The question down here is based upon the pre and post money valuations we use for VC method of investing in companies. The formulas we use there helps us in determining the fractional share to be owned and arrive at the stock price. Could you help me out with this question Savannah Walton, a venture-capital analyst for Mixon University’s endowment, is investigating Xavier’s Fine Paper. Management seeks a $12 million investment to fund expansion. Assuming owners hold 4 million shares and are willing to issue Mixon 5 million shares, Walton should: A) do the deal, because the buy-in price is $3.0 million below the estimated value. B) do the deal, because the buy-in price is $9.6 million below the estimated value. C) not do the deal, because the buy-in price is $2.4 million more than the estimated value
all I can tell from this is that the estimated avlue has to be $21.6MM or greater for the investors to invest $12MM…are you sure you are not missing information for the question?
This is from Q bank… The correct answer was C) not do the deal, because the buy-in price is $2.4 million more than the estimated value. Step 1: We calculate a post-money valuation. POST = INV / fractional ownership = $12 million / (5 million / 9 million) = $21.6 million. Step 2: Then we determine the pre-money valuation. PRE = POST − INV = $9.6 million. $21.6 million − $12 million − $9.6 million. Since the investment costs $12 million and is worth an estimated $9.6 million, Mixon is paying $2.4 million too much and should not do the deal I did not understand the answer… The VC anyways is being given his fractional volume of the ownership based on his investment. Can we judge anything about overvalued or undervalued? The explanation doesnt make any sense to me… Just let me know if this is correct?
Thanks for reminding me about a section I have completely forgotten 
Reviewing all the VC formulas is on my never ending list of things to review.
This is my toughest section so far after quant
Dax21B, I don’t understand that answer either. To me, if the POST equals $21.6 mil, and Mixon is to have 5 mil shares of 9 mil available, the value of their investment would be $12 mil, which is what they paid. The $9.6 mil referenced in the answer is the value of the firm’s share, not Mixon. Another example of a crappy Qbank question.