An entrepreneur seeks $11 million from a VC fund. The entrepreneur and fund mana
ID: 2769389 • Letter: A
Question
An entrepreneur seeks $11 million from a VC fund. The entrepreneur and fund managers agree that the entrepreneur's venture is currently worth $25 million and that the company will likely be ready to go public in five years. At that time, the company is expected to have net income of $7.0 million, and comparable firms are expected to be selling at a price/earnings ratio of 35. Given the company's stage of development, the venture capital fund managers require a 55% compound annual return on their investment. What fraction of the firm will the fund receive in exchange for its $11 million investment? Round your answer to two decimal places.
_______%
Explanation / Answer
Calculation 1.0.0 Value of firm = Net Income x P/E Income = $7 million x 35 $ 245,000,000 2..000 55 % compound return is required on investment = 11,000,000 X ( 1.55 )5 = $ 98,412,706.56 = $ 0.40 40 % of the firm