Venture Capital Horus Inc. has just issued a patent on a new solar panel technology. The company wants to take advantage of the boom in the development of renewable energies to raise money and develop a marketable product. The key aspects of the business plan are summarized below

- Development cost: $8 Millions (to be committed upfront). - Estimated time to market (length of time until the product can be marketed to customers): 5 years.

- Technological risk: the probability that Horus fails to develop a marketable product is 40%.

- Valuation: the expected market value of Horus if and when it can start marketing the product is $150 million.

- Market information: risk-free rate 3%, market risk premium 6%. Horus was specifically created to develop this product and has no other lines of business.

1. The company currently has 1,000,000 stocks outstanding. A VC firm offers to inject the $8 millions initial funding in exchange for 150,000 newly issued stocks. Assuming that this equity issue is correctly priced, what is the systematic risk β of Horus which is implicit in this offer? (10 points)

Suppose now that the β of Horus is 0.8. You are the sole shareholder of Horus, and you have on your desk a term sheet (contract) proposition from the VC fund MBA Partners, who agrees to provide $8 millions in exchange for 150,000 new shares. You are also considering an alternative offer from Energy Venture. Energy Venture is a VC fund dedicated to investments into the energy industry. On top of a $8 millions investment, Energy Venture offers its expertise and network to accelerate the commercial development of Horus. In particular, Energy ventures would shorten time to market from 5 to 3 years. However, Energy wants 200,000 stocks. You have to choose one of the two offers, which do you pick? 

Answer rating: 100% (QA)

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