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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 premoney 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 outofpocket 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 aftermarket 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 postmoney 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 riskfree 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 welldiversified 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.
(3)
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This note was uploaded on 02/19/2012 for the course FIN 124 taught by Professor Jackson during the Spring '05 term at University of Texas at Dallas, Richardson.
 Spring '05
 jackson
 Finance, Interest, Valuation

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