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In: Accounting

QUESTION 3 Three years ago, you founded an outdoor recreation company called EloMax Inc., a retailer...


QUESTION 3
Three years ago, you founded an outdoor recreation company called EloMax Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far your company has gone through three funding rounds:
Round
Date
Investors
Shares
Share Price (GHS)
Series A
Feb 2016
You
500,000
1.00
Series B
Aug. 2017
Angels
1,000,000
2.00
Series C
Sept. 2018
Venture Capital Trust Fund
2,000,000
3.50
It is now 2019 and you need to raise additional capital to expand your business. You have decided to take your firm public through an Initial Public Offering (IPO). You would like to issue an additional 6.5 million new shares through this IPO. Additionally, as part of the IPO you also decide that the timing was right to cash in on your investment by selling a quarter of your current share-holding in a secondary offering. EDC Securities acting as your lead investment banker has set a price of GHS5.3 for the IPO. If your firm successfully completes its IPO, you forecast that 2019 Earnings per share will be GHS0.75.
Required:
a. After the Series C round of financing what will be the total value of your equity stake in the business? ​​​​​​​​​[3 marks]
b. What is the total amount the firm will raise through the IPO for the purpose of expanding the business? ​​​​​​​​​[3 marks]
c. What is the total number of shares that will be issued for the purposes of the IPO? [4 marks]
d. What percentage of the firm will you own after the IPO? ​​​​[4 marks]
e. After going public in 2019 EloMax Inc identified a strange pattern in stock price in June 2019. The stock price of EloMax Inc declined following the offering. The CEO is enraged and does not understand this happening. At breakfast this morning, the CEO engages you in your capacity as a financial analyst for the firm and wants to know what reasons could have possibly accounted for the share price decline. Briefly state your response to the CEO. ​​​[6 marks]
(Total: 20

Solutions

Expert Solution

a. Total value of your equity stake in the business after series C round of financing:

Series Total value of equity(Amount in GHS)
A 500,000*1= 500,000
B 10,00,000*2= 20,00,000
C 20,00,000*3.50= 70,00,000
Total 95,00,000

b)Calculation of total amount raised through IPO

Amount raised through IPO= No of shares raised through IPO* Issue price per share

= (65,00,000*5.3)

=344,45,000

c)Total number of shares that will be issued for the purposes of the IPO

Total number of shares for IPO 65,00,000
LESS:Quarter shares sold (500,000/4) 125,000
Total number of shares in IPO 63,75,000

d)Percentage of the firm after the IPO:

SERIES A (500,000-125,000)=3750000
SERIES B 10,00,000
SERIES C 20,00,000
IPO 65,00,000
LESS:Quarter shares sold 125,000
TOTAL SHARES A 97,50,000
Own Holding(500,000-125,000) B 375,000
Shareholding (B/A*100) 3.85%

e) Reason possibly accounted for the share price decline are as follows:

1)MAJOR SHAREHOLDIN SELLING: Some institutional sharholders target to sell their shareholding at a particular date or at a given price.This result supply for sale usually depresses the share

2)NEGATIVE RESEARCH NOTES: Negative research can sometimes lead into decrease into the stock price

3)FAULTY NUMBERS:This is also one of the reason why there is decrease in the prices of the stock

Plz UPVOTE IFU FIND THE SOLUTION HELPFUL !

ekkarill92 answered 2 years ago
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