Question

Using the information below, please answer the following questions about Perry Mason, a startup company. The company needs $ 10 million capital. In your analysis, assume the valuation date is the end of year 5, projected earnings will in year 5 will be $30 million, and an appropriate price-to-earnings ratio for valuing these earnings is 20 times. Assume that there are 500,000 shares outstanding. The required return for the investors is 50%.

What percentage ownership at time 0 should the investors demand for their $ 10 million investment?

What would be the number of new shares issued?

What would be the pre-money and post-money valuation?

Answer 1

Here the projected Earnings in 5th year is 30m that is the 50% return on capital of investors

so the total capital is = $30m / 50%

That comes = 60$ million

now the total share outstanding is 500000 that is 0.5 million

So the MPS is 60$ million / 0.5 million

Therefore MPS = 120$

The percentage ownership at time 0 should the investors demand for their $ 10 million investment =

= $ 10 million / (60+10)$ million

= 14.28%

The number of new shares issued is

= $ 10 million / 120 = 83333 shares or .0833 Million shares

The pre money valuation of share is $ 120

And After that post money valuation is = $70 million / 0.5833 million is also $ 120.06