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You are working for a venture capitalist (VC). The VC is interested in acquiring a one-third stake in a start-up. The total value (i.e., PV of future expected cash flows) of the start-up is one of $30M, $45M, $60M, $75M, $90M.' The VC regards the five outcomes as equally likely. The start-up is currently wholly owned by its founder. The founder knows the details of the start-up's prospects, and so knows the start-up's total value. The founder needs liquid cash to cover personal expenses, and moreover is risk averse and would like to partially diversify. For these reasons, the founder values any offer from the VC at 50% more than the amount of the offer. For example: If the VC offers $10M for the one-third stake, the founder values this offer at $15M. Assume that if the founder is indifferent between accepting and rejecting an offer then the founder accepts. The VC seeks to maximize expected profits. What offer(s), if any, should the VC make? Show your work by filling out the following table: Expected VC's profit V's offer $6.67M $10M $13.34M $16.67M $20M

You are working for a venture capitalist (VC). The VC is interested in acquiring a one-third stake in a start-up. The total value (i.e., PV of future expected cash flows) of the start-up is one of $30M, $45M, $60M, $75M, $90M.' The VC regards the five outcomes as equally likely. The start-up is currently wholly owned by its founder. The founder knows the details of the start-up's prospects, and so knows the start-up's total value. The founder needs liquid cash to cover personal expenses, and moreover is risk averse and would like to partially diversify. For these reasons, the founder values any offer from the VC at 50% more than the amount of the offer. For example: If the VC offers $10M for the one-third stake, the founder values this offer at $15M. Assume that if the founder is indifferent between accepting and rejecting an offer then the founder accepts. The VC seeks to maximize expected profits. What offer(s), if any, should the VC make? Show your work by filling out the following table: Expected VC's profit V's offer $6.67M $10M $13.34M $16.67M $20M

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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You are working for a venture capitalist (VC). The VC is interested in acquiring a one-third stake in a start-up. The total value (i.e., PV of future expected cash flows) of the start-up is one of $30M, $45M, $60M, $75M, $90M. The VC regards the five outcomes as equally likely. The start-up is currently wholly owned by its founder. The founder knows the details of the start-up's prospects, and so knows the start-up's total value. The founder needs liquid cash to cover personal expenses, and moreover is risk averse and would like to partially diversify. For these reasons, the founder values any offer from the VC at 50% more than the amount of the offer. For example: If the VC offers $10M for the one-third stake, the founder values this offer at $15M. Assume that if the founder is indifferent between accepting and rejecting an offer then the founder accepts. The VC seeks to maximize expected profits. What offer(s), if any, should the VC make? Show your work by filling out the following table: Vc's offer Expected VC's profit $6.67M $10M $13.34M $16.67M $20M
Transcribed Image Text:You are working for a venture capitalist (VC). The VC is interested in acquiring a one-third stake in a start-up. The total value (i.e., PV of future expected cash flows) of the start-up is one of $30M, $45M, $60M, $75M, $90M. The VC regards the five outcomes as equally likely. The start-up is currently wholly owned by its founder. The founder knows the details of the start-up's prospects, and so knows the start-up's total value. The founder needs liquid cash to cover personal expenses, and moreover is risk averse and would like to partially diversify. For these reasons, the founder values any offer from the VC at 50% more than the amount of the offer. For example: If the VC offers $10M for the one-third stake, the founder values this offer at $15M. Assume that if the founder is indifferent between accepting and rejecting an offer then the founder accepts. The VC seeks to maximize expected profits. What offer(s), if any, should the VC make? Show your work by filling out the following table: Vc's offer Expected VC's profit $6.67M $10M $13.34M $16.67M $20M
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