QUESTION 1. Firmin Technologies is expected to earn $6.25 million (NI) in year 5, when the firm is expected to be sold to an acquiring company. Comparable companies have a P/E ratio of about 18. The initial investment the VC is being asked to make is $3.5 million. Before that investment is made there are 1 million shares outstanding. The VC will get new shares. (There is expected to be no debt or available cash at the investment horizon.)
If the VC requires a 70% target return, how much stock should he demand? Please give total number of shares with no commas (for example 2 million is 2000000.)
QUESTION 2 It is the same exact scenario as the previous question. What price per share does the t=0 investment represent? Answer in dollars to two decimal places.
QUESTION 3 Now assume the more realistic scenario where the investment is spread over three rounds: $1,500,000 at t=0, 1,250,000 at t=2, and 750,000 at t = 4. Investors at t=0 require a 70% annual target return, investors at t=2 will demand a 50% annual target return, and investors at t=4 will require a 30% annual target return. As before, the firm is expected to earn $6.25 million in year 5, and comparable firms have a P/E ratio of 18. There are 1 million shares owned by the founder and the VC investors will get new shares. Early investors anticipate the later investments.
What percentage of the final value of the firm does the round 1 investor require at t=5? Please answer in decimal form to four decimal places.
QUESTION 4 The same scenario continues. What percentage of the final value of the firm does the round 2 investor require at t=5? Answer to 4 decimal places.
QUESTION 5 The same scenario continues. And I bet you expected this question. What percentage of the final value of the firm does the round 3 investor require at t=5? Answer in decimal form to 4 decimal places.
QUESTION 6 The same scenario continues. How many shares will the round 1 investor receive when the investment is made? Remember to answer without commas.
QUESTION 7 The same scenario continues. Still regarding the round 1 investor--what price per share does that reflect when the investment is made? Do not use the dollar sign. Answer in dollars to two decimal places.
QUESTION 8 The same scenario continues. How many shares will the round 2 investor receive when the investment is made? Again, do not use commas.
QUESTION 9 The same scenario continues. Still regarding the round 2 investor--what price per share does that reflect when the investment is made? Do not use a dollar sign. Answer in dollars to two decimal places.
QUESTION 10 The same scenario continues. How many shares will the round 3 investor receive when the investment is made? Again, do not use commas.
QUESTION 11 The same scenario continues. Still regarding the round 3 investor--what price per share does that reflect when the investment is made? Do not use the dollar sign. Answer in dollars to two decimal places.
QUESTION 12 The same scenario continues. Tell me the percentage of the firm the first investor owns at t=0 (at the time of his investment). Note that this takes a little thought and is often gotten wrong. Answer in decimal form to 4 decimal places.
QUESTION 13 The same scenario continues. Tell me the post-money valuation at round 1 (t=0)? Answer in dollar to two decimal places. Do not use commas or the dollar sign.
QUESTION 14 And now, what is the pre-money valuation at round 1? Again, no dollar sign, no commas.
QUESTION 15 Yes, we are going to do this for the next two rounds too. What is the post-money valuation at round 2 (t=2)? No dollar sign, no commas.
QUESTION 16 And now the pre-money valuation of round t (t=2)? No dollar sign, no commas.
QUESTION 17 ok, let's do just one more. What is the post-money valuation at round3 (t=4)? No dollar sign, no commas.
QUESTION 18 Ok, another scenario. And only three questions here.
This is a continuation of the problem we did in class, the one where John Ford starts a firm Bestafer and Bob Strong is the venture capitalist. It is not really hard but it might make you think a little. The situation is as follows: John Ford, CEO of Bestafer, Inc., sought to raise $5 million in a private placement of equity in his early stage dairy products company. Ford conservatively projected net income of $4 million in year 5, and knew that comparable but more mature companies traded at a price earnings ratio of 20x. The venture capitalist, Bob Strong, has a 50% target rate of return. Ford has 1,000,000 shares. (There is expected to be no debt or available cash at the investment horizon.) All this is as before.
But here is what is different: Bob Strong of Kennebunk Capital liked Ford's plan, but thought it naive in one respect: to recruit a senior management team, he felt Ford would have to grant generous stock options in addition to the salaries projected in his business plan. From past experience, he felt management should have the ability to own at least a 15% share of the company by the end of year 5 (at t=5). That is, management will be rewarded with stock options that Strong feels will result in these managers (not including Ford) owning 15% of all shares as of t=5. (Those shares will not be issued at t=0)
Given these beliefs, how many shares should Strong insist on today if his target rate of return is 50%? (The assumption here is that a wise venture capitalist will anticipate this 15% management pool at the time of the financing.) Assume that $5 million must be invested now. Do not use commas in your answer.
QUESTION 19. The same scenario. What price per share at t=0 does that represent? Answer in dollar to two decimal places, but do not use the dollar sign.
QUESTION 20. The final question. The same scenario. What percentage of the firm does Strong obtain at t=0? (Remember the shares in the management pool are anticipated but not yet issued at t=0.) Please answer in decimal form to 4 places.