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How many shares of stock and at what stock price should be

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Angie Ghent a local prominent Business Angel has expressed a keen interest in Razor Wire Productions ("RWP"), a large manufacturing of industrial fencing products. Angie estimates that RWP will have after tax earnings of $3.5 million in 2020 (year 1), $4.75 million in 2021, and $9.25 million in 2022 (year 3).

In 2022 RWP is expected to have about 8.12 ROA, $12 million in total debt, and approximately $14 million in capital assets. Angie intends to value the firm as of year 2022 (her expected timeframe for exiting the investment) and is using an earnings multiple of 9 times. Angie's required rate of return is 60%.

The US tax rate is expected to remain constant at 21% for foreseeable future. Ralph Smithson owns RWP. Ralph is the sole owner and has 1.75 million shares of stock. If Angie invests $4 million into the RWP what percentage ownership of RWP should Angie receive in return? Also, how many shares of stock and at what stock price should be issued to Angie upon closing the deal with Ralph Smithson?

Reference no: EM132344668

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