# 06 - Question and Problem Answers Chapter 6 Primary Equity...

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R 1 r \$2,700,000 \$10,000 270.00 1 269.00 r 26,900% \$50,000 40 shares \$1,250 per share 300,000 shares outstanding \$50.00 share \$15,000,000 0.40 300,000 shares 120,000 shares 120,000 shares \$50.00 share \$6,000,000 \$6,000,000 0.05 \$300,000 ( underwriter ) \$6,000,000 0.95 \$5,700,000 ( Discovery Cafe ) 0.30 (0.60 300,000 shares ) 54,000 shares 54,000 shares \$50 share \$2,700,000 Question and Problem Answers page 1 Chapter 6 - Primary Equity Markets ± 6 - 1: Divide the ownership of the Discovery Café into 100 shares. The Venture capitalist purchases 40 shares (40% of the company) for \$50,000. Thus each share is worth \$1,250. A. Joe Partner owns 30% or 30 shares * \$1,250 = \$37,500. B. The total shares outstanding are worth 100 shares * \$1,250 = \$125,000. ± 6 - 2: A. Market capitalization is \$15 million B. 120,000 shares are offered to the public C. We raise \$6 million through the offering, \$300,000 goes to the underwriter; so Discovery Café realizes \$5,700,000. D. Elizabeth and Joe each have 54,000 shares for a total market value of \$2.7million. This represents a rate of return of 26,900%. Since we do not know the time between the initial partnership investment and the IPO this is simply a holding period return.

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06 - Question and Problem Answers Chapter 6 Primary Equity...

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