Question

Marcus Company, is a successful start up business, but needs additional funding of $500,000 to fund continued growth. Currently the company is worth $1,500,000.   An angel investor is willing to invest the full $1,500,000. The owner of the company currently owns all 100,000 shares in her business

a. Calculate the fair price per share

b. How many additional shares must be sold to the angel investor?

c. What proportion of the company will the angel investor own?

d. What are 3 reasons that explain why the owner of the company wants to raise new equity capital?

e. What are 3 reasons that explain why the owner might consider raising new capital through debt rather than equity?

Answer 1

a. Calculate the fair price per share

Fair price = Pre money valuation / Number of shares outstanding = 1,500,000 / 100,000 = $ 15

b. How many additional shares must be sold to the angel investor?

Additional shares = Investment amount / fair price per share = 1,500,000 / 15 = 100,000

c. What proportion of the company will the angel investor own?

Proportion owned = Shares owned by investor / (Shares owned by investor + shares owned by owner) = 100,000 / (100,000 + 100,000) = 50%

d. What are 3 reasons that explain why the owner of the company wants to raise new equity capital?

• The company needs new capital and owner doesn't have the capital to infuse
• The company needs new capital and all other sources of capital (except equity raise) have been exhausted.
• The owner of the company wants to share the risk as well as reward with the other investors.

e. What are 3 reasons that explain why the owner might consider raising new capital through debt rather than equity?

• Cost of debt is lower than cost of equity. Debt is a relatively cheaper capital.
• Interest on debt is tax deductible. Thus the effective cost of debt, post tax cost of debt, is even lower.
• Owner doesn't want to dilute his stake in the company