This problem has 4 parts: a), b), c), and d). They are independent of one another.

a) You founded your own firm 3 years ago. You initially contributed $200,000 of your own money and in return you received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are now considering raising capital from a venture capital firm. This venture capital firm would invest $5 million and would receive 2 million newly issued shares in return.

Answer: (1) What will be the post-money valuation of your firm? (2) Assuming that this is the venture capitalist's first investment in your firm, what percentage of the firm will the venture capitalist own? (3) What percentage of the firm will you own? (4) How much will your shares be worth, that is, the current total value of your investment? What will your rate of return be for these 3 years?

b) During the most recent fiscal year, KD Industries had revenues of $400 million and earnings of $30 million. KD has filed a registration statement with the OSC for its IPO. Before it is offered, KD's investment bankers would like to estimate the value of the firm using comparable companies. The investment bankers have assembled the following information based on data for other companies in the same industry that have recently gone public. In each case the ratios are based on the IPO price.

Comparable Company Price/Earnings Price/Revenues

Eenie 12.4 1.6

Meenie 14.6 1.4

Minie 16.2 1.2

Moe 20.4 0.8

Answer: (1) Based on the average price ratios, what would be a reasonable range for KD's value? (2) Assuming that KD has 25 million shares outstanding and the lead investment banker's recommendation of using the median be accepted, what will be the IPO price per share? How much capital will KD raise by issuing 10 million new shares (net of 5% underwriting spread)?

c) Suppose that in January 2016, the federal finance department of Canada issued a 10-year inflation-indexed note with a coupon of 3 %. On the date of issue, the consumer price index (CPI) was 175.1. In January 2017, the CPI would have increased to 198.3. What coupon payment would be made on this bond with a usual face value in January 2017?

d) Luther Industries has just issued a callable, 10-year, 8% coupon bond with semi-annual coupon payments. The bond can be called at 102 in 3 years or anytime thereafter on a coupon payment date. It has a current price of 99. (1) What is the yield to maturity (YTM) on this bond? (2) What is the yield to call (YTC) on this bond?