FIN 534
Financial; Management
Week 9 Problem Solutions
Chapter 23
3.
a.
After the funding round, the founder’s 8 million shares will represent 80% ownership of the firm.
To solve
for the new total number of shares (TOTAL):
8,000,000 = .80*TOTAL
So TOTAL = 10,000,000 shares.
If the new total is 10 million shares, and the venture capitalist will end up
with 20%, then the venture capitalist must buy 2 million shares.
Given the investment of $1 million for 2
million shares, the implied price per share is $0.50.
b.
After this investment, there will be 10 million shares outstanding, with a price of $0.50 per share, so the
post-money valuation is $5 million.
7.
First, compute the cumulative total number of shares demanded at or above any given price:
Price
Cumulative Demand
14.00
100,000
13.80
300,000
13.60
800,000
13.40
1,800,000
13.20
3,000,000
13.00
3,800,000
12.80
4,200,000
The winning price should be $13.40, because investors have placed orders for a total of 1.8 million shares
at a price of $13.40 or higher.
15.
Investors will receive a total of 10 million rights.
Since it takes ten rights to purchase one share, they will
be able to purchase 1 million shares.
At a price of $40/share, the company will be able to raise ($40/share)