PetIQ, 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 PetIQ in exchange for this $8 million investment. Na Venture has a target annual rate of return of 30% on ventures at the similar stage of life cycle as PetIQ is currently in. The following table listing the 3 cash flow scenarios for PetIQ when Na Venture expected to exit at the end of 4 years. Amount invested $8,000,000 Required return 30% Outcome Black Hole Living Dead Venture Utopia Probability Year0 0.25 0.55 0.3 1 0 0 0 2 0 0 0 3 0 0 $15,000,000 0 $80,000,000 4 0 In order to minimize its investment risk, NaVenture requires an annual $2 million preferred dividend under the utopia scenario (including 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 dead scenarios nor are paid to other Naventure investors. Required: Calculate the required percentage of final ownership of PetIQ that NaVenture would need to earn a 30% annual rate of return on its investment for 4 years.
PetIQ, 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 PetIQ in exchange for this $8 million investment. Na Venture has a target annual rate of return of 30% on ventures at the similar stage of life cycle as PetIQ is currently in. The following table listing the 3 cash flow scenarios for PetIQ when Na Venture expected to exit at the end of 4 years. Amount invested $8,000,000 Required return 30% Outcome Black Hole Living Dead Venture Utopia Probability Year0 0.25 0.55 0.3 1 0 0 0 2 0 0 0 3 0 0 $15,000,000 0 $80,000,000 4 0 In order to minimize its investment risk, NaVenture requires an annual $2 million preferred dividend under the utopia scenario (including 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 dead scenarios nor are paid to other Naventure investors. Required: Calculate the required percentage of final ownership of PetIQ that NaVenture would need to earn a 30% annual rate of return on its investment for 4 years.
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
Problem 1PS
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Transcribed Image Text: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 dead scenarios nor are paid to
other NaVenture investors.
Required:
Calculate the required percentage of final ownership of PetlQ that NaVenture would
need to earn a 30% annual rate of return on its investment for 4 years.
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