Question

In: Finance

What percentage of your equity should you give to the investor?


An investor offers you $801,066 in exchange for shares of your start-up company. The investor demands an annual rate of return of 62%, and expect that your IPO will be in 5 years. At that time you expect your firm to have annual income of around $1,811,566 dollars. A similar firm was recently acquired for $18,930,059 dollars. At the time of acquisition, their income was $1,573,471 million dollars per year.


What percentage of your equity should you give to the investor?

Enter your answer as a percentage, without decimals. For example, if your answer is 0.76543, that's 76.543%, which rounds to 77%.

Solutions

Expert Solution

Current Price earnings ratio from comparable firm=value of comparable firm/income of comparable firm

=18930059/1573471=12.03076

Value of my firm at the same price earnings=Expected annual income*Price Earnings ratio

=$1811566*12.03076=$21,794,523.87

Value of amount invested by investor at 62% annual rate=amount invested*(1+interest)^number of years=$801066(1.62)^5=$8938062.19

Hence amount of equity to be given=value of investor's share/value of company

=8938062.19/21794523.87=0.4101=41.01%=41%(approx.)

jeff jeffy answered 2 years ago
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