Chemtech wants to have a venture investor inject $0.5 million at Year 0 and $1 million at Year 2. The founder has 300,000 shares. The founder expects to make a profit until Year 4 when the net income is expected to be $ 400,000. The common stock of Biosystems, a comparable firm, currently trades in the over-the- counter at $30 per share. Biosystems' net income for the most recent year was $300,000 and the firm has 150,000 shares of common stock outstanding.

Venture investors want a 50% and 30% compound annual rate of return for rounds 1 and 2, respectively.

A. What percentage of ownership is sold during the first round? During the second round? (5 points)

B. How many shares will be issued in rounds 1 and 2? (5 points)

C. If 6 percent of total equity in Year 4 is set aside for incentive compensation, what is the second-round share price? (5 points)

Answer rating: 100% (QA)

A To find out the percentage of ownership sold during the first and second rounds of funding we need to calculate the value of the company at the time ... View the full answer