A2Z Technologies is a tech start-up focused on developing new software applications. The company has recently completed a successful seed funding round and is now seeking to raise $25 million to invest in R&D and expand its team. A2Z's management believes that it will take 2 years to bring its new software application to market, and expects that once the software is released, it will generate $50 million in annual revenue with a growth rate of 10% per year. The company's beta is estimated to be 1.5, the market risk premium is 7%, and the risk-free rate is 3%. A2Z's founders own 60% of the company's equity, with the remaining 40% held by a group of angel investors.


a. What is the current value of A2Z's equity?

b. If A2Z issues new equity to raise the $25 million it needs, how many new shares will need to be issued and at what price per share?

c. Suppose A2Z decides to issue debt instead of equity to raise the $25 million it needs, and can borrow at a rate of 8%. What would be the new value of A2Z's equity assuming the company takes on $25 million in debt?

d. If A2Z's management believes that the company's beta will decrease to 1.2 once the new software application is released, what is the expected return on the company's equity at that point?

e. Suppose A2Z's founders are considering selling a portion of their equity stake to a venture capital firm in exchange for $10 million in capital. What percentage of the company's equity would the venture capital firm own if it receives 10% of A2Z's total equity?

2. StIn is a food start-up with a new meal delivery service. The company has secured funding to launch its service and is looking to raise additional capital to expand. StIn needs $10M immediately to invest in working capital and $5M in technology to start shipping the new meals. If they start delivering the new meals, StIn expects $8M per year in annual FCF. Analysts estimate that StIn has a beta of 1.2. The market risk premium and risk-free rate are both 6%. StIn's founder Chris owns 80% of the shares of StIn, and New Horizon Ventures owns 20%. There are 2,000,000 shares outstanding. Please address the following:
 

a. What is the value of StIn's ticket stack?
b. What is the price per share of StIn's equity?
c. What is StIn's value add?
d. The venture capital market is very competitive, and StIn has a number of bidders seeking to provide capital. Suppose that Delta Ventures is set to provide the $15M in exchange for a 25% stake in the company. That is, Delta Ventures will receive new common shares amounting to 25% of the total number of common shares (i.e., the original 2,000,000 common shares plus the new common shares issued to Delta). Upon receiving the $15M, StIn will purchase the assets required.
 

i. What are StIn's assets worth?
ii. What is StIn's value add?
iii. What fraction of the tickets will Delta Ventures now own?
iv. How many new shares must be issued to Delta Ventures in exchange for their investment?
v. What is the price per share of StIn? Did the price change from your answer above? Why or why not?