13. The existing capital of a newly found medium-sized firm in South Africa, SFS Enterprise, is divided evenly among its eight founding investors who own at least 250,000 shares each in SFS Enterprise. The investors aim to raise foreign capital and bring together their ideas to the early-stage venture capitalist, Iporo Capital Fund (ICF). They stated that at the end of each investor’s six-year investment horizon, they expect revenue of US$32 million per annum. To get their company in full swing they needed a start-up capital of US$1,200,000. The existing company in the industry that is almost equivalent to SFS Enterprise has a multiple around 2.35.

The financial advisers of the investors concluded that because the business is a start-up, there seems to be uncertainty regarding the future performance of the company. So, they consider a risk premium of 25 %, a β

of 2.5 and a Treasury bill rate of 8.5 %, which is appropriate for the business.

Based on this scenario, how many shares will the investors demand to put SFS Enterprise in shape to do business in South Africa? What will be the SP of SFS Enterprise?

(a) Using the NPV method.

(b) Using the IRR method.

(c) Assuming SFS later decides to raise an additional US$ 7 million from another VC firm, Opportunity Capital Fund (OCF). The business is expected to expand further with a lower risk premium of 13 % while the risk-free rate and the β remain the same.

(i) How many shares will be issued to Business Opportunity Fund?

(ii) What will the SP be?