Venture Capital question

Savannah Walton analyzes venture-capital opportunities for the Mixon University endowment. She is considering an investment in Xavier’s Fine Paper. Management seeks $12 million to fund expansion. Required rate of return 36% Xavier’s historical profit growth 44% Estimated value of Xavier in 7 years $198 million Management’s stake 4 million shares The number of shares Mixon must receive to do this deal is closest to: A) 2.09 million. B) 4.36 million. C) 14.03 million.

POST=198/1.36^7=23 INV=12 PRE=11 11 Million Dollars = 4 Million Shares so 23 Mill = [4/11] (23) = 8.36 Million shares so Mixon would get 8.36 - 4 = 4.36 Million shares.

POST=198/1.36^7=23 fraction=INV/POST=52.2% S(pe)=4*(f/(1-f))=4.36

POST = 198/1.36^7 = 23; PRE = 23-12 = 11 Portional shares Venture retains 11/23 = 47.85% Total Shares = T*.4785 = 4mill or T = 4mill*.4785 = 8.36mill Total shares less ventures stake = 8.36-4 = 4.36mill Ans: B