"You founded your firm with a contribution of $500,000, receiving 2,000,000 shares of stock. Since then, you sold 6,000,000 stocks to Angel Investors. Now you are considering raising more capital from a Venture Capitalist. They will invest $7,000,000 and would receive 5,000,000 newly issued shares. If this is the VC's first investment in the company, what percentage of the firm will they end up owning? Note: Express your answers in strictly numerical terms. For example, if the answer is 5 percent, enter 0.05 as an answer."

"You founded your firm with a contribution of $500,000, receiving 2,000,000 shares of stock. Since then, you sold 6,000,000 stocks to Angel Investors. Now you are considering raising more capital from a Venture Capitalist. They will invest $7,000,000 and would receive 5,000,000 newly issued shares. If this is the VC's first investment in the company, what percentage of the firm will they end up owning? Note: Express your answers in strictly numerical terms. For example, if the answer is 5 percent, enter 0.05 as an answer."

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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Finding the WACC. Monica is the CFO of Cooking for Friends (CFF) and uses the pecking order hypothesis philosophy when she raises capital for company projects. Currently, she can borrow up to $450,000 from her bank at a rate of 7.75%, float a bond for $800,000 at a rate of 10%, or issue additional stock for $1,500,000 at a cost of 15%. What is the WACC for CFF if Monica chooses to invest A. $900,000 in new projects? B. $200,000 in new projects? C. $2,750,000 in new projects?
You are a Financial Investment Counselor, and you have several clients who are working for a very successful technology company. Combined they have millions of dollars invested stock options, which are substantially in the money. You have warned them to some extent about the dangers of keeping all their assets in a single stock, and their reprise is that what other stock or portfolio could possibly give them the 40% annual return they have been receiving on their company's stock in the last two years. How would you reply, remember these are vested options but not yet exercised.
2. An analyst for Acme, R. Runner, has recommended that Peter the Anteater purchase shares in a private firm (a firm that is not traded on any exchange) called Dynamite Corp. Dynamite has 30% debt and 70% equity. R. Runner believes that Dynamite will generate a return of 10% over the next year. Since Y. Lee is new to the job, he decides to do a little research on his own. He finds a company, Explosions Unlimited, that has very similar business as Dynamite. Explosions has an equity beta of 1.05 and is composed of 40% debt and 60% equity. Should Peter the Anteater buy the stock? The expected return on the market is 12% and the expected risk-free rate is 5%.
A big pharmaceutical company, DRIg, has just announced a potential cure for cancer. The stock price increased from $5 to $138 in one day. A friend calls to tell you that he owns DRIg. You proudly reply that you do, too. Since you have been friends for some time, you know that he holds the market, as do you, and so you both are invested in this stock. Both of you care only about expected return and volatility. The risk-free rate is 3%, quoted as an APR based on a 365-day year. DRIg made up 0.82% of the market portfolio before the news announcement. a. On the announcement your overall wealth went up by 1.4% (assume all other price changes cancelled out so that without DRIg, the market return would have been zero). How is your wealth invested? b. Your friend's wealth went up by 2.5%. How is his wealth invested?
You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company. UnderWater's stock price is $19 and it has 2.00 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 39%. You are planning on doing a leveraged buyout of UnderWater and will offer $23.75 per share for control of the company. a. Assuming you get 50% control, what will happen to the price of non-tendered shares? b. Given the answer in part (a), will shareholders tender their shares, not tender their shares, or be indifferent? c. What will your gain from the transaction be? a. Assuming you get 50% control, what will happen to the price of non-tendered shares? Share price will be $. (Round to the nearest cent.) Incorrec
You have started a company and are in luck—a venture capitalist has offered to invest. You own 100% of the company with 4.56 million shares. The VC offers $1.03 million for 820,000 new shares. b. What is the post-money valuation? c. What fraction of the firm will you own after the investment?
Baghiben
You have been hired as a financial consultant by Himalaya Ltd. The CEO, Ms. Natasha Romanoff has just returned from a conference of top managers, held at a prestigious University in Australia where the issue of share buy-backs, dividends, and earnings per share (EPS) were debated. She was particularly puzzled after hearing the quote below: Share buybacks (repurchases) are going into the market and pumping up the price of your shares by using your own cash, not to invest in business. - (Elizabeth Warren, U.S. Senator,2021)Required:In light of the above statement write a short memorandum format report to the CEO, Natasha Romanoff to answer the following four questions raised by Ms. Romanoff.i. Discuss what dividends, EPS and share buybacks are?ii. Discuss at least TWO reasons why companies pay dividends to shareholders?iii. Based on the statement above by Elizabeth Warren (U.S. Senator) criticallyevaluate why companies may consider buying back its own shares. iv. Discuss at least TWO…

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