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Downtown Partners is considering an investment of $500,000 in an early stage company, Newco. Downtown requires a 40% annual rate of return. Newco generated $400,000 in EBITDA last year, and this amount is expected to grow at a rate of 25% per year over the next five years. Companies similar to Newco are being valued at five times EBITDA, and Downtown thinks this is a reasonable multiple for the valuation of the firm in five years. What fraction of Newco does Downtown need to own at the end of five years in order to realize the required return on its investment?   25% 33% 44% 100% None of the abo

Downtown Partners is considering an investment of $500,000 in an early stage company, Newco. Downtown requires a 40% annual rate of return. Newco generated $400,000 in EBITDA last year, and this amount is expected to grow at a rate of 25% per year over the next five years. Companies similar to Newco are being valued at five times EBITDA, and Downtown thinks this is a reasonable multiple for the valuation of the firm in five years. What fraction of Newco does Downtown need to own at the end of five years in order to realize the required return on its investment?   25% 33% 44% 100% None of the abo

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Downtown Partners is considering an investment of $500,000 in an early stage company, Newco. Downtown requires a 40% annual rate of return. Newco generated $400,000 in EBITDA last year, and this amount is expected to grow at a rate of 25% per year over the next five years. Companies similar to Newco are being valued at five times EBITDA, and Downtown thinks this is a reasonable multiple for the valuation of the firm in five years. What fraction of Newco does Downtown need to own at the end of five years in order to realize the required return on its investment?

 

  1. 25%
  2. 33%
  3. 44%
  4. 100%
  5. None of the above.
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