Eric and Ana continue to converse, and Ana proposes a term sheet. Ana still wants to have a 50% rate of return on her $5 million investment and is offering to buy standard preferred shares. Eric conservatively projects net income of $13 million in year five (five years from now) and knows that comparable companies trade at a price to earnings ratio of 40. There is only one round of investment. There are 1,000,000 shares outstanding initially. 

 

In a later counter-offer, Ana proposes that instead of a standard preferred she be allowed to use standard preferred and that her shares be augmented with a pay-in-kind dividend (a stock dividend) equal to 10% of her investment every year. In addition to cash, Ana will receive shares. So, she would get the same number of shares initially, but they would behave differently than the PP shares.

 

d. What is Ana's internal rate of return on this transaction if she takes the same number of shares as part just now with the in-kind dividend rather than preferred shares.

 

e. If Ana purchases the same number of shares for this deal as the deal with the preferred cash dividend, what price per share does she pay?

Answer rating: 100% (QA)

SOLUTION a First we need to calculate the net income of the company in year five 5 by adding the projected net income of 13 million to the sum of the ... View the full answer