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

Next > < Previous

Related Solutions

A potential investor is seeking to invest $750,000 in a venture, which currently has 1,000,000 shares...

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...

A potential investor is seeking to invest $1,250,000 in a venture, which currently has 2,000,000 shares...

A potential investor is seeking to invest $1,250,000 in a venture, which currently has 2,000,000 shares held by its founders, and is targeting a 40% return four (4) years from now. The venture is expected to produce $1,750,000 in income per year at year 4. It is known that a similar venture recently produced $1,750,000 in income and sold shares to the public for $17,500,000. Suppose that the first round investor believes that the venture cannot reach the E4 projection...

As an entrepreneur seeking funds to capitalize your venture, you will be faced with investor proposals...

As an entrepreneur seeking funds to capitalize your venture, you will be faced with investor proposals regarding their preference for a funding option. After a review of Chapter 15 and preceding chapters, consider the following funding options: loan, common stock, and convertible debenture. Which do you think would be a better financial choice for a venture capitalist and why?

Investor W has the opportunity to invest $615,000 in a new venture. The projected cash flows...

Investor W has the opportunity to invest $615,000 in a new venture. The projected cash flows from the venture are as follows. Use Appendix A and Appendix B. Year 0 Year 1 Year 2 Year 3 Year 4 Initial investment $ (615,000) Taxable revenue $ 81,500 $ 76,500 $ 66,500 $ 61,500 Deductible expenses (18,000) (18,000) (21,500) (21,500) Return of investment 615,000 Before-tax net cash flow $ (615,000) $ 63,500 $ 58,500 $ 45,000 $ 655,000 Investor W...

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...

The production line produces a product which currently has annual sales of $1,000,000 and has a...

The production line produces a product which currently has annual sales of $1,000,000 and has a contribution to the business beyond ingredients of $500,000. Your line is currently operating at full standard capacity. You are putting in new equipment which will make the line more efficient and last for 10 years. The equipment will increase the capacity of the line by 30%. - so, add capability to produce $300,000 more per year and will eliminate 3 positions of manual labor...

On Monday January 17, 2017 an investor wanted to invest $1,000,000 in two stocks Verizon (VZ)...

On Monday January 17, 2017 an investor wanted to invest $1,000,000 in two stocks Verizon (VZ) and ATT (T). Using historical adjusted weekly closes from January 2, 2016 to January 15, 2017. a) FInd the proportions of the portfolio with minmal risk b) As of June 23, 2017, find the market value of this portfolio and deduce the rate of return of this investment.

An investor wants to invest his money in a fund which has maintained a steady value....

An investor wants to invest his money in a fund which has maintained a steady value. A fund manager claims that one of his bond funds has maintained an average price of $⁢19.00 with a variance of 0.2. In order to find out if the fund manager's claim is true, the investor samples the prices from 22 random days and finds a standard deviation of 0.0947 in the price. Can the investor conclude that the variance of the share price...

Subjects