Johnson Transformers Inc.

Following is the five-year forecast for a new venture called Johnson Transformers: (all amounts in $000)

	2018	2019	2020	2021	2022
EBIT	$200	$1,800	$2,400	$3,000	$4,000
Capital Expenditures	$550	$350	$200	$150	$150
Changes in Working Capital	$40	$45	$50	$10	$(30)
Depreciation	$40	$80	$125	$150	$150

Beginning in year 2023 the annual growth in EBIT is expected to be 3%, a rate that is projected to be constant over Johnson Transformers remaining life as an enterprise. Beginning in 2023 Johnson's Transformers capital expenditures and depreciation are expected to offset each other (capex - depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). Discount rate is 60%.

Assume a tax rate is 21%

Johnson Transformers is own by J. Walter Johnson who has issued himself 1.2 million shares in return for an initial infusion of $100K in capital. Johnson is looking for $500,000 in equity investments and has approached a number of Business Angel networks and small Venture Capital firms.

David Royce of Royce Capital is very interested in Johnson Transformers and expects to provide Mr. Johnson a term sheet.

ASSUME THAT ROYCE WILL RECEIVE 18% OF JOHNSON TRANSFORMERS FOR HIS INVESTMENT.

J. Walter Johnson owns 1.2 million shares of stock in his Johnson Transformers venture. After the deal with Royce Capital Investment is closed, how many shares of stock will Mr. JOHNSON own?

1.056 million

1.2 million

.216 million

Cannot determine using only the data provided in the problem