Using the following information, please answer the questions about Surelock Homes, a start-up company. In your analysis, assume the valuation date is the end of year 6, projected earnings in year 6 will be $12 million, and an appropriate price-to-earnings ratio for valuing these earnings is 20 times.
Financing Round Amount in millions Year Required Return
1 $6 0 60%
2 8 2 40%
3 12 4 30%
In addition, the company wants to reserve 15 percent of the shares outstanding at time 6 for employee bonuses and options.
a. What percentage ownership at time 0 should round 1 investors demand for their $6 million investment?
b. If Surelock presently has 1 million shares outstanding, how many shares should round 1 investors demand at time 0?
c. What is the implied price per share of Surelock stock at time 0?
d. What is Surelock's pre-money value at time 0? What is its postmoney value?