Homework_5

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University of California, Irvine *

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134B

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Finance

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Apr 3, 2024

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462 Part 5 Long-Term Financing 2. Starware Softwarewas founded last year to develop software for gaming applications The founder initially invested $800,000 and received 8 million shares of stock. Star. ware now needs to raise a second round of capital, and it has identified a venture capitalist who is interested in investing. This venture capitalist will invest $l million and wants to own 20% of the company after the investment is completed. a. How many shares must the venture capitalist receive to end up with 20% ofthe company?What is the implied price per share of this funding round? b. What will the value of the whole firm be after this investment (the post-money valuation)? 3. Your start-up company needs capital. Right now, you own 100% of the firm with 10 million shares. You have received two offers from venture capitalists. The first offrs to invest $3 million for I million newshares. The second offers $2 million for500,000 new shares. a. What is the first offer's post-money valuation of the firm? b. What is the second offer's post-money valuation of the firm? c. What is the difference in the percentage dilution caused by each offer? d. What is the dilution per dollar invested for each offer? 4. Three years ago, you founded your own company. You invested $100,000 of your own money and received 5 million shares of Series A preferred stock. Your company has since been through three additional rounds of financing. Round Series B Series C Series D (S Price 0.50 2.00 4.00 Number of Shares 1,000,000 500,000 500,000 a. What is the pre-money valuation for the Series D funding round? b. What is the post-money valuation for the Series D funding round? 5. Based on the information in Problem 4 (and that each share of all series of preferred stock is convertible into one share of common stock), what fractions of the firm do the SeriesB, C, and D investors each own in your firm? 6. Assuming that you own only the Series A preferred stock in Problem 4 (and that each share of all series of preferred stock is convertible into one share of common stock), what percentage of the firm do you own after the last funding round? Taking Your Firm Public: The Initial Putblic Offering 7. Roundtree Software is going public using an auction IPO. The firm has received the following bids: Price ($) 14.00 13.80 13.60 13.40 13.20 13.00 12.80 Number of Shares 100,000 200,000 500,000 1,000,000 1,200,000 800,000 400,000 Created with Scanner Pro

..Youri Chapter 14 Raising Equity Capital Assuming Roundtree would like to sell 1.8 milion shares in its IPO, what will be the winning auction offerprice? 463 8. If Roundtree from Problem 7decides to issue an extra 500,000 shares (for a total of 2.3 millionshares),howmuchtotalmoneywill itraise? 9. Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities suchas camping, skiing, and hiking. So far, your comparnyhas gone through three funding rounds: Round Series A Series B Series C Date Feb. 2016 Aug. 2017 Sept. 2018 Investor Shares 500,000 1,000.000 2.000.000 SharePrice() 1.00 200 3.50 You Angels Venture capital It is now 2019 and you need to raise additional capital to expand your business. You have decided to take your firm public through an IP0. You would like to issue an additional 6.5 million newshares through this IPO. Assuming that your fim suc- cessfully completes its IPO, you forecast that 2019 net income will be $7.5 million. a. Your investment barnker advises you that the prices of other recent IPOS have been set such that the P/E ratios based on 2019 forecasted earnings average 20.0. Assuming that your IPO is set at a price that implies a similar multiple, what will your IPO price per share be? b. What percentage of the firm will you own after the IPO? 10. the Your investment bankersprice your IPO at $15 pershare for 10 million shares.If price at the end of the first day of trading is $17 per share, a. What was the percentage underpricing? b. How much money did the firm miss out on due to underpricing? 11. Margoles Publishing recently completed its IPO. The stock was offered at $l4 per share. On the first day of trading, the stock closed at $19 per share. a. What was the initial return on Margoles? b. Who benefited from this underpricing? Who lost, and why? 12. IfMargolesPublishingfromProblem ll paidan underwritingspread of 7% for its IPO and sold 10 million shares, what was the total cost (exclusive of underpricing) to it of goingpublic? 13. Chen Brothers, Inc., sold 4 million shares in its IPO, at a price of $18.50 per share. Management negotiated a fee (the underwriting spread) of 7% on this transaction. What was the dollar cost of this fee? 14. You are negotiating with your underwriters in a firm commitment offering of 10 mil- lion primary shares. You have two options: set the IPO price at $20.00 per share with a spread of 7%, or set the price at $19.50 per share with a spread of 4%. Which option raises more money for your firm? 15. Your firm is selling 3 million shares in an IPO. You are targeting an offer price of $17.25 per share. Your underwriters have proposed a spread of 7%, but you would like to lower it to 5%. However you are concerned that if you do so, they will argue for a lower offer price. Given the potential savings from a lower spread, how much lower can the ofer price go before you would have preferred to pay 7% to get $17.25 per share? Created with Scanner Pro

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