Mini-Case T&T Web Developers.com From exercise bikes to fete tickets, if you can think of it, you can buy it on the Internet. The visible faces of e-commerce are the millions of Web sites that serve as online stores for merchants who may be multi-billion-dollar businesses like Amazon.com or individual entrepreneurs working out of a spare bedroom in their home. As computer science majors at the UWI in 1992, Annalene Kramer and Kavita Gopaul were quick to realize that the supply of aspiring online entrepreneurs greatly exceeded the supply of skilled Web site developers. Annalene and Kavita became close friends at UWI. As a student, Kavita picked up spending money helping other students and faculty members develop individual Web pages. Annalene worked briefly as a telemarketer but managed to get transferred to accounting, where she acquired an in-depth knowledge of telephone credit card transactions. During their final year, the friends answered an ad pinned to the department bulletin board by the forward-looking owner of a chain of mini-appliance stores. He wanted his business to have a Web site. His simple requirements at that time were to post phone numbers and locations of his outlets, store hours, and announcements of special sales and promotional events along with photos of himself, the sales staff, and the latest new appliance offerings. The businessman was so impressed with Annalene's and Kavita's work that he referred them to several business associates and provided "angel" financing to start their new business, incorporated as T&T Web Developers. He became something of a mentor, offering useful advice on marketing, financial controls, and other management issues. Fifteen years later, T&T Web Developers offers comprehensive e-commerce services, including shopping carts, search engine optimization, graphic design, consulting services for setting up merchant accounts and credit card processing with affiliated banks, and Web site hosting. The business employs nearly 50 programmers, graphic designers, business consultants, and support staff. It has clients throughout Trinidad & Tobago and a growing business in the CARICOM region. Five years ago, T&T repaid the original $2,000,000 loan given to it by its angel investor. Instead of interest, T&T's angel accepted 500,000 shares in the fledgling company. T&T then obtained a $6,000,000 loan from MR Venture Capital. The loan required annual interest payments at 5% above the one-year Treasury bill rate. After five years, the venture capitalists had the option of converting the loan principal into 6,000,000 common shares with a par value of $1.00 each. Annalene, Kavita, the angel, and the venture capitalist group all anticipated that T&T would have a liquidity event or initial public offering at that point. Questions 1. The one-year Treasury bill rates for 2002 through 2006 are as follows: Year Rate 2002 2.00% 2003 1.24% 2004 1.89% 2005 3.62% 2006 4.94% ILITI How much interest did MR Venture Capital receive each year? What was the average interest rate that T&T Web Developers paid over the five-year period? (3 marks) 2. Brooks Brothers Investment Bankers has offered T&T Web Developers two options for its initial public offering. In addition to the 500,000 shares held by the original angel and the 6,000,000 shares held by the venture capitalists, T&T will offer 5,000,000 shares to the public at $20 per share. Brooks Brothers is willing to either make a best efforts offering and keep 4% of the retail sales or make a firm commitment of $95,000,000. If T&T Web Developers expects to sell at least 95% of the shares, which offer should it accept? (6 marks) 3. Describe the steps the investment bankers and the firm must make before and after the initial public offering. (6 marks) 4. The provider of the original angel financing loaned T&T Web Developers $2,000,000 at the end of 1994. At the end of 2001, T&T repaid the $2,000,000 principal on the loan and gave him 500,000 shares in lieu of interest. At the end of 2007, he sold the 500,000 shares at an average price of $22. What was his rate of return on the original loan? Hint: Construct a time line of the cash flows, and find the internal rate of return. (5 marks) 5. If MR Venture Capital sold its shares at the end of 2007 for the same $22 price, what was th rate of return on its investment? Include the interest payments calculated in Question marks) WE 6. Assume T&T Web Developers is a typical investment for MR Venture Capital, but on investment in six is actually successful. What is MR's average overall rate of return? For sake of simplicity, assume the five (out of six) investments that fail never make any payments to MR. (5 