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 2 years ago
Next > < Previous

Related Solutions

1 Corp X is authorized to issue 1,000,000 shares of Common Stock Par $1 No Entry...
1 Corp X is authorized to issue 1,000,000 shares of Common Stock Par $1 No Entry since it was just authorized but not issued. 2 Corporation X issued 500,000 shares of Common Stock Par $1 for $ 8 per share 3 Corporation X issued 1,500,000 shares of Common Stock Par $1 for $10 per share 4 Corporation X reacquired 1,000,000 shares of their Common Stock Par $1 for $ 2 5 Sold 500,000 shares of treasury stock at $8 per...
Dunbar Company had 1,000,000 shares of $1 par value common stock outstanding at January 1, 2015....
Dunbar Company had 1,000,000 shares of $1 par value common stock outstanding at January 1, 2015. On July 1, 2015, the company issued 100,000 additional shares of common stock. In addition, at December 31, 2015, 90,000 shares were issuable upon exercise of executive stock options which require a $40 cash payment upon exercise. The average market price during 2015 was $50.    Dunbar Company also has two convertible securities. There are 10,000 convertible bonds with a face amount of $1,000,...
Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000...
Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 6% convertible bonds outstanding during 2015. The preferred stock is convertible into 40,000 shares of common stock. During 2015, Hanson paid dividends of $.60 per share on the common stock and $1.50 per share on the preferred stock. Each $1,000 bond is convertible into 40 shares of common stock. The net income for 2015 was $400,000 and the income tax rate was 30%....
Truman Company is authorized to issue 1,000,000 shares of its $5 par value common stock and...
Truman Company is authorized to issue 1,000,000 shares of its $5 par value common stock and 500,000 shares of its $10 par value preferred stock. During 2019, the company had the following select transactions. Issued 200,000 shares of common stock for $35 per share Issued 50,000 shares of preferred stock for $55 per share Reacquired 80,000 shares of common stock at $30 per shares Reissued 50,000 shares from treasury for $33 per share Reissued 30,000 shares from treasury for $23...
Mesa Company is authorized to issue 1,000,000 shares of its $5 par value common stock and...
Mesa Company is authorized to issue 1,000,000 shares of its $5 par value common stock and 600,000 shares of its $10 par value preferred stock. During 2018 – its first year of business - the company earned $650,000 of net income and had the following select transactions. No dividends were declared or paid throughout the year. The net income and events below are the only ones that impact Stockholders’ Equity this year. Issued 300,000 shares of common stock for $35...
A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The first investment,...
A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The first investment, a software company, has a 15% chance of returning $9,000,000 profit, a 24% chance of returning $2,000,000 profit, and a 61% chance of losing the million dollars. The second company, a hardware company, has a 11% chance of returning $5,000,000 profit, a 18% chance of returning $1,000,000 profit, and a 71% chance of losing the million dollars. The third company, a biotech firm, has...
Creating a discrete probability distribution: A venture capitalist, willing to invest $1,000,000, has three investments to...
Creating a discrete probability distribution: A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The first investment, a social media company, has a 20% chance of returning $7,000,000 profit, a 30% chance of returning no profit, and a 50% chance of losing the million dollars. The second company, an advertising firm has a 10% chance of returning $3,000,000 profit, a 60% chance of returning a $2,000,000 profit, and a 30% chance of losing the million dollars....
A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The first investment,...
A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The first investment, a software company, has a 6% chance of returning $7,000,000 profit, a 42% chance of returning $1,000,000 profit, and a 52% chance of losing the million dollars. The second company, a hardware company, has a 14% chance of returning $6,000,000 profit, a 41% chance of returning $500,000 profit, and a 45% chance of losing the million dollars. The third company, a biotech firm, has...
On January 1, 2018, Warren Corporation had 1,000,000 shares of common stock outstanding. On March 1,...
On January 1, 2018, Warren Corporation had 1,000,000 shares of common stock outstanding. On March 1, the corporation issued 160,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 stock split. On October 1, the corporation purchased on the market 520,000 of its own outstanding shares and retired them. Compute the weighted average number of shares to be used in computing earnings per share for 2018. Weighted average number of shares
On January 1, 2019, UMB Corporation had 1,000,000 shares of common stock outstanding. On April 1,...
On January 1, 2019, UMB Corporation had 1,000,000 shares of common stock outstanding. On April 1, the corporation issued 200,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 stock split. On Nov. 1, the corporation purchased 600,000 treasury shares from the market. In addition, in 2018, UMB issued 5,000, $1,000 face value, 10% 10-year convertible bonds at par value. Each bond is convertible into 100 shares of common stock. The par value...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT