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Chariot.com needs $ 5 0 0 , 0 0 0 in venture capital to bring a new Internet messaging service to market. The firm's management
Chariot.com needs $ in venture capital to bring a new Internet messaging service to market. The firm's management has approached Route Ventures, a venture capital firm located in the hightech startup mecca known as Route in Boston, Massachusetts, which has expressed an interest in the investment opportunity. Chariot.com's management made the following EBITDA forecasts for the firm, spanning the next five years:
Year EBITDA
$
Route Ventures believes that the firm will sell for six times EBITDA in the fifth year of its operations and that the firm will have $ million in debt at that time, including $ million in interestbearing debt. Finally, Chariot.com's management anticipates having a $ cash blanace in five years.
The venture capitalist is considering three ways of structuring the financing:
Straight common stock, where the investor requires an IRR of
Convertible debt paying interest. Given the change from common stock to debt, the investor would lower the required IRR to
Redeemable preferred stock with an dividend rate, plus warrants entitling the VC to pruchase of the value of the firm's equity for $ in five years. In addition to the share of the firm's equity, the holder of the redeemable preferred shares will receive dividends for each of the next five years, plus the face value of the preferred stock in year
a Based on the offering terms for the first alternative common stock what fraction of the firm's shares will it have to give up to get the requisite financing?
b If the convertible debt alternative is chosen, what fraction of the firm's ownership must be given up
c What rate of return will the firm have to pay for the new funds if the redeemable preferred stock alternative is chosen?
d Which alternative would you prefer if you were the management of Chariot.com? Why?
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