marks) Mini-Case T&T Web Developers.com From exercise bikes to fete tickets, if you can think of it, you can buy it on the Internet. The visible faces of e-commerce are the millions of Web sites that serve as online stores for merchants who may be multi-billion-dollar businesses like Amazon.com or individual entrepreneurs working out of a spare bedroom in their home. As computer science majors at the UWI in 1992, Annalene Kramer and Kavita Gopaul were quick to realize that the supply of aspiring online entrepreneurs greatly exceeded the supply of skilled Web site developers. Annalene and Kavita became close friends at UWI. As a student, Kavita picked up spending money helping other students and faculty members develop individual Web pages. Annalene worked briefly as a telemarketer but managed to get transferred to accounting, where she acquired an in-depth knowledge of telephone credit card transactions. During their final year, the friends answered an ad pinned to the department bulletin board by the forward-looking owner of a chain of mini-appliance stores. He wanted his business to have a Web site. His simple requirements at that time were to post phone numbers and locations of his outlets, store hours, and announcements of special sales and promotional events along with photos of himself, the sales staff, and the latest new appliance offerings. The businessman was so impressed with Annalene's and Kavita's work that he referred them to several business associates and provided "angel" financing to start their new business, incorporated as T&T Web Developers. He became something of a mentor, offering useful advice on marketing, financial controls, and other management issues. Fifteen years later, T&T Web Developers offers comprehensive e-commerce services, including shopping carts, search engine optimization, graphic design, consulting services for setting up merchant accounts and credit card processing with affiliated banks, and Web site hosting. The business employs nearly 50 programmers, graphic designers, business consultants, and support staff. It has clients throughout Trinidad & Tobago and a growing business in the CARICOM region. Five years ago, T&T repaid the original $2,000,000 loan given to it by its angel investor. Instead of interest, T&T's angel accepted 500,000 shares in the fledgling company. T&T then obtained a $6,000,000 loan from MR Venture Capital. The loan required annual interest payments at 5% above the one-year Treasury bill rate. After five years, the venture capitalists had the option of converting the loan principal into 6,000,000 common shares with a par value of $1.00 each. Annalene, Kavita, the angel, and the venture capitalist group all anticipated that T&T would have a liquidity event or initial public offering at that point. Questions 1. The one-year Treasury bill rates for 2002 through 2006 are as follows: Year Rate 2002 2.00% 2003 1.24% 2004 1.89% 2005 3.62% 2006 4.94% ILITI How much interest did MR Venture Capital receive each year? What was the average interest rate that T&T Web Developers paid over the five-year period? (3 marks) 2. Brooks Brothers Investment Bankers has offered T&T Web Developers two options for its initial public offering. In addition to the 500,000 shares held by the original angel and the 6,000,000 shares held by the venture capitalists, T&T will offer 5,000,000 shares to the public at $20 per share. Brooks Brothers is willing to either make a best efforts offering and keep 4% of the retail sales or make a firm commitment of $95,000,000. If T&T Web Developers expects to sell at least 95% of the shares, which offer should it accept? (6 marks) 3. Describe the steps the investment bankers and the firm must make before and after the initial public offering. (6 marks) 4. The provider of the original angel financing loaned T&T Web Developers $2,000,000 at the end of 1994. At the end of 2001, T&T repaid the $2,000,000 principal on the loan and gave him 500,000 shares in lieu of interest. At the end of 2007, he sold the 500,000 shares at an average price of $22. What was his rate of return on the original loan? Hint: Construct a time line of the cash flows, and find the internal rate of return. (5 marks) 5. If MR Venture Capital sold its shares at the end of 2007 for the same $22 price, what was th rate of return on its investment? Include the interest payments calculated in Question marks) WE 6. Assume T&T Web Developers is a typical investment for MR Venture Capital, but on investment in six is actually successful. What is MR's average overall rate of return? For sake of simplicity, assume the five (out of six) investments that fail never make any payments to MR