1. Review these basic formulas and information regarding venture finance: Earnings per Share (EPS) = Earnings / Number of Shares Outstanding Share Price = Earnings per Share * PE Ratio Market Capitalization Share price * Number of Shares Outstanding Note: "Earnings" is often called Net Income or After-Tax Profit 2. Ask the following study questions of yourself: The current number of shares outstanding for BioGene is 23 million and its current PE ratio is 49. Assuming a yearly growth in earnings of 50 percent for the next four years and a decline in PE ratio to 25, this implies a valuation of $962 million in 2022. Assume InterWeb's earnings (after-tax profits) in 2022 are $6.3 million as stated in their business plan. Assigning a PE ratio of 50 of InterWeb in 2022, what will their valuation be? What is Barbara's percentage ownership in each firm assuming nothing else changes in shares outstanding for either of them in the next four years when the options vest? Recall from the case that BioGene has 23 million outstanding shares, and InterWeb has 23.7 million outstanding shares. Using the valuation estimates in Question 1 for 2022, compare the offers in four years when the stock options will be fully vested. Assuming Barbara remains employed until that time and can sell her options in a cashless transaction on the same day, which stock option offer yields a large gain? Make sure to include the cost of the stock options and state all critical assumptions. In addition to compensation matters, what other factors would you suggest Barbara consider in making her decision? 1. Review these basic formulas and information regarding venture finance: Earnings per Share (EPS) = Earnings / Number of Shares Outstanding Share Price = Earnings per Share * PE Ratio Market Capitalization Share price * Number of Shares Outstanding Note: "Earnings" is often called Net Income or After-Tax Profit 2. Ask the following study questions of yourself: The current number of shares outstanding for BioGene is 23 million and its current PE ratio is 49. Assuming a yearly growth in earnings of 50 percent for the next four years and a decline in PE ratio to 25, this implies a valuation of $962 million in 2022. Assume InterWeb's earnings (after-tax profits) in 2022 are $6.3 million as stated in their business plan. Assigning a PE ratio of 50 of InterWeb in 2022, what will their valuation be? What is Barbara's percentage ownership in each firm assuming nothing else changes in shares outstanding for either of them in the next four years when the options vest? Recall from the case that BioGene has 23 million outstanding shares, and InterWeb has 23.7 million outstanding shares. Using the valuation estimates in Question 1 for 2022, compare the offers in four years when the stock options will be fully vested. Assuming Barbara remains employed until that time and can sell her options in a cashless transaction on the same day, which stock option offer yields a large gain? Make sure to include the cost of the stock options and state all critical assumptions. In addition to compensation matters, what other factors would you suggest Barbara consider in making her decision
