5. StartCo is an early stage company whose financial plans call for the company to be...
5. StartCo is an early stage company whose financial plans call for the company to be sold in 5 years, at a valuation of $10 million. You are considering an investment of $100,000 in StartCo;
you like the company but feel that it is a fairly risky venture, so you want a 40% annual return on your investment.
a. What is the present value of StartCo, using your required rate of return as the discount rate?
b. What % of the company would you expect to receive for your $100,000?
c. If there are 750,000 shares of StartCo already outstanding, out of 10 million shares authorized, how many shares will there be after you invest your $100,000?
d. How many shares will you be purchasing, and at what price?
Homework Answers
A)Present value of the company= expected value after five years/(1+ discount rate)time
=$10m/(1.40)5
=$1.8593million
B) % of the company would we received by investing $100000.
={investment / (Present value of the company +investment) }*100
={$0.1million/(1.8593+0.1)million}*100=5.1039%
C)total no of the shares after investment= 750000/(100-5.1039)*100=790338(rounded off)
D) Price of per share =1.8593million/.75million=2.4791
No of the share to be issued=100000/2.4791=40338(rounded off)
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