Question

You are a venture capitalizing considering making a SEK 100 million investment in FerrisMedia, a young technology company, and you have been provided with the following forecasts of revenues and free cash flows to the firm.

1 2 3

Revenues 100.00 500.00 1,500.00

FCFF (-150.00) (-50.00) 75.00

At the end of year 3, you expect the company to become a stable growth company, with

year 3 FCFF, growing 2% a year in perpetuity, and to be acquired by a publicly traded

company. The unlevered beta for the business is 1.26, but you are a sector-focused

venture capitalist, and your portfolio of holdings has a correlation of only 0.5 with the

market. After the third year the correlation will be 1.0 (The risk free rate is 2% and the market risk premium is 6%.)

Question: Assuming that there is no debt or cash in the company, how much of the equity in the company should you demand as your fair share for the SEK 100 million investment?