John Thompson, CEO of WVU, Inc., wants to raise $5 million in a private equity in his early stage venture. Thompson conservatively projects net income of $8 million in year five (fiveyears from now) and knows that comparable companies trade at a price to earnings ratio of 16X.
A.) If the Price to Earnings ratio for a company like John's is 16X, how much does he expect his company to be worth at the end of year 5.
B.) Sitting at his desk at the end of year 01, John wants to raise $5 million. If a Venture Capitalist wants a rate of return of 50% per year, what percent of the company should the venture capitalist ask for to earn her return in 5 years?