John and Samantha continue to converse, and Samantha proposes a new term sheet. Samantha still wants to have a 50% rate of return on her $5 million investment and is offering to buy standard preferred shares⁴ . Thompson conservatively projects net income of $7 million in year five (five years from now) and knows that comparable companies trade at a price to earnings ratio of 39. There is only one round of investment. There are 1,000,000 shares outstanding initially.

a. What percentage of the company would Samantha need to own in Year 0⁵?

b. How many shares should she purchase?

c. At what price?

Notes:

⁴ Check back to the lecture. For standard preferred, the investor gets a cash dividend (equal to the initial investment in this case) and the remainder of the return in common stock. So, subtract the dividend off the top from the value available to distribute between the investors and calculate her ownership % based on the new value available to investors.