Question

Hello, I want soln of this question but please you have to follow the method given in image. It is hint or model you can say made on excel by instructor. Follow this, do not use any other method or solution. Use excel please and show cell formulas.

A potential investor is seeking to invest $750,000 in a venture, which currently has 1,000,000 shares held by its founders, and is targeting a 45% per annum return for the next five years. The venture is expected to produce $1,000,000 in income per year at year 5. It is known that a similar venture recently produced $2,000,000 in income and sold shares to the public for $15,000,000.

a.    What is the percent ownership of our venture that must be sold in order to provide the venture investor’s target return?

b.    What is the number of shares that must be issued to the new investor in order for the investor to earn his target return?

c.    What is the issue price per share?

d.    What is the pre-money valuation?

e.    What is the post-money valuation?

Make sure you specifically include a section in your submission that clearly states your answer to each question.

50% Annual Return to Investor Years to exit Investment Business Value at Exit 650,000 10,000,000 650,000 975,000 1,462,500 2,193,750 3,290,625 4,935,938 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Existing Shareholder New Investor $$ Shares 2,000,000 650,000 1,949,398 3,949,398 % Price 50.64% 49.36% 0.3334 100.00% Pre-money Valuation 666,872.43 Post-money Valuation 1,316,872.43

Answer 1

a). %age of ownership to be acquired = investment made/[(comparable PE ratio*Year 5 earnings)/(1+annual required return)^number of years of investment]

= 750,000/[(15,000,000/2,000,000)*1,000,000)/(1+45%)^5] = 64.10%

b). Number of shares to be issued = number of initial shares*%age acquired/(1 - %age acquired) = 1,000,000*64.10%/(1-64.10%) = 1,785,309

c). Issue price per share = investment made/number of shares issued = 750,000/1,785,309 = 0.4201 per share

d). Pre-money valuation = initial number of shares*issue price per share = 1,000,000*0.4201 = 420,095.35

e). Post-money valuation = final number of shares*issue price per share = (1,000,000 + 1,785,309)*0.4201 = 1,170,095.35

Excel template:

45% Annual return to investor Years to exit Investment Business value at exit 750000 7500000 750000 1087500 Yr 1 1576875 Yr 2 2286469 Yr 3 3315380 Yr 4 4807301 Yr 5 Price Existing shareholder New investor Shares 1000000 1785309 2785309 750000 35.90% 64.10% 100.00% 0.4201 Pre-money valuation Post-money valuation 420095.35 1170095.35

Formulas:

4 Annual return to investor 0.45 5 Years to exit 6 Investment 750000 7 Business value at exit =(15000000/2000000)*1000000 F =B6 =F4*(1+$B$4) =F5*(1+$B$4) =F6*(1+$B$4) =F7*(1+$B$4) =F8*(1+$B$4) Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 $$ Shares Price 1000000 =1-D12 =C11*D12/(1-D12) =B6/B7/(1+B4)^B5) =B12/C12 =C12+C11 =D12+D11 =B6 11 Existing shareholder 12 New investor 13 14 15 Pre-money valuation 16 Post-money valuation -C11*E12