Question
am stumped and cannot move on. see below. How do you get 77.68% in the answer? Products, a closely held corporation, are contemplating merging the
am stumped and cannot move on. see below. How do you get 77.68% in the answer?
Products, a closely held corporation, are contemplating merging the successful venture into a much larger diversified firm that operates in the same industry. ACE estimates its free cash flows that will be available to the enterprise next year at $5,200,000. Since the venture is now in its maturity stage, ACEs free cash flows are expected to continue to grow at a 6 percent annual compound growth rate in the future. A weighted average cost of capital (WACC) for the venture is estimated at 15 percent. Interest-bearing debt owed by ACE is $17.5 million. In addition, the venture has surplus cash of $4 million. ACE currently has five million shares outstanding, with three million held by venture investors and two million held by founders. The venture investors have an average investment of $2.50 per share while the founders average investment is $.50 per share.
A. Based on the above information, estimate the enterprise value of ACE Products. What would be the value of the ventures equity?
Enterprise Value: V= D+E
enterprise next year at $5,200,000
the venture is estimated at 15 percent - grow at 6 percent annual compound growth
Enterprise value = $5,200,000/(0.15 0.06) = $57,777,778
Total Enterprise Value = $57,777,778 + $4,000,000 in surplus cash = $61,777,778
Value of equity = $61,777,778 (debt $17,500,000) = $44,777,778
B. How much of the value of ACE would belong to the venture investors versus the founders? How much would the venture be worth on a per-share basis?
ACE has 5,000,000 shares; venture investors has 3,000,000 = 3,000,000/5,000,000 = 60%
Founders has 2,000,000/5,000,000 = 40%
Venture investors value: $44,777,778 x .60% = $26,566,667
Ventures investors value per share = $26,566,667/3,000,000 shares = $8.856
Founders value = $44,777,778 x (1-.60 =.40%) = $17,711,111
Founders value per share = $17,711,111/2,000,000 held by founders = $8.856
Total investors: $44,277,778/5,000,000 ACE shares = 8.856
C. What would be the percentage appreciation on the stock bought by the venture investors versus the investment appreciation for the founders?
Appreciation percentage of Venture Investors = [($8.856 2.50)/$2.50] x 100 =
$6.356/2.25 x 100 = 254.24%
Appreciation percentage of Founders = [($8.856 - $.50)/$.50] x 100 =
$8.806 /.50 x 100 = 1,671.20%
D. If the founders have held their investments for five years, calculate the compound annual or internal rate of return on their investments. The venture investors made a first-round investment of 1.5 million shares at $2 per share four years ago. What was the compound annual rate of return on the first-round investment? Venture investors made a second-round investment of 1.5 million shares at $3 per share two years ago. Calculate their compound rate of return on this investment.
Founders investment present value = 2,000,000 shares x .50 $1,000,000
Founders future value = $17,711,111
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