“A private equity firm makes a $10 million investment in a portfolio company and calculates that the firm’s investors should hold 1,000,000 shares at a price of $15.00 per share using the IRR approach. The founders of a portfolio company currently hold 300,000 shares. The appropriate post-money (POST) valuation is:” What I did was first calculate the fraction of the VC ownership as: 1,000,000 / (1,000,000+300,000) = 77% Then used f = Investment / PV exit value to calculate the Post Money Value: POST = 10,000,000/0.77 = 12,987,013 Why is this wrong? HELP Please. I got all other questions on this LOS right but I don’t understand why this is wrong. Maybe I’m tired…
The fraction of ownership will be 700,000/1,000,000 = 70% Post value will be 10,000,000/0.70 = 14,285,714
PRE + INV = POST $15x300k + $10 mn = POST $4.5 mn + $10 mn = $14.5 mn
Actually the answer was: 1,000,000 * 15 = 15,000,000 I still don´t get it
Mel_2008 Wrote: ------------------------------------------------------- > Actually the answer was: 1,000,000 * 15 = > 15,000,000 > > I still don´t get it Sorry, I meant 15 x (1,000,000 + 300,000) = 19,500,000 I still do not understand why what I did was wrong
what you did was wrong because you used 10 Million Investment to calculate the POST valuation. 10 Million Investment was in the Portfolio Company. (for the 300000 K shares). 15/.77 = 19.48 Mill… is more like it.
^ ahhhhhh…thanks cpk.
To be honest I still don’t understand this one. I’m thinking of all the formulas available for these calculations and I don’t think I would ever think to take the price/share and divide it by the PE firm’s ownership percentage. CP - How did you know to do this and is there anything I can reference in CFAI text (or Schweser) that would bring this together for me?
The way to do it … is not the way I have done. total # of shares issued = 1.3 Mill (1 Mill for VC, .3 Mill for the Mgmt firm). each share is 15$ so 15*1.3 = 19.5 Mill and just to clarify - earlier I was not doing Share price / Ownership. I was doing Ownership of VC Firm = 15 * 1 Mill Shares / .77 …