To be successful in the Dragons’ Den, an entrepreneur needs to persuade one or more of the dragons to make a financial investment in their company. Whenever an entrepreneur asks for £100,000 in return for a 10% stake in their company, they implicitly value their business at £1 million. However, many of the entrepreneurs have difficulty justifying how they have decided that their ideas are worth so much.
In this article, we look at two aspects of financial investment. In the first scenario, a manager is deciding whether to commit funds to a project and wants to know when they will get the investment back, what returns they might make over a given period and what the value is of the project. These questions are answered using investment appraisal techniques. In the second scenario, an investor is trying to decide whether to invest in an entire business by deciding how much the shares of a company might be worth and comparing this with the price at which they are available. This scenario is important both for potential shareholders and for managers targeting growth through acquisition.
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