1. Natasha is an example of what kind of an investor?

2. At each funding stage prior to the IPO (i.e., 1985, 2000, 2003, and 2006) calculate the pre-money and post-money valuation of the equity of the company.

3. What fraction of the IPO was a primary offering, and what fraction was a secondary offering?

4. Immediately following the IPO the shares traded at $14.50.

a. At this price, what was the value of the whole company? Expressed as a percentage, by how much was the deal underpriced?

b. In dollars, how much did this un-derpricing cost existing shareholders?

c. Assuming that none of the owners purchased additional shares at the IPO, what fraction of the equity did Hannah own, and what was it worth immediately following the IPO?

d. What was the company's debt-equity ratio-the ratio of the book value of debt outstanding to the market value of equity-immediately following the IPO?

5. Address the following questions related to the SEO:

a. What fraction of the SEO was a primary offering, and what fraction was a secondary offering?

b. Assuming that the underwriters charged a 5% fee, what were the proceeds that resulted from Hannah's sale of her stock? How much money did the company raise that would be available to fund future investment and repay the term loan?

6. Immediately following the SEO, the stock price remained at $20 per share.

a. Once the term loan was repaid, what was the value of the whole company?

b. What fraction of the equity did Hannah own?

7. Assume the LBO was successful.

a. How much bank debt was required?

b. What was the debt-equity ratio immediately following the LBO?

8. A year after the LBO, just after the second payment was made, the convertible debt traded for a price of $950.

a. What was its yield to maturity?

b. What was the yield to call?

9. Assume that, in the five years following the LBO, Hannah was able to turn the company around. Over the course of this period, all the bank debt was repaid and the company went public again. The price per share was now $60. Predict what the holders of the convertible debt would do. What would their investment be worth?

On May 8, 1984, Hannah Eisenstat graduated from McGill University. She set to work opening a coffee shop in Montreal called HannaH and found a perfect location in a new development. Using a $50,000 inheritance to finance the venture, together with her own sweat equity, she started the business on August 1, 1984, as a sole proprietorship. The shop was profitable in the first year. Hannah found, however, that the quality of her coffee was not as high has she had initially envisioned. She discussed this issue with one of her regular customers, Natasha Gagnon. On the spot, Natasha offered to help finance the purchase of a roasting machine. By roasting the beans herself, Hannah could produce higher-quality coffee, as well as expand the business by offering beans for sale.

Expansion. After looking carefully at the financials, Hannah determined that she would need an investment of $75,000 from Natasha to undertake this expansion. In exchange for this investment, Hannah offered her a 40% share in the business. Natasha accepted the offer and the business was incorporated with two owners. The equity consisted of 1,000,000 shares in total, with Natasha owning 400,000 shares and Hannah owning 600,000 shares.

By the end of the second year, the business was doing extremely well. Revenue from the sale of beans soon began to rival beverage sales. In response to this success, Hannah and Natasha decided to expand to five stores over the next two years. Rather than using equity financing, they decided to seek bank financing. Each new store required an investment of $100,000. Opening the stores took longer than planned, but by the end of 1999, there were five HannaH's in Montreal employing 30 people. As planned, this expansion was financed solely with debt that was ultimately consolidated into a $500,000 term loan due in 2004.

Venture Capital. In early 2000, the two owners decided to take a weekend retreat and reevaluate their initial business plan. Perhaps the biggest surprise was the popularity of beans; almost 80% of revenue was attributable to bean sales alone. Furthermore, a buyer from a local supermarket chain had approached HannaH with a proposal to sell the beans in the chain's stores. However, HannaH was currently at its capacity limits-it could barely roast enough coffee for its five stores. More importantly, to enhance the coffee quality further, Hannah proposed that they buy beans directly from coffee farmers in Costa Rica, where she would be able to monitor quality closely. However, the supermarket proposal would require a significant increase in the production of roasted beans. By the end of the retreat, Hannah and Natasha had decided to change the focus of the business from retail beverage and bean sales to wholesale roasted coffee beans. Rather than build new stores, they decided to invest in a state-of-the-art roasting facility.