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Problem Set 5

# Problem Set 5 - trading at P/E ratios of 15 on average...

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BusM 401 Problem Set #5 Financial Markets Instructions: Complete all questions. This problem set will not be graded, but you will still be required to understand all of the material contained in it. Short answers (“checkpoints”) are available for some questions on Blackboard so that you can check your answers. Full solutions will be available on Blackboard before the exam. (Some full answers are found in the back of Higgins; it’s best not to look at these until you have tried your best to answer the question.) Onward to knowledge. 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

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Unformatted text preview: 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? 2. Do Higgins, Chapter 9, #10. 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? 4. Do Higgins, Chapter 5, #5 2...
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