So, in the previous sessions we talked about venture capital term sheets, and one of the things on the term sheet was valuation of the company. Now, let's look at how you value the companies. Here, we are talking about the three core things in valuation. So the three core things are, first; cash flow is king, time value of money, and risk premium. Let's consider future free cash flow. This is cash leftover after working capital and investment. So, this is the cash flow leftover after you pay for maintaining and growing your business. So, when you value a company you consider this company as an ATM and estimate how much is this ATM by considering the future free cash flows it'll generate. The second thing is time value of money, and this means one dollar today is not the same as one dollar one year from now because inflation and impatience. I guess that you're familiar with inflation, but what about impatience? So, I'll give you an example. So, suppose that you have someone and he wants to give $1,000. He asks you, "Do you want it today or a year from now? When do you want it?" Probably, you'll say today, and he'll say, "Why? There's no inflation here." What's your answer to this? You might think, what if he changed his mind and I want to buy something today if I get this $1,000. So, this is impatience. He could say that, "Since you really want it, would you accept $950 today? So, would you accept 950 or would you wait for one year?" Maybe many of you would agree to receive $950 today. If you do that, you consider 950 today more valuable than $1000 one year from now. So, this is time value of money. The third thing is risk premium and this graph shows the annual return of corporate bonds with respect to the ratings. So, if a company's rating is a triple A, triple A means here in this table, the probability of insolvency or not able to pay back is zero up to 10 years. If another company's rating is a triple C, it has a very high probability of insolvency and the annual return of a bond with triple C rating is much higher. So this means with more risk the return could be higher. If your company or your project has high risks then you will have to pay more when you secure investment money or loan. So, let's consider our new project. In this project, your initial investment money is one million dollars now, and then you expect to have an annual return of about $200,000 from the next year for 10 years. So, the question is should you invest or not? So, this graph shows the cash investment this year and future cash flow of 200,000 for the next 10 years. You need to estimate the present value of the future cash flow because there is time value of money. So, $200,000 in year two is not the same as $200,000 in year 11. So, to receive $100 one year from now, how much do you need to deposit when the interest rate is three percent? So, you deposit D this year with this interest rate and you will get $100 next year. So, if you solve for D, D is $97.09. So, this is the present value of $100 one year from now, and this one over one plus 0.03 is called the discount factor. So, let's calculate the present value of future cash flow. The present value of future cash flow is expressed like this and here is the discount rate and the first term is from the cash flow next year, in two years, and so on. So, the project we are considering, we expect the cash flow for 10 years so the present value is expressed like this. This d is the rate company has to pay to get money like loan or investment and this is called cost of capital, and this is the risk premium. Net present value is the present value minus the initial investment, in this case, one million dollars. So, in this graph we plot net present value with respect to D, the cost of capital. So, if it is low like 5-10 percent, this project makes sense. But if d, cost of capital is high like 20 percent, you should not do this project. So in summary, we have talked about three core things in valuation: cash flow is king, time value of money, and risk premium