Section 1.1: From Concept to Reality

Ziwi was particularly impressed by Kyle's relentless spirit and his knack for creating delightful ice cream for their kids. Spotting an opportunity, she encouraged him to turn this passion into a business.

"It sounds like a fantastic idea!" Kyle remarked, but quickly hesitated. "I’ve been pretty busy using GIS tools to analyze napkin pollution throughout the city. Once I identify the problem areas, I could collect and recycle them—it's like a cash-for-gold scheme, but with diner napkins. Eventually, napkins will become scarce, and I could profit immensely!"

Ziwi, taken aback, replied, "Kyle, that might be the most convoluted plan I've heard. You truly shine when making ice cream; it brings you joy."

"I do enjoy making ice cream," Kyle admitted, starting to warm to the idea.

"I'm thrilled you're coming around! If we dive into this, I believe we could make a fortune. Your ice cream is so good that we could be millionaires in no time!" Ziwi exclaimed, fueling Kyle’s optimism.

Kyle felt a surge of excitement at the thought. After all, his uncle always said, "Scared money doesn't make money." With renewed determination, they began sketching out their new venture, "Icy Warm Cones."

"Icy Warm?" Ziwi questioned, slightly confused.

"Absolutely! The name will draw customers year-round. We won't even need to close in winter; it'll evoke warmth," Kyle explained.

"Are you planning to offer hot drinks during winter too?" she asked, hopeful.

"Hot drinks? No way! True ice cream lovers will crave it no matter the season!" Kyle insisted, although Ziwi remained skeptical. Nevertheless, they decided to go all-in.

With both working part-time, they pooled their savings of around $25,000 each and also offered 150 preferred stocks at $1,500 each to potential investors. While Ziwi was happy about their valuation, she worried about Kyle's lack of a solid valuation method for their stocks.

Unfortunately, their expectations of attracting investors were overly optimistic. The only taker was Krill, a young crypto enthusiast who, despite his gambling tendencies, had demonstrated a knack for solid market decisions.

Krill purchased all 150 preferred stocks, granting him equity worth approximately $225,000. While preferred stockholders have limited voting rights, they often enjoy better returns than common stockholders. For a startup, investing in preferred stocks is risky, especially given the uncertainty tied to new ventures. However, taking calculated risks can yield significant rewards.

Kyle was unconcerned about accurately pricing his shares, confident that Icy Warm Cones would be a billion-dollar success. What could possibly go wrong?

"I don't think it's wise to avoid diversifying our products during winter," Krill suggested.

"Listen, Krill, you're just a passive investor. Sit back and let the profits roll in," Kyle retorted.

"Though I lack voting rights, I can still offer advice. Ignoring diversification could be a costly error, especially in our midwestern locations. Who prefers ice cream over hot cocoa in winter? Think practically!" Krill urged.

Kyle paused for a moment before responding, "Krill, this is about brand identity. If we add other products, we won't be a true ice cream shop; we'll be a shop for everything!"

"What if, instead of diversifying, we invest in a factory to produce and sell our ice cream? That could offset the losses from low winter sales," Krill proposed, looking at Kyle with newfound interest.

Section 1.2: The Investment Dilemma

Kyle and Ziwi failed to accurately assess the value of their stocks for Icy Warm Cones. It's crucial to understand the distinction between stock valuation and business valuation. While Kyle believed in the billion-dollar potential of their idea, this didn't provide investors with a clear understanding of actual worth.

The Cost of Preferred Stock Formula:

Rp = D (dividend)/ P0 (price)

For instance:

A company offers preferred stock with an annual dividend of $50. If the current share price is $1,500, the cost of preferred stock would be:

Rp = D / P0

Rp = 50 / 1500= 3%

Investors should note that the cost of preferred stock can vary, influenced by market supply and demand. Generally, preferred stock tends to be more valuable than common stock due to its likelihood of dividend payments and greater security in case of company failure.

Krill's investment carries substantial risk, particularly given the high share price and his complete ownership of the stocks. He stands to gain or lose significantly based on the company’s future performance.

In the next section, Krill will grapple with his inability to persuade Kyle to diversify. He questions whether a factory will effectively mitigate losses and views it as a hefty capital investment. We will explore how analyses like NPV can guide leaders in evaluating the impacts of significant investments.

The first video, "Thrice - Cold Cash and Cold Hearts [Audio]," delves into themes of financial struggle and emotional resilience, echoing Kyle and Ziwi's own journey in the business world.

The second video, "The Story Behind... Warm Heart In A Cold World," highlights the importance of empathy and warmth in business, reinforcing the message that relationships matter in entrepreneurial endeavors.

Thanks for Reading! If you’re considering buying, selling, or listing your business, check out the following tips for accurately valuing your organization.

Methods for Determining Organizational Value

1. Book Value: This straightforward method calculates the difference between an organization's assets and liabilities. However, it often overlooks indirect assets that can impact cash flow and revenue.
2. Market Capitalization: A simple measure for publicly traded companies, calculated by multiplying the share price by the total number of shares. This method, however, only considers equity and neglects debt.
3. Enterprise Value Model: This model accounts for both debt and equity, subtracting unused cash to provide a more comprehensive valuation. Though it is more complex than the previous methods, it offers a detailed perspective on a company's worth.