Hi Guys,
I had a small issue at work (private equity deal) and thought why not go back to analystforum to talk to my fellow CFA crowd!
My boss told me something like this:
“I expect company X to make $1.5m net profit and have told them that $10 m equity can be raise based upon $25m valuation at 16PE so 40% dilution”
Now my observations:
Case 1: If he meant $25m as pre-money valuation, then, post-money valuation is $35m. My net worth which was $25mn before the transaction, shrinks to 60% of $35m = $21m (This DOES NOT make sense)
Case 2: If he meant $25m as post-money valuation, then, pre-money valuation is $15m. My net worth which was $15mn before the transaction, stays the same at 60% of $25m = $15m (This MAKES sense)
Now assuming case two is correct, the PE ratio should be 15/1.5=10x and not 16x!
Am I missing something here!