Reference no: EM132199714

Question - Roger Harkel, CEO of Bestafer Inc., sought to raise $5 million in a private placement of equity in his early stage dairy products company. Harkel conservatively projected net income of $5 million in year five, and knew that comparable companies traded at a price earnings ratio of 20X.

On further analysis and discussion, Benedicta and Roger agree that the company will probably need another round of financing in addition to the current $5 million. Benedicta believes that Bestafer will need an additional $3 million in equity at the beginning of year 3. While the first round investors (including herself) will require a 50% return, Benedicta feels that round 2 investors, in recognition of the progress made between now and then, will probably have a hurdle rate of only 30%. As before, management should have the ability to own a 15% share of the company by the end of year 5.

a. Based on this new information, what share of the company should Benedicta seek today? What price per share should she be willing to pay?

b. What share of the company will the Round 2 investors seek? What price per share will they be willing to pay?

c. Suppose it was apparent in the beginning of year 3 that Bestafer would meet it's financial targets, but not until the end of year 7. How would your answers to parts 3a and 3b change? If Benedicta took her pro-rata share of the round (e.g. to keep her percentage ownership of the company the same after the offering as it was before), what overall internal rate of return could she expect?