Question

3. Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your company has gone through three funding rounds: Round Date Investor Shares Share Price ($) Series A Feb. 2009 You 600,000 1.00 Series B Aug. 2010 Angels 1,200,000 2.50 Series C Sept. 2011 Venture capital 2,000,000 3.25 It is currently 2012 and you need to raise additional capital to expand your business. You have decided to take your firm public through an IPO. You would like to issue an additional 6 million new shares through this IPO. Assuming that your firm successfully completes its IPO, you forecast that 2012 net income will be $7 million. a. Your investment banker advises you that the prices of other recent IPOs have been set such that the P/E ratios based on 2012 forecasted earnings to be 18.0 on average. Assuming that your IPO is set at a price that implies a similar multiple, what will your IPO price per share be? b. What percentage of the firm will you own after the IPO?

Answer 1

Investors	Round	No of Shares	Share price ($)	Amount Raised ($)
YOU	A	600000	1	600000
Angel	B	1200000	2.5	3000000
Venture Capital	C	2000000	3.25	6500000
	IPO	6000000	12.86	77160000
A	Total Number of shares after IPO	9800000
B	2012 Earnings Forecast ($)	7000000
C = B/A	Earnings Per Share ($)	0.71
D	PE Ratio	18
E = C*D	Issue price per share ($)	12.86
Percentage of Shares owned by you after IPO		600000/9800000	6.12%