Estimate what fraction of the equity in your company

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Question:

You are in a negotiation with a Venture Capitalist (VC). It is estimated that company cash flow will be $10 million next year, growing at a constant rate of 4% forever. The VC will inject an investment of $20 million into the company, as required to fund a key CAPX today (t=0). Your company is a private company and so there is considerable debate between you and the VC regarding the correct discount rate. You agree on the following facts. Your company will operate in unlevered form. The risk free rate is 2%. The market risk premium is 6%. The market's Sharpe Ratio is 1/3 (0.333). Your company's equity volatility is approximately 36% (0.36). Assuming the VC is entitled to the same compensation (risk premium) per unit of risk as the typical CAPM investor, estimate what fraction of the equity in your company the VC is entitled to, acknowledging that the VC will not be in a diversified position.

Reference no: EM133290586

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