Assume that EBV invested in Newco at the terms in Exercise 10.2, and it is now one year later. Talltree is considering a $10M Series B investment in Newco. Talltree proposes to structure the investment as 8M shares of convertible preferred stock. The employees of Newco have claims on 10M shares of common stock, and the previous venture investors (EBV) hold 6M shares of Series A convertible preferred. Thus, following the Series B investment, Newco will have 10M common shares outstanding, and would have 24M shares outstanding on conversion of the CP. Talltree estimates a 40 percent probability for a successful exit, with an expected exit time in 4 years and an exit valuation of $500M. The $250M Talltree fund has annual fees of 2 percent for each of its 10 years of life and earns 20 percent carried interest on all profits.10.2 EBV invested in Newco Initial Investment by EBV 5.00Expected Value of EBV's Stake 46.88Annual Return56.46%

To calculate the impact of the Series B investment on the ownership and value of Newco, we can first…

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Business

Finance

Assume

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 17P

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EBV is considering a $6M Series A investment in Newco. EBV proposes to structure the investment as 5M shares of convertible preferred stock. The founder and employees of Newco have claims on 10M shares of common stock. Thus, following the Series A investment, Newco will have 10M common shares outstanding and would have 15M shares outstanding on conversion of the CP. EBV estimates a 30 percent probability for a successful exit, with an expected exit time in 5 years and an exit valuation of $250M. The $100M EBV fund has annual fees of 2 percent for each of its 10 years of life and earns 20 percent carried interest on all profits. Assume the following: The cost of venture capital is 10%; Expected GVM -2.5; expected retention for first round investors is 50%. GP% - 10%. Apply standard assumptions listed in the textbook and lecture notes for additional data and information required for the valuation. What is the proposed ownership today at the time of investment? O 16.65% O33.3% O40.0%
EBV is considering a $5M Series A investment in Newco. EBV proposes to structure the investment as 6M shares of convertible preferred stock. The employees of Newco have claims on 10M shares of common stock. Thus, following the Series A investment, Newco will have 10M common shares outstanding and would have 16M shares outstanding on conversion of the CP. EBV estimates a 25 percent probability for a successful exit, with an expected exit time in 5 years and an exit valuation of $500M. The $100M EBV fund has annual fees of 2 percent for each of its 10 years of life and earns 20 percent carried interest on all profits. What is your investment recommendation for EBV? (Show all works.)
(answer the next 3 questions with the following information.) A fictitious VC firm, EBV, that is considering a series A investment in a start-up company named Newco. The terms specify that EBV invests $5 million for 5M shares into Newco, which currently has 10M shares allotted to employees and founders. Security structure is as follows: First pay [one] times the Original Purchase Price on each share of Series A Preferred. Thereafter, the Series A Preferred participates with the Common Stock pro rata on an as-converted basis. The liquidation return is capped at four times OPP. EBV has committed capital of $100M with 2% management fee. GP% is 10%. If the exit value is $72, how much is the distribution to the VC? O $32M O $27.3 O $24M O $10.7M
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ABC Co. is authorized to issue 1,000,000 ordinary shares with a $5 par value and 100,000, 6% preference shares with a $20 par value. The company is considering financing a large expansion project that is expected to bring sustainable growth to the company. The company's investment banker has suggested that the company takes advantage of both equity and debt financing. He proposed that the company sells securities to investors called HYBRID. Each unit of HYBRID consists of: (1) a $1,000 face value, 10% stated rate, 5-years bond, which pays interest annually, and (2) 20 ordinary shares. On January 1, 2017, the company issued 500 units of HYBRID for a price of $1,200 per unit. The company paid 50 units of HYBRID to the Investment banker as underwriting fees. Assume that the effective market rate was 12% and that ordinary shares have an appraisal value of $15 per share. Required: For ABC Co.: Prepare the necessary journal entry(ies) to record the issue of HYBRID units on January 1, 2017.…
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ABC Co. is authorized to issue 1,000,000 ordinary shares with a $5 par value and 100,000, 6% preference shares with a $20 par value. The company is considering financing a large expansion project that is expected to bring sustainable growth to the company. The company’s investment banker has suggested that the company takes advantage of both equity and debt financing. He proposed that the company sells securities to investors called HYBRID. Each unit of HYBRID consists of: (1) a $1,000 face value, 10% stated rate, 5-years bond, which pays interest annually, and (2) 20 ordinary shares. On January 1, 2017, the company issued 500 units of HYBRID for a price of $1,200 per unit. The company paid 50 units of HYBRID to the Investment banker as underwriting fees. Assume that the effective market rate was 12% and that ordinary shares have an appraisal value of $15 per share. Required: For ABC Co.: Prepare the necessary journal entry(ies) to record the issue of HYBRID units on January 1, 2017.
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