A VC  invests  $4M into  a  firm in  which  the entrepreneur has  5M  shares of common.   The VC receives in exchange 6M shares of CP at $0.5 per share. Assume that rf=5%, that the exit time is 3 years and that the volatility of the investment is σ=60%. 

1. Find the implied firm value offered by the VC.
2. Would the implied firm value be larger if:
   1. The exit time is longer (say 4 years)
   2. The volatility of the investment is higher (say 75%)?  Explain why.

Answer rating: 100% (QA)

To find the implied firm value offered by the VC we need to calculate the value of the common shares held by the entrepreneur and the value of the sha... View the full answer