Suppose a company just arranged its first funding round with a VC. The VC is investing $5 million in exchange for Series A convertible preferred shares, based on a $9 million pre-money valuation. There are 20 million common shares currently outstanding (and no other convertible or participating preferred shares outstanding). What percentage of the common stock will the VC effectively own (on an "as converted" or "fully diluted" basis) after this round? [Note: Please write this as a fraction, not a percent, since that's how D2L will auto- grade it. In other words, for 57%, write 0.57 or .57.]

Suppose a company just arranged its first funding round with a VC. The VC is investing $5 million in exchange for Series A convertible preferred shares, based on a $9 million pre-money valuation. There are 20 million common shares currently outstanding (and no other convertible or participating preferred shares outstanding). What percentage of the common stock will the VC effectively own (on an "as converted" or "fully diluted" basis) after this round? [Note: Please write this as a fraction, not a percent, since that's how D2L will auto- grade it. In other words, for 57%, write 0.57 or .57.]

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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In the summer of 2018, the Gallatin Company was planning to financean expansion with a convertible security. It considered a convertible debenture but fearedthe burden of fixed interest charges if the common stock price did not rise enough to makeconversion attractive. The firm decided on an issue of convertible preferred stock, whichwould pay a dividend of $1.07 per share.The common stock was selling for $21 a share at the time. Management projected earningsfor 2018 at $1.40 a share and expected a future growth rate of 12% per year in 2019 andbeyond. The investment bankers and management agreed that the common stock wouldcontinue to sell at 15 times earnings, the current price/earnings ratio.a. What conversion price should the issuer set? The conversion rate will be 1.0; thatis, each share of convertible preferred can be converted into 1 share of common.Therefore, the convertible’s par value (as well as the issue price) will be equal to theconversion price, which in turn will be…
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