Same setup as Exercise 14.1, except that now EBV is considering two additional structures: Alternative I: A

Question:

Same setup as Exercise 14.1, except that now EBV is considering two additional structures:

Alternative I: A 2X liquidation preference on the RP; or

Alternative II: A cumulative compound dividend of 0.75 percent per month, to be paid only if dividends are paid to the common stock or on the liquidation of the company.

(a) Find the LP valuation equation for both alternatives.

(b) Compute the LP valuation for both alternatives under the assumption that total valuation5$ 30M. Which alternative should EBV prefer?

Data From Exercise 14.1

Suppose EBV is considering a $5M Series A investment in Newco. EBV proposes to structure the investment as RP with APP of $4M plus 5M shares of common stock. (We refer to this basket of RP plus common as “Series A”.) The employees of Newco have claims on 15M shares of common stock. Following the Series A investment, Newco will have 20M common shares outstanding.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Liquidation
Liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due....