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Chapter 15 Questions and Problems - ENTREPRENEURIAL FINANCE...

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E NTREPRENEURIAL F INANCE : Strategy, Valuation, and Deal Structure Chapter 15. Harvesting Questions and Problems 1. The investors in Generation.com, a company organized to sell fashions to the current generation of teenagers over the Internet, are interested in harvesting their investments. Based on a lengthy meeting with an investment banker, they believe the pre-money valuation of Generation.com is $80 million. The investment banker is recommending an IPO that would yield gross proceeds of about $12 million. The investment banker would try to set the issue price at about 85 percent of the expected market value per share after the offering and would charge a total fee of $900,000. In addition, Generation.com would incur out-of-pocket costs of about $400,000. a. Assuming the venture currently has 2 million shares outstanding, what is the premoney valuation per share? b. What is the expected after-market valuation per share? c. How many new shares would the venture issue in the IPO? d. What is the total issue cost in dollars and as a percentage of gross proceeds? e. What is total issue cost as a percentage of post-money market value of equity? 2. Suppose the current investors in Generation.com intend to harvest by using Rule 144. Based on the agreement they expect to enter with the investment banker, they cannot sell anything for six months. Assume that the market standard deviation is 14 percent per six months, the risk-free rate is 2 percent per six months, the market risk premium is 3 percent per six months, the equity beta is 1.5, and the standard deviation of the stock value in six months is 45 percent of the expected stock price. a. After the six months are over, a well-diversified investor expects that it would take one year to completely harvest her investments by gradual sale into the market under the Rule. (Thus, the average time required per share is 12 months after the IPO.) (1) Compute the expected stock price in 12 months, assuming there are 2 million shares of Generation.com outstanding and the expected appreciation depends on the CAPM. (2) Compute the standard deviation of share values as of month 12, assuming returns are uncorrelated over time.
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