Can you please answer this accounting question ? An entrepreneur seeks $11 million from a VC fund. Theentrepreneur and fund managers agree that theentrepreneur's venture is currently worth $25 million andthat the company will likely be ready to go public in fiveyears. At that time, the company is expected to have a netincome of $7.5 million, and comparable firms are expectedto be selling at a price/earnings ratio of 30. Given thecompany's stage of development, the venture capital fundmanagers require a 45% compound annual return on theirinvestment. What fraction of the firm will the fund receivein exchange for its $11 million investment? Round youranswer to two decimal places.

Step 1: Introduction to the Venture CapitalVenture capital is recognized as a component of private…

Answered: An entrepreneur seeks $11 million from…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 18P

See similar textbooks

Similar questions

Please help with this question
Use the following given information of Greyhorse Partners to answer the following question. Greyhorse is willing to provide $1.2 million fundings in exchange for a share of the common stock in a firm called Bull-Builders. As this the first-stage financing, Greyhorse’s required rate of return is 50% per year based on a 5-year investment horizon without receiving any cash until the end of this period. Forecast of EBITDA for Bull-Builders in year 5 is $6m. EBITDA multiple of similar firms is 7 times. Bull-Builders’ projected balance sheet at year 5 includes $100,000 in cash and $1m in interest-bearing debt. What is the post-money value of the firms’ equity today? A. $42,000,000 B. $41,100,000 C. $4,212,720 D. $5,412,720
A private equity firm is aiming to buy a company. Under private equity ownership, the company will earn an annual cash flow of $10mln up to infinity. The first cash flow is expected next year. The estimated IRR is 13%. What is the investment outlay (in millions) closest to?
PetlQ, a pet service venture, is seeking the first-round financing. NaVenture, a professional venture capital firm, is considering to invest $8 million in PetlQ. NaVenture needs to decide to ask for how much percent equity ownership in PetlQ in exchange for this $8 million investment. NaVenture has a target annual rate of return of 30% on ventures at the similar stage of life cycle as PetlQ is currently in. The following table listing the 3 cash flow scenarios for PetlQ when NaVenture expected to exit at the end of 4 years. Amount invested $8,000,000 Required return 30% Outcome Probability Year0 2 3 4 Black Hole 0.25 Living Dead Venture Utopia O $15,000,000 O $80,000,000 0.55 0.3 In order to minimize its investment risk, NaVenture requires an annual $2 million preferred dividend under the utopia scenario (including the exit year) in addition to the $80 million cash inflow in Year 4 (the exit year). No preferred annual cash flows are expected under either the black hole or the living…
A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. Year Free cash flows Selling price Total free cash flows ($ millions) 1 $ 31 2 $ 46 3 4 859 $ 51 $ 56 $ 31 $ 46 $51 $ 56 $ 56 $672 $ 728 To finance the purchase, the investors have negotiated a $460 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Tax rate Selected Additional Information 40 percent Risk-free interest rate Market risk premium a. Estimate the target firm's asset beta 3…
A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…
A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…
A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $33 $48 $53 $58 $ 58 Selling price $ 696 Total free cash flows $33 $48 $53 $58 $ 754 To finance the purchase, the investors have negotiated a $480 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…
A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 5 1 $38 Free cash flows 2 3 4 $53 $58 $63 $ 63 $ 756 Selling price Total free cash flows $38 $53 $58 $63 $819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk premium 5 percent a. Estimate the target firm's…
An all-equity firm consists of a single project that will produce a perpetual cash flow of either $100M (good state) or $30M (bad state) next year. The probability of the good state is 30 percent. The beta of the asset cash flows is 1.25 and the risk-free rate is 3 percent and the market risk premium is 8 percent. There are 6M shares outstanding. Suppose the firm announces it will issue $40M in debt. The debt has an interest rate of 8 percent, and will mature in 3 years. Because the debt is ___ , any bankruptcy costs would ___ the firm's share price after the announcement. a. Safe, not change b. risky, raise c. risky, lower
A financial services company is considering a new investment in a new technology platform for investment management. The company has identified a fintech startup that is seeking funding at a valuation of $5 million. The company expects to receive a dividend of $200,000 per year over a five year term and sells it equity stake at a valuation of $10 million. What is the expected return on investment if the financial services company invests $2 million in the fintech startup
Jacob PLC is listed on the Stock Exchange. Analysts estimate the stock’s equity beta to be at 2.17. The S&P 500 Index is expected to earn a return of 15 percent per annum. The T-bill rate is at 5 percent per annum. The expected cashflows of the two projects are as shown on the table. The firm plans to invest in one of two mutually exclusive projects P or Q where both project is the same risk as the firm’s other assets. Required:(a) Calculate the company shareholders’ required return. (b) Using the net present value approach, which project should Yulbury plc accept? Assume the discount rate to be the cost of equity capital. (c) The two projects have the same project beta, being 1.52. Derive the projects’ required return and advise on project selection using the net present value and the discounted payback period approaches. (d) Assume that the general inflation rate has risen by 25 percentage points. Discuss the impact of this on the cost of equity, the after-tax weighted average…

SEE MORE QUESTIONS

Recommended textbooks for you

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

SEE MORE TEXTBOOKS