Galaxy Fund has a second fund, and some of its portfolio companies are close to the exit stage. Galaxy Fund owns 5,000,000 Convertible Preferred shares at $1 per share in Trident, one of the portfolio companies. Galaxy owns 30% of Trident, and the senior partner responsible for Trident believes that Trident could have an exit value as high as $150,000,000 or as low as $6,000,000 next year. Trident is currently valued at $68,000,000.  The current one-year risk-less rate is 3%.

 

1. What are the potential payoffs to Galaxy next year?

 

2. What should be the market value of Galaxy's Convertible Preferred shares?

 

3. What is your estimate of the value of the option embedded in Galaxy's Convertible Preferred shares?