Question

A potential investor is seeking to invest $750,000 in a venture, which currently has 1,000,000 shares held by its founders, and is targeting a 45% per annum return for the next five years. The venture is expected to produce $1,000,000 in income per year at year 5. It is known that a similar venture recently produced $2,000,000 in income and sold shares to the public for $15,000,000.

a. What is the percent ownership of our venture that must be sold in order to provide the venture investor’s target return?

b. What is the number of shares that must be issued to the new investor in order for the investor to earn his target return?

c. What is the issue price per share?

d. What is the pre-money valuation?

e. What is the post-money valuation?

Make sure you specifically include a section in your submission that clearly states your answer to each question. I will not hunt through your spreadsheets or calculations to find your answers. If possible, please try to include only one document in your submission and please do not use embedded spreadsheets if you use a word document. Please label your assignment using our assignment labeling convention. Each question is worth three points.

Answer 1

(a) Percent ownership of venture that must be sold in order to provide the venture investor’s target return

Exit value required by investor = 750,000 * 1.45 ^ 5

=$ 4,807,300

Exit value of the firm = 15,000,000 * 0.5 = $ 7,500,000

Ownership required = $ 4,807,300 / $ 7,500,000

= 64.10%

(b) Number of shares to be issued to the new investor in order for the investor to earn his target return

No. of shares to be issued = 2,000,000 * [0.641 / 1-0.641)]

=3,570,565 shares

(c) Computation of issue price per share

  Issue price per share = Investment amount / No. of shares

= $750,000 / 3,570,565

= $0.21 per share

(d) Computation of pre-money valuation

Pre-money valuation = Post money valuation - Investment amount

= 1,170,101.56 - 750,000

= $ 420,101.56

(e) Computation of post-money valuation

  Post-money valuation = Investment amount / Ownership acquired

= 750,000 / 64.10%

= $1,170,101.56