Reference no: EM133500268

Problem

John and Samantha continue to converse, and Samantha proposes a term sheet. Samantha still wants to have a 50% rate of return on her $5 million investment and is offering to buy standard preferred shares. Thompson conservatively projects net income of $14 million in year five (five years from now) and knows that comparable companies trade at a price to earnings ratio of 7. There is only one round of investment. There are 1,000,000 shares outstanding initially.

Question 1. How much of the company would Samantha need to own in Year 05?

Question 2. How many shares should she purchase?

Question 3. At what price?

In a later counter-offer, Samantha proposes that instead of a standard preferred she be allowed to use standard preferred and that her shares be augmented with a pay-in-kind dividend (a stock dividend) equal to 10% of her investment every year. In addition to cash, Samantha will receive shares. So, she would get the same number of shares initially, but they would behave differently than the PP shares.

Question 1. What is Samantha's internal rate of return on this transaction if she takes the same number of shares, but now including the share dividend too.

Question 2. If Samantha purchases the same number of shares for this deal as the deal with the preferred cash dividend, what price per share does she pay?