An entrepreneur seeks $11 million from a VC fund. The entrepreneur and fund managers agree that the entrepreneur's venture is currently worth $25 million and that the company will likely be ready to go public in five years. At that time, the company is expected to have a net income of $7.5 million, and comparable firms are expected to be selling at a price/earnings ratio of 30. Given the company's stage of development, the venture capital fund managers require a 45% compound annual return on their investment. What fraction of the firm will the fund receive in exchange for its $11 million investment? Round your answer to two decimal places.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter12: The Cost Of Capital
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An entrepreneur seeks $11 million from a VC fund. The
entrepreneur and fund managers agree that the
entrepreneur's venture is currently worth $25 million and
that the company will likely be ready to go public in five
years. At that time, the company is expected to have a net
income of $7.5 million, and comparable firms are expected
to be selling at a price/earnings ratio of 30. Given the
company's stage of development, the venture capital fund
managers require a 45% compound annual return on their
investment. What fraction of the firm will the fund receive
in exchange for its $11 million investment? Round your
answer to two decimal places.
Transcribed Image Text:An entrepreneur seeks $11 million from a VC fund. The entrepreneur and fund managers agree that the entrepreneur's venture is currently worth $25 million and that the company will likely be ready to go public in five years. At that time, the company is expected to have a net income of $7.5 million, and comparable firms are expected to be selling at a price/earnings ratio of 30. Given the company's stage of development, the venture capital fund managers require a 45% compound annual return on their investment. What fraction of the firm will the fund receive in exchange for its $11 million investment? Round your answer to two decimal places.
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