Stuck on a homework question? Our verified tutors can answer all questions, from basic math to advanced rocket science!

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.

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?