An entrepreneur seeks $10 million from a VC fund. The entrepreneur and fund managers agree that the entrepreneur’s venture is currently worth $25 million and that the company is likely to be ready to go public in five years. At that time, the company is expected to have net income of $7.5 million, and comparable firms are expected to be selling at a price/earnings ratio of 30. Given the company’s stage of development, the venture capital fund managers require a 50% compound annual return on their investment. What fraction of the firm will the fund receive in exchange for its $10 million investment?
Answer to relevant QuestionsThe venture capital fund Techno Fund II made a $4 million investment in Optical Fibers Corporation five years ago and, in return, received 1 million shares representing 20% of Optical Fibers’ equity. Optical Fibers is now ...What is a tender offer, and how can it be used as a mechanism to orchestrate a merger? Explain how agency problems may lead to non-value-maximizing motives for mergers. Discuss the various academic theories offered as the rationale for these agency problem–induced motives. A firm has four divisions—food, cookware, retail, and credit services—that generate revenues of $1.5 million, $3.8 million, $5.7 million, and $3.1 million, respectively. Compute the Herfindahl Index (HI) for the firm. ...Firm A plans to acquire Firm B. The acquisition would result in incremental cash flows for Firm A of $10 million in each of the first five years. Firm A expects to divest Firm B at the end of the fifth year for $100 million. ...
Post your question