Question

In: Finance

Upon its founding, the high-potential firm issued 10 million shares of stock in total, all held...

Upon its founding, the high-potential firm issued 10 million shares of stock in total, all held by the two co-founders after having been granted at $0.05 per share. No additional shares are to be issued. (A decision about issuing new shares would be reconsidered in the event the firm went public at some time in the future). One year after founding a VC invests $3.5 million in startup-stage financing at a share price of $1.25. In an additional round of financing several months later the VC invests an additional $6 million at a share price that places the company's valuation at double that after the first financing round. If the founders were able to liquidate their remaining shares immediately after this second round, what would their shares be worth in total?

a.

$8 mil

b.

$5 mil

c.

$12 mil

d.

$20 mil

Solutions

Expert Solution

Initial Valuation = 10 million share*$0.05 per share = $500000

VC's Invests $3500000 at $1.25 per share. Therefore, Number of shares received by VC = 3500000/1.25 = 2800000 shares

VC's stake in the company after 1st funding = Shares held by VC/Total Shares = 2800000/12800000 = 0.21875 = 21.875%

Company Valuation after VC's 1st Investment = Investment made by VC/VC's stake = 3500000/0.21875 = $16000000

New Investment of $6 million at a share price that will double the valuation.

Say, for example, VC will receive n Number of Shares. Therefore, Total Shares after VC's Investment will be 12800000+n

Therefore, VC's Stake will be n/(12800000+n)

Therefore, New Valuation will be = New Investment made/Stake = 6000000/[n/(12800000+n)]

16000000*2 = 6000000*(12800000+n)/n

[32000000/6000000]*[n] = 12800000+n

5.3333n-n = 12800000

Therefore, Number of Share = n = 12800000/4.3333 = 2953846 shares

VC's stake after new investment = Total VC's shares/Total Company's shares = (2800000+2953846)/15753846 = 36.5234%

Therefore, Founders' Stake = 100-VC's Stake = 100-36.5234 = 63.4766%

Valuation of Founders' Shares = Total Valuation of Company after nmew investment*Founders' Stake = (16000000*2)*63.4766% = $20312512 which is equivalent to $20 Million


Related Solutions

Suppose you own 50,000 shares of common stock in a firm with 2.5 million total shares...
Suppose you own 50,000 shares of common stock in a firm with 2.5 million total shares outstanding. The firm announces a plan to sell an additional 1 million shares through a rights offering. The market value of the stock is $35 before the rights offering and the new shares are being offered to existing shareholders at a $5 discount. a. If you exercise your preemptive rights, how many of the new shares can you purchase? New shares 20000 b. What...
Suppose you own 88,000 shares of common stock in a firm with 4.4 million total shares...
Suppose you own 88,000 shares of common stock in a firm with 4.4 million total shares outstanding. The firm announces a plan to sell an additional 2.2 million shares through a rights offering. The market value of the stock is $40 before the rights offering and the new shares are being offered to existing shareholders at a $5 discount. a. If you exercise your preemptive rights, how many of the new shares can you purchase?      New shares b. What...
Suppose you own 50,000 shares of common stock in a firm with 2.5 million total shares...
Suppose you own 50,000 shares of common stock in a firm with 2.5 million total shares outstanding. The firm announces a plan to sell an additional 1 million shares through a rights offering. The market value of the stock is $35 before the rights offering and the new shares are being offered to existing shareholders at a $5 discount. (LG 8-3)     If you exercise your preemptive rights, how many of the new shares can you purchase?     What is...
1. Bonita Corporation issued 2,000 shares of $10 par value common stock upon conversion of 1,000...
1. Bonita Corporation issued 2,000 shares of $10 par value common stock upon conversion of 1,000 shares of $50 par value preferred stock. The preferred stock was originally issued at $65 per share. The common stock is trading at $24 per share at the time of conversion. Record the conversion of the preferred stock. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles...
Cristian, Inc. issued 10,000 shares of stock at a stated value of $10/share. The total issue...
Cristian, Inc. issued 10,000 shares of stock at a stated value of $10/share. The total issue of stock sold for $15/share. The journal entry to record this transaction would include a A. credit to Common Stock for $150,000. B. debit to Cash for $100,000. C. credit to Common Stock for $100,000. D. credit to Paid-in Capital in Excess of Par Value for $150,000.
Southern Wind is an all-equity firm with 26,500 shares of stock outstanding and a total market...
Southern Wind is an all-equity firm with 26,500 shares of stock outstanding and a total market value of $376,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $38,000 if the economy is normal, $23,600 if the economy is in a recession, and $52,400 is the economy booms. Ignore taxes. Management is considering issuing $95,200 of debt with an interest rate of 6 percent, if the firm issues the debt, the...
Suppose a firm has 10 million shares of common stock outstanding at a price of $40...
Suppose a firm has 10 million shares of common stock outstanding at a price of $40 per share. The firm also has 300,000 bonds outstanding with a current price of $1050. The outstanding bonds have yield to maturity 7.1%. The firm's common stock beta is 1.4 and the corporate tax rate is 35%. The expected stock market return is 10% and the T-bill rate is 1.5%. What is the WACC for this firm? (Enter your answer to 4 decimal places...
Agee Storage issued 35 million shares of its $1 common stock at $16 a share on...
Agee Storage issued 35 million shares of its $1 common stock at $16 a share on July 1, 2006 Agee reacquired to retire 1 million shares at $14 a share on September 12, 2006. Agee reacquired 4 million shares as treasury stock at $11 a share on October 7, 2006 Agee issued 3 million shares of treasury stock at $8.50 a share on November 1, 2006 Record all of the applicable general journal entries and post to T-Accounts (check figure:...
   On January 1, 2016, A Corp. issued shares of its common stock to acquire all of...
   On January 1, 2016, A Corp. issued shares of its common stock to acquire all of the outstanding common stock of B Inc. B’s book value was only $140,000 at the time, but A issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. A was willing to convey these shares because it felt that buildings (ten-year life) were undervalued on B's records by $60,000 while equipment (five-year life) was undervalued...
ABC Inc. has 10 million shares of common stock outstanding. The firm also has 1,200,000 shares...
ABC Inc. has 10 million shares of common stock outstanding. The firm also has 1,200,000 shares of 6 percent preferred stock (annual dividend=$6) and 300,000 semi-annual bonds of $1,000 face value with a coupon rate of 8 percent semiannual bonds outstanding. The bonds were issued five years ago with maturity of 30 years when they were issued. The market price of common stock is $46 per share and has a beta of 0.85, the preferred stock currently sells for $90...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT