a. John Thompson, CEO of NewVenture, Inc., seeks to raise $5 million in a private placement of equity in his early stage venture. Thompson conservatively projects net income of $5 million in year five and knows that comparable companies trade at a price earnings ratio of 20X. What share of the company will a venture capitalist require today if her required rate of return is 50% per annum? b. If the company has 1,000,000 shares outstanding before the private placement, how many shares should the venture capitalist purchase? What price per share should she agree to pay if her required rate of return is 50%? (Note: Assume investment is in standard preferred stock with no dividends and a conversion rate to common of 1:1) c. John feels that he may need as much as $12 million in total outside financing to launch his new product. If he seeks to raise the full amount in this round, how much of his company will he have to give up? What price per share will the venture capitalist agree to pay if her required rate of return is 50%? d. Draw graphs that show the relationship between the investor share required, the investor discount rate and the amount of capital raised. e. Samantha Jones of Gorsuch Capital likes Thompson's plan, but thinks it naive in one respect: to recruit a senior management team, she believes Thompson will have to grant generous stock options in addition to the salaries projected in his business plan. From past experience, she thinks management should have the ability to own at least a 15% share of the company by the end of year 5. Given her beliefs, what share of the company should Samantha insist on today if her required rate of return 50%? Part 1:John Thompson, CEO of NewVenture, Inc., seeks to raise $5 million in a private placement ofequity in his early stage venture. Thompson conservatively projects net income of $5 million in yearfive and knows that comparable companies trade at a price earnings ratio of 20X.What share of the company will a venture capitalist require today if her required rate ofreturn is 50% per annum?а.b. If the company has 1,000,000 shares outstanding before the private placement, howshares should the venture capitalist purchase? What price per share should she agree to payif her required rate of return is 50%? (Note: Assume investment is in standard preferredstock with no dividends and a conversion rate to common of 1:1)manyc. John feels that he may need as much as $12 million in total outside financing to launch hisnew product. If he seeks to raise the full amount in this round, how much of his companywill he have to give up? What price per share will the venture capitalist agree to pay if herrequired rate of return is 50%?d. Draw graphs that show the relationship between the investor share required, the investordiscount rate and the amount of capital raised.Samantha Jones of Gorsuch Capital likes Thompson's plan, but thinks it naive in one respect:to recruit a senior management team, she believes Thompson will have to grant generousstock options in addition to the salaries projected in his business plan. From past experience,she thinks management should have the ability to own at least a 15% share of the companyby the end of year 5. Given her beliefs, what share of the company should Samantha insist ontoday if her required rate of returnе.50%?

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Answered: John Thompson, CEO of NewVenture, Inc.,…

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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a. John Thompson, CEO of NewVenture, Inc., seeks to raise $5 million in a private placement of equity in his early stage venture. Thompson conservatively projects net income of $5 million in year five and knows that comparable companies trade at a price earnings ratio of 20X. What share of the company will a venture capitalist require today if her required rate of return is 50% per annum? b. If the company has 1,000,000 shares outstanding before the private placement, how many shares should the venture capitalist purchase? What price per share should she agree to pay if her required rate of return is 50%? (Note: Assume investment is in standard preferred stock with no dividends and a conversion rate to common of 1:1) c. John feels that he may need as much as $12 million in total outside financing to launch his new product. If he seeks to raise the full amount in this round, how much of his company will he have to give up? What price per share will the venture capitalist agree to pay if her required rate of return is 50%? d. Draw graphs that show the relationship between the investor share required, the investor discount rate and the amount of capital raised. e. Samantha Jones of Gorsuch Capital likes Thompson's plan, but thinks it naive in one respect: to recruit a senior management team, she believes Thompson will have to grant generous stock options in addition to the salaries projected in his business plan. From past experience, she thinks management should have the ability to own at least a 15% share of the company by the end of year 5. Given her beliefs, what share of the company should Samantha insist on today if her required rate of return 50%?

Part 1:
John Thompson, CEO of NewVenture, Inc., seeks to raise $5 million in a private placement of
equity in his early stage venture. Thompson conservatively projects net income of $5 million in year
five and knows that comparable companies trade at a price earnings ratio of 20X.
What share of the company will a venture capitalist require today if her required rate of
return is 50% per annum?
а.
b. If the company has 1,000,000 shares outstanding before the private placement, how
shares should the venture capitalist purchase? What price per share should she agree to pay
if her required rate of return is 50%? (Note: Assume investment is in standard preferred
stock with no dividends and a conversion rate to common of 1:1)
many
c. John feels that he may need as much as $12 million in total outside financing to launch his
new product. If he seeks to raise the full amount in this round, how much of his company
will he have to give up? What price per share will the venture capitalist agree to pay if her
required rate of return is 50%?
d. Draw graphs that show the relationship between the investor share required, the investor
discount rate and the amount of capital raised.
Samantha Jones of Gorsuch Capital likes Thompson's plan, but thinks it naive in one respect:
to recruit a senior management team, she believes Thompson will have to grant generous
stock options in addition to the salaries projected in his business plan. From past experience,
she thinks management should have the ability to own at least a 15% share of the company
by the end of year 5. Given her beliefs, what share of the company should Samantha insist on
today if her required rate of return
е.
50%?

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