Problem_Set__5_Checkpoints - (Post-Check)

Problem_Set__5_Checkpoints - (Post-Check) - How many shares...

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BusM 401 Problem Set #5 Checkpoints Financial Markets Note: These checkpoints are short answers intended to help you check your work as you go along. They are not full solutions, which will be posted on Blackboard after the problem set is turned in. Remember that to get full credit for problem sets you must show all your work, and the answers listed here are usually not sufficient responses to the questions. 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.
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Unformatted text preview: 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? Pre-money valuation = $10.625 million Post-money valuation = 2. Do Higgins, Chapter 9, #10. Pre-money value = Post-money value = $25 million. 3. Magenta Corp. wants to raise $50 million in a seasoned equity offering, net of all fees. Magenta stock currently sells for $10 per share. The underwriters will require a fee of $0.50 per share, and indicate that the issue must be underpriced by 5%. In addition to the underwriter’s fee, the firm will incur $1,000,000 in legal, administrative, and other costs. How many shares must Magenta sell? 5.67 million shares. 4. Do Higgins, Chapter 5, #5 Answers provided in the back of the book....
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