Consider a firm that only has the following two classes of investors

 • Total number of shares of common stock: 80 million
• Total number of shares of Series-A preferred stock: 30 million

Suppose the preferred stock is standard non-participating preferred and was issued at $0.75 and has a 1.5x liquidation preference.
You are confident that the company will have an exit in exactly 7 years and will pay investors no dividends or other income until then. Your view is that the current value of all of the company's equity (common and preferred combined) is $80 million. The risk- free rate is 4% (EAY) which is equivalent to 3.93307% per year continuously- compounded.

Finally suppose the volatility of the value of the firm's equity is 125%. Feel free to use Excel functions to answer this problem.

 a) What is your best estimate of today's total value of the Series-A preferred.

b) What would be your best estimate of today's total value of the Series-A preferred if it was PARTICIPATING preferred without a cap.

Answer rating: 100% (QA)

To calculate the values of the SeriesA preferred stock under two scenarios nonparticipating and participating without a cap well need to use the infor... View the full answer