The Stockhub company estimates that the expected return of an investment in the company over the next five years is 55x. In other words, an Β£1,000 investment in the company is expected to return Β£55,000 in five years time. The assumptions used to estimate the return figure can be found in the table below. Assuming that a suitable return level over five years is 10% per year and Stockhub achieves its expected return level (of 55x), then an investment in the Stockhub company is considered to be a 'suitable' one. For those in the UK: Stockhub is SEIS and EIS eligible, a key benefit of which is that those who invest now can claim back up to 50% of the investment amount in income tax relief. Accordingly, the estimated expected return of investing in the business is even higher for UK-citizens (than non-UK citizens). === What are the assumptions used to estimate the return?=== {| class="wikitable" |+Key inputs !Description !Value !Commentary |- |Which valuation model do you want to use? |Discounted cash flow |There are two main approaches to estimate the value of an investment: #By calculating the present value of the investment's expected future cash flows (i.e. discounted cash flow valuation); and #By comparing the investment to other similar investments (i.e. relative valuation). Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the discounted cash flow approach<ref name=":5">Demirakos et al., 2010; Gleason et al., 2013</ref>, so that's the approach that Stockhub suggests to use here; nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the using the relative valuation approach (the valuation based on the relative approach can be found in the appendix of this report). |- |Which financial forecasts to use? |Stockhub |The only available forecasts are the ones that are supplied by the Stockhub company (the forecasts can be found in the financials section of this report), so Stockhub suggests using those. |- | colspan="3" |'''<div style="text-align: center;">Growth stage 1</div>''' |- |Discount rate (%) |25% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. Research indicates that companies in the first stage of the business lifecycle are often held by either undiversified owners or by partially diversified venture capitalists.<ref name=":7" /> Consequently, it does not make sense to assume that the only risk that should be priced in is the market risk; the cost of equity has to incorporate some (in the case of venture capitalists) or maybe even all (for completely undiversified owners) of the firm specific risk. |- |Probability of success (%) |20% |Research suggests that a suitable rate for a company in this growth stage (i.e. stage 1) is 20%. |- | colspan="3" |'''<div style="text-align: center;">Growth stage 2</div>''' |- |Discount rate (%) |15% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. |- |Probability of success (%) |50% |Research suggests that a suitable rate for a company in this growth stage (i.e. stage 2) is 50%. |- | colspan="3" |'''<div style="text-align: center;">Growth stage 3</div>''' |- |Discount rate (%) |10% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. Research suggests that it's best to use a similar margin rate as the one used by peers that are in the same growth stage (i.e. growth stage 3). A peer that is in growth stage three (i.e. the same growth stage) is Meta Platform Inc. and its discount rate is around 10% (for further information on the discount rate, see the table in the Appendix below). |- |Probability of success (%) |100% |Research suggests that a suitable rate for a company in this growth stage (i.e. stage 3) is 100%. |- | colspan="3" |'''<div style="text-align: center;">Growth stage 4</div>''' |- |Discount rate (%) |10% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. |- |Probability of success (%) |100% |Research suggests that a suitable rate for a company in this growth stage (i.e. stage 4) is 100%. |- | colspan="3" |'''<div style="text-align: center;">Other key inputs</div>''' |- |What's the current value of the company? |Β£4,000,000 |As at 23rd February 2022, the Stockhub company estimates the current value of its company at Β£4 million. |- |Which time period do you want to use to estimate the expected return? |Between now and five years time |Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years.<ref>https://www.newyorkfed.org/mediabrary/media/medialibrary/media/research/staff_reports/research_papers/9809.pdf</ref> Accordingly, Stockhub suggests that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time. |} ===Sensitive analysis=== The main inputs that result in the greatest change in the expected return of the Stockhub investment are, in order of importance (from highest to lowest): #The discount rate (the default time-weighted average rate is 15%); #The probability of success rate (the default time-weighted average rate is 71%); and #Stockhub peak market share (the default share is 2%) The impact of a 50% change in those main inputs to the expected return of the Stockhub investment is shown in the table below. {| class="wikitable sortable" |+Stockhub investment expected return sensitive analysis ! Main input !50% worse !Unchanged !50% better |- |The discount rate |10x |55x |412x |- |The probability of success rate |14x |55x |88x |- |Stockhub peak market share |27x |55x | 82x |}
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