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Problem_Set__5_Solutions - (Post-Check)

# Problem_Set__5_Solutions - (Post-Check) - BusM 401 Problem...

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BusM 401 Problem Set #5 Financial Markets Solutions 1. A venture capital firm wants to invest \$5 million in Rosita Corp., a startup biotechnology firm. Rosita is expected to go public in 5 years. Earnings will be negligible until year 5, but are projected to be \$8 million in year 5. Comparable biotech firms are trading at P/E ratios of 15 on average. Rosita has 500,000 shares of stock outstanding. The VC firm will apply a discount rate of 50% to the investment. How many shares of stock should the VC firm be given for its \$5 million investment? What should be the price per share? What are the implied pre-money and post-money valuations? Terminal value = \$8 million X 15 = \$120 million Discounted TV = \$120 million/1.5 5 = \$15.8 million Required ownership percentage = 5/15.8 = 32% Number of new shares = (New owners% / existing owners%) X current shares = (.32/.68) X 500,000 = 235,294 Price of new shares = 5,000,000/235,294 = \$21.25 Pre-money valuation = 500,000 X 21.25 = \$10.625 million Post-money valuation = 735,294 X 21.25 = \$15.625 million

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Problem_Set__5_Solutions - (Post-Check) - BusM 401 Problem...

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