Question
A bias-neutral venture capitalist is contemplating investing $2 million in a start-up company. Company net income at end of year two is expected to be
A bias-neutral venture capitalist is contemplating investing $2 million in a start-up company. Company net income at end of year two is expected to be $2 million. Given the two year length of his investment, his firm requires a 30% internal rate of return compounded annually. Given that the start-up companys product line is in the biotech area, rapid growth is expected and therefore the price to earnings ratio is expected to be 30. Neither future investments nor change in earnings projection is expected prior to the end of the investment term. Using the Sahlman Ownership proportion Formula, compute rounded to the nearest thousandth the percentage of ownership in a start-up company that the venture capitalists should seek and enter digits for in the form (#.###) in the corresponding answer box below. For example, 27.3% would be entered 0.273, 100% would be entered as 1.000.. Answers will be graded correct if within +/- 1% of the correct answer.
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