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Assignment #1 – Topics in Entrepreneurial Finance

Make sure to submit the calculations and explanations to get full score.

Part A

James Roth, CEO of the new start-up Arbuckle, Inc., which manufactures highly popular shoes, seeks toraise \$5 million investment in his early stage venture. James conservatively projects earnings at exit of \$5 million, five years from now, and knows that comparable companies at the time of exit trade at a priceearnings ratio of 20X.

1. What share of the company will a venture capitalist require today if her required rate of return is

50% per year?

2. What is the post-money valuation?

3. What is the pre-money valuation?

4. If the company has 1,000,000 shares outstanding before the investment, how many shares should

the venture capitalist purchase? What price per share should she agree to pay if her required rate

of return is 50%?

5. On further analysis, the VC and Madhav agree that the company will probably need another

round of financing in addition to the current \$5 million. The VC thinks the company will need an

additional \$3 million in equity three years from today. While the first round investors still require

a 50%/year return, she thinks the second round investors will only require 30%/year. Based on

this new information, what share of the company will Round 2 investors seek?

6. What is the post-money and pre-money valuation of Round 2 investment?

7. Based on the information in Question 5, what share of the company would Round 1 investors

seek today (i.e., in the first round)?

8. How many shares should be issued to investors in round 1 and then subsequently to investor in

round 2?

9. What is the price per share in both rounds?