Start-up company VacationHoliday went through the first round of financing in January 2009. At
that time, the after-tax cash flow forecast looked as follows:
Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 and onwards
($ 10,000,000) ($ 2,000,000) $ 3,000,000 $ 5,000,000 $5,500,000 (10%
The company raised $ 10,000,000 by selling 500,000 common shares to a private equity investor
D&B (the agreement did not have any anti-dilution clause). The after-tax cost of capital
(expected long-term annual return) was 25%. All remaining shares were retained by
In January 2010, the revised after-tax cash flow forecast looked as follows
Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 and onwards
($ 4,000,000) $ 1,000,000 $ 3,000,000 $ 5,000,000 $5,300,000 (6% annual
New private equity investor H&I has agreed to invest $ 4,000,000 in the company by buying
newly issued common shares (no additional shares were issued between rounds). The after-tax
cost of capital (expected long-term annual return) remains at 25%. The company has no debt.
a. Last year, in January 2009, what were the VacationHoliday post-money valuation and the
ownership structure (total number of shares, number of shares belonging to entrepreneurs
b. In January 2010 what were the VacationHoliday post-money valuation and the ownership
structure (total number of shares, number of shares belonging to entrepreneurs, D&B, and
c. What is D&B’s one year return (no dividends were paid, so the return is equal to capital
d. What kind of a problem does D&B have? What is the typical form of private equity
investment and how does it help to avoid this problem?
Hint: you might find my PowerPoint slides and Excel example provided in Session 8
materials quite helpful.
If you forgot the formula for growing perpetuity, you can find its explanation on page 222:
(1 ) t
where k is the discount rate and g is the cost of capital.
This question was asked on Apr 17, 2010 and answered on Apr 22, 2010.
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