Question

Roger Harkel, CEO of Bestafer, Inc. seeks to raise $6.6 million in a private placement of equity in his early stage venture. Harkel conservatively projects net income of $5 million in year five and knows that comparable companies trade at a price earnings ratio of 20X. What share of the company will a venture capitalist require today if her required rate of return is 50%? ((Hint: Round off the decimal to the nearest integer)

A. 89%

B.50%

C.76%

D. 30%

E.15%

Answer 1

We know,

MCAP = EBIT * Price Earning Ratio

Now on the fifth Year, EBIT = 5 Million

Expected Price Earning Ratio = 20

MCAP = 20* 5 = 100 Million

Present Value of MCAP in Year 0

PV of MCAP =

r = r required rate of return = 50% = 0.5

PV of MCAP = 100 / ( 1+0.5)^05 = 13.16

Bestafer, Inc. seeks to raise $6.6 Million

% Share of Company will a venture capitalist require today = Amount / PV of MCAP = 6.6 / 13.16 = 50.11%

Ans :% Share of Company will a venture capitalist require today 50%