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: A) $15 million. B) $19.5 million. C) $13 million. Your answer: A was incorrect. The correct answer was B) $19.5 million. Since we have no information on exit value or the IRR rate, but the share price and number shares held by each party is given, the post-money valuation (POST) is calculated as: POST = shares price x total number of shares = $15 × (1,000,000 + 300,000) = $19.5 million. ---------- So I get what they did: PRICE = POST/(#SHARESvc + #SHARESmgmt) POST = PRICE x (#SHARESvc + #SHARESmgmt) = 15 X (1M + 0.3M) = 19.5M But I expected to get the same answer doing it this way: POST = PRE + INV PRICE = PRE/(#SHARESmgmt) PRE = PRICE x (#SHARESmgmt) = 15 X 0.3M = 4.5M POST = PRE + INV = 4.5 + 10 = 14 Would appreciate some input, thank you.
1 million shares - would be worth 15 mill $ - not 10… so 15 + 4.5 = 19.5 … same answer.
CP stop taking the crown all the time let someone else shine: you need 1.3 million shs after the investment is done: post = 1.3*15 don’t mind me CP just trying to stay up and running
But that’s not what I’ve done in other instances to ge the same results. In all instances I’ve successfully checked to see if I got the same results for price by doing: Price = INV/(SHARESvc) Price = PRE/(SHARESmgmt) Price = POST/(SHARESvc + SHARESmgmt) So when using PRE, shouldn’t you be using the shares that are owned by the portfolio firm? PRE = PRICE x (#SHARESmgmt) If you use the 1.3M in parenthesis then the variable on the left side of the equals sign should be POST rather than PRE.
not sure but the 3 prices you wrote would not equal if you want a post value of the whole firm, the market value is appropriate. total outstanding share*prices = total post investment value
in fact myself used the wrong method from the very beginning. I used Spe=S0*[f/(1-f)] and 1000000=300000*[f/(1-f)] so I solved the fraction is 10/13 and then f=10/13=INV/POST, I get POST=13 but however, I realized later the Spe=S0*[f/(1-f)] relationship holds only when the price per share remains no change from PRE to POST. Now from this question we can be sure during the investment, the mgmt doesn’t compensate the PE investor fully with issuing more shares. they issue some shares(1000000 more), and the share price also raises. so you have to just compute the market value i/o using the POST-PRE-INV method.
I think that the Private equity firm is not the only investor in the portfolio company. If they invest 10 mio, the value of their investment at that moment (part of POST) is 10 mio. and they own 2/3 of 1 mio shares owned by investors. And there must be some other investors who own the rest, 1/3 of 1 mio shares. Plus management owns 0.3 mio shares, share price 15.
the show NY Wrote: > > Price = INV/(SHARESvc) > > Price = PRE/(SHARESmgmt) > > Price = POST/(SHARESvc + SHARESmgmt) > IMO, only the 3rd formula for Price is correct. Logic is, Price of $15 holds, ONLY when ALL investors (Mgmt and VC) have committed their money in the company. Meaning, if the Company cannot manage to get funds from VCs, then price of $15 per share for their 300,000 shares does not hold. So, to get Price POST value should be considered and not PRE and INV on standalone basis. Hope it helps.
pfc–wehere are you getting 2/3 from? rus1bus–your reasoning makes sense except that every single other problem ive done on this topic (10+ problems) as a sanity check ive calculated the price all 3 ways–POST,PRE,INV in numerator–with its respective denominator–all sahres, mgmt’s shares, vc’s shares–and gotten the same exact answer for price. try it on any other Q (like the ones in schweser book on this topic).
You’re over complicating this. The value of any company’s equity is market price x shares outstanding, so 1.3MM x 15 = 19.5 MM. Using the above calculations are important for determining the price, based on POST/PRE values and the amount of shares outstanding. In this case you’re given the price (along with the shares outstanding), so it’s just one times the other.
so the ownership fraction for the VC in this case is not y/x+y=76.92%, but should be I/POST = 51.3%? is it because it’s IRR method so we can’t use I/POST = y/x+y? why would the share price change from PRE to POST?
to the show NY: I take 10mio USD investment and devide it by 15, which is equal to 2/3 of 1 mio shares (666 667 shares) and I cannot imagine that I invest 10 mio USD and immediately at that moment I value my investment at 15 mio usd (15 x 1 000 000). Thats why I say there must be some other investors and I own only 2/3 of 1 mio shares. If I am wrong let me know why, pls.
IRR method is just a distracting noise word. CPK’s reasoning and epoh’s reasoning is the simple, direct and correct approach .
I agree with pfcfaataf. I think this question itself is technically wrong. I invest 10 million and immediately I value it at 15 million. Should not be possible. (IRR or no IRR, or any other method we have studied or not studied). Technically INV = 10 million and not 15 million. In the question price per share could not be $15, it should have been $10 to be technically consistent with other data they provided.