Question

Problems 5 and 6 are connected. 5) As a venture capitalist, you are considering investing in a startup company called Xevo. Xevo, like most startups, is not expected to generate profits in the near future. After careful analysis, you and your colleagues determine that Xevo will start generating profits of $400,000 at the end of the 6th year. Thereafter, it will grow at 11% per year forever. Using a discount rate of 8%, and assumingyou will be acquiring 50% of the company, what is the amount your venture capital firm would be w/illing to invest? (a) $2,857,143 (b) $1,248,883 (c) $1,695,575 (d) $1,058,376 evo is hot in the Valley, and there are other venture capitalists bidding for the 50% share of the company. Another venture capitalist, a long lost friend with whom you once took Corporate Finance together at OSU, says that it's more likely that Xevo will be able to generate $100,000 in profits at the end of each year for the first 5 years. She agrees with you on Xevo's prospects after that as well as on discount rate, what's her price tag for the 50% share in Xevo? (a) $1,214,735 (b) $1,405,242 (c) $1,561,600 (d) $2,857,143

Answer 1