John Thompson, CEO of WVU, Inc., wants to raise $5 million in a private equity in his early stage venture. Thompson conservatively projects net income of $11 million in year five (five years from now) and knows that comparable companies trade at a price to earnings ratio of 24.

a. If the Price to Earnings ratio for a company like Johns is 24X, how much does he expect his company to be worth at the end of year 5.

b. Sitting at his desk at the end of year 02 , John wants to raise $5 million. If a Venture Capitalist wants a rate of return of 50% per year, what percent of the company should the venture capitalist ask for to earn her return in 5 years?

c. If the company has 1,000,000 shares outstanding before the private placement, how many shares should the venture capitalist purchase?

d. What percent of the company should she buy if her required rate of return is only 30%?

e. John feels that he may need as much as $12 million in total outside financing to launch his new product. If he seeks to raise the full amount in this round, how much of his company will he have to give up (assume VC wants the standard 50%)?

Assume now that the company is worth $115 million, and that John needs to raise $5 million in a private equity. Samantha, the venture capitalist, is still making her $5 million investment. There are 1,000,000 shares outstanding initially.

f. What price per share should she agree to pay if her required rate of return is 50%?

g. How many shares would the VC purchase if her required rate of return is 30%?