Question

In: Accounting

28. A potential investor is seeking to invest $1,000,000 in a venture, which currently has 1,000,000...

28. A potential investor is seeking to invest $1,000,000 in a venture, which currently has 1,000,000 shares held by its founders, and is targeting a 40% return five years from now. The venture is expected to produce half a million dollars in income per year at year 5. It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $20,000,000.

What is the percent ownership of our venture that must be sold in order to provide the venture investor’s target return? a. 33.33% b. 53.78% c. 75.94% d. 85.00%

What is the number of shares that must be issued to the new investor in order for the investor to earn his target return? a. 1,163,659 b. 1,578,138 c. 4,156,276 d. 2,578,138

What is the issue price per share? a. $0.8594 b. $0.7520 c. $0.3168 d. $0.1584

What is the pre-money valuation? a. $859.4K b. $752.0K0 c. $316.8K d. $158.4K pls show work

Solutions

Expert Solution

a) Price earning ratio of similar venture = Share Price/Income

= $20,000,000/$1,000,000 = 20

Share price of our venture = Price earning ratio*Expected Income

= 20*$500,000 = $10,000,000

Required Share capital of investor after 40% return = Investment amount*(1.40)5

= $1,000,000*5.37824 = $5,378,240

Ownership percent that must be sold = $5,378,240/$10,000,000 = 0.5378 or 53.78%

Therefore, 53.78% ownership of our venture must be sold in order to provide the venture investor’s target return. Hence the correct option is b) 53.78%.

2) Ownership percent held by founders = 100% - 53.78% = 46.22%

Shares issued to new investor = Shares held by founders*(% share of investor/% share of founders)

= 1,000,000 shares*(53.782/46.218) = 1,163,659 shares

Hence the correct option is a) 1,163,659 shares

3) Issue price per share = Amount invested by investor/Number of shares issued

= $1,000,000/1,163,659 shares = $0.8594 per share

Hence the correct option is a) $0.8594

4) Pre-money valuation = Shares held by founders*Issue price per share

= 1,000,000 shares*$0.8594 per share = $859,400 or 859.4K

Hence the correct option is a) $859.4K

ekkarill92 answered 1 year ago
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