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An Angel Investor has been asked to invest $200,000 into a new firm. The Angel Investor...

An Angel Investor has been asked to invest $200,000 into a new firm. The Angel Investor expects to realize an annual rate of return of 25% over a 4 year period. The estimate value of the firm in four years is believed to be $6 million. Based on these facts what is the dollar value of the return the Angel Investor expect to receive and what percentage of ownership does this amount equate to for the Angel Investor? Please explain how you arrived at the numbers.

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Answer #1

Dollar Value of Ret to Angel Investor:

FV = PV(1+r)^n

r is Annual rate of Ret and n is time gap

= $ 200,000(1+0.25)^4

= $ 200,000 * (1.25^4)

= $ 200,000 * 2.4414

= $ 488,281.25

% of Ownership by Angel Investor:

Angel Investor Value after 4 Years / Firm value after 4 years

= $ 488,281.25 / $ 6,000,000

= 0.0814 i.e 8.14%

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