Question

7. AppCo is an early stage company whose financial plans call for the company to be sold in 4 years, at a valuation of $50 million. You are considering an investment of $100,000 in AppCo; you like the company but feel that it is a somewhat risky venture, so you want a 35% annual return on your investment. [Hint: refer to Question 1 for guidance]

a. What % of the company would you expect to receive for your $100,000?

b. If there are 1,000,000 shares of StartCo already outstanding, out of 50 million shares authorized, how many shares will you be purchasing, and at what price?

Answer 1

7. a

Value of AppCo after 4 years = V₄ = $50 million = 50 x 1000000 = $50000000

Discount rate = Annual return = r = 35%

Let V₀ be the current value of the company

V₀ = Discounted value of V₄ discounted at 35%

V₀ = V₄ / (1 + r)⁴

V₄ = 50000000 / (1 + 35%)⁴

V₄ = 50000000 / 1.35⁴

V₄ = 50000000 / 3.32150625

V₄ = 15053411.3853 = 15053411.39

Investment made = 100000

% of company expected to receive = Investment made / V₄ = 100000 / 15053411.39 = 0.006643012 = 0.6643012% = 0.66% (rounded to two places of decimal)

b. Price per share = V₄ / No of shares outstanding = 15053411.39 / 1000000 = = 15.05341139 = 15.05

Hence price paid per share = 15.05

No of shares purchased = Investment made / Price per share = 100000 / 15.05 = 6644.51 = 6644

No of shares purchased = 6644

No of shares purchased can also be found out using the formula: = % of company expected to receive x no of shares outstanding = 0.6643012% x 1000000 = 6643.12 which is approximately equal to 6644 shares

Hence number of shares purchased will be equal to 6644 and at price of $15.05