Vail Venture Investors, LLC, has recently acquired a 40 percent equity ownership in Black Hawk Products, Inc.,
Question:
Part A
A. Calculate the internal rate of return (IRR) for each scenario or outcome for Black Hawk Products.
B. Calculate the weighted average of the IRRs for the three scenarios. What is the expected IRR for the Black Hawk Products venture?
C. What would be Vail Venture Investors expected IRR if its $5 million investment in Black Hawk Products bought only a 35 percent interest in the venture?
D. Show how your answer in Part C would change if Vail Ventures received a 51 percent ownership stake in the Black Hawk Products venture for $5 million.
Part B
Now assume under the venture utopia scenario that, in addition to the $50 million cash inflow in Year 5, there will be an annual $1 million preferred dividend (to be paid to Vail Venture Investors but not other equity investors). Vail Venture expects to receive this $1 million dividend under the venture utopia scenario in each of the five years that the Black Hawk investment will be maintained. No preferred annual cash flows are expected under either the black-hole or the living-dead scenario.
E. Calculate the revised internal rate of return for the venture utopia scenario if Vail Ventures equity ownership stake in Black Hawk Products is 40 percent.
F. What would be Vail Ventures expected IRR on the Black Hawk Productsventure?
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Step by Step Answer:
Entrepreneurial Finance
ISBN: 978-0538478151
4th edition
Authors: J . chris leach, Ronald w. melicher