You are a venture capitalist who is interested in investing \($50\) million in Friends Online, a social media company. The business will take three years to become operational (during which period it will generate no positive cash flows), and once operational, it will generate \($27\) million in after-tax cash flows, growing 3% in perpetuity. The cost of capital for established social media companies is 12%, but there is a 60 percent chance that the business will not survive (in which case it will have no assets of value to liquidate).

a. Estimate the value of Friends Online, once it is operational.

b. Given the likelihood of failure, estimate the proportion of equity in Friends Online you would demand today in return for your \($50\) million investment. (You can assume that Friends Online has no debt or cash.)

c. Estimate the target return you would demand over the next three years, with the risk of failure incorporated into the return.

To solve the next two problems, you will need access to a simulation program like Crystal Ball or @Risk.