John Thompson, CEO of WVU, Inc., wants to raise $5 million in a private equity in his early stage venture. John projects net income of $11 million in year five (five years from now) and knows that comparable companies trade at a price to earnings ratio of 24x. Samantha likes Walter’s plan, but thinks it short-sighted in one respect: To recruit a senior management team, she believes Walter 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 10% share of the company at the end of year 5. a. If Samantha insists that professional managers own 10% of the company at the end of year 5, how much of the company is left for investors to own (as a dollar value)? b. If Samantha wants her investment in the company to be worth $30 million, what percent of the company’s equity should she insist on owning?
John Thompson, CEO of WVU, Inc., wants to raise $5 million in a private equity in his early stage venture. John projects net income of $11 million in year five (five years from now) and knows that comparable companies trade at a price to earnings ratio of 24x. Samantha likes Walter’s plan, but thinks it short-sighted in one respect: To recruit a senior management team, she believes Walter 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 10% share of the company at the end of year 5.
a. If Samantha insists that professional managers own 10% of the company at the end of year 5, how much of the company is left for investors to own (as a dollar value)?
b. If Samantha wants her investment in the company to be worth $30 million, what percent of the company’s equity should she insist on owning?
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