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). For discounting purposes consider 2018 as year 1.

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.

Assuming Mr. Johnson accepts Royce's offer and valuation, what percentage of the company would Johnson be giving up? (In other words what percent of the company will Royce require for his $500,000 investment).