How many new shares and at what price per share will need

Reference no: EM133415786

1. A technology start-up called A2Z Technologies focuses on creating novel software applications. After a successful seed funding round, the business now wants to raise $25 million to spend on R&D and hire more people. The management of A2Z is of the opinion that it will take the company two years to release its brand-new software application. Once that time has passed, the company anticipates that the software will bring in $50 million annually, growing at a rate of 10% per year. The market risk premium is 7%, the risk-free rate is 3%, and the company's beta is estimated to be 1.5. The founders of A2Z own 60% of the company's equity, with a group of angel investors holding the remaining 40%.

a. What is A2Z's equity currently worth?

b. How many new shares and at what price per share will need to be issued if A2Z issues new equity to raise the $25 million it requires?

c. Let's say A2Z decides to borrow $25 million at a rate of 8% by issuing debt rather than equity. If A2Z were to take on $25 million in debt, what would the equity's new value be?

d. If management at A2Z believes that the beta of the company will fall to 1.2 once the new software is released, what is the anticipated return on equity at that point?

e. Let's say that the founders of A2Z are thinking about selling a portion of their equity stake to a venture capital firm for $10 million in capital. If the venture capital firm received 10% of A2Z's total equity, how much equity would it own?

2. StIn is a new food startup that offers meal delivery. The company is looking to raise additional capital for expansion after securing funding to launch its service. To begin shipping the new meals, StIn needs to invest $5 million in technology and $10 million in working capital right away. StIn anticipates an annual FCF of $8 million if they begin delivering the new meals. The beta of StIn is, according to analysts, 1.2. Both the risk-free rate and the market risk premium are 6%. New Horizon Ventures owns 20% of StIn's shares, while Chris, the company's founder, owns 80%. There are 2,000,000 outstanding shares. Please respond to the following:

a. What is the worth of StIn's ticket stack?
b. What is the price of StIn's equity per share?
c. What value does StIn add?
d. There are a lot of bidders competing for capital in the venture capital market, and StIn is no exception. Let's say Delta Ventures agrees to contribute $15 million in exchange for a 25% stake in the business. This means that Delta Ventures will receive new common shares equal to 25% of the total number of common shares (the original 2,000,000 common shares plus the new common shares given to Delta). StIn will acquire the necessary assets when it receives the $15 million.

i. How much do StIn's assets cost?
ii. What value does StIn add?
iii. How much of the tickets will now belong to Delta Ventures?
iv. How many brand-new shares must Delta Ventures receive in return for their investment?
v. How much does StIn cost per share? Did the cost change from what you said above? If not, why not?

Reference no: EM133415786

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