Question

In: Finance

1. Venture capitalist X invests in 20% (1,000,000 shares of common stock) of a company for...

1. Venture capitalist X invests in 20% (1,000,000 shares of common stock) of a company for $10 million dollars and in the next round of financing the company issues an additional 5 million shares of common stock to venture capitalist Z for $5 million dollars. The stake of Venture capitalist X in the company is reduced to 10%. This is an example of dilution. (True or False)

2. One way for individuals who are not accredited investors to gain exposure to venture capital investments is to invest in public companies that are actively involved in funding startups (True or False)

3.

Investors who bought the series D convertible preferred stock issued by Zoom in 2016 and then sold the shares in the IPO earned an annual rate of return of between 105% and 110%. (assume the purchase was on January 1st, 2016 and the sale was on December 31st, 2019). (True or False)

time

$$cashflow

2016

0

-3.74

2017

1

0

2018

2

0

2019

3

34.2

4. Preferred shares that are sold to venture capitalists give the venture capitalists preferred rights to residual economic value relative to the rights of common shares. (True or False)

Solutions

Expert Solution

1. True. X was 20% shareholder in the company which reduced to 10% due to additional shares issues by the company. Dilution means reduciton in % of shareholding.

2. True, venture capital is a form of private equity who provide financing to startup and small size firms who have potential for growth. However this requires high amount of investment and so not available for general public. But one can invest in publicly trader venture capital companies as they can buy even a small no of shares. But the no of venture capital companies that go public are very few.

3. True

Year 0 1 2 3
Investment value 3.74 3.74 7.85 16.49
return @ 110% 4.11 8.64 18.14
total 3.74 7.85 16.49 34.64
Year 0 1 2 3
Investment value 3.74 3.74 7.67 15.72
return @ 105% 3.93 8.05 16.50
total 3.74 7.67 15.72 32.22

4. False.

Preferred rights are not entitled to residual economic value relative to the rights of common share. Residual economic value is the remaining income after distribution of preferrence dividend and any value left of a company that is unwound after distribution to all creditors and preference share capital. this is available to common equity shareholders and preference equity shareholders only receive the dividend that is agreed upon and the par value at unwind.

jeff jeffy answered 1 year ago
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