Module 7: Debt and Equity Financing Rogue Space is a startup technology company that specializes in fixing satellites while they are in orbit around the Earth. The company has been raising funds from friends, family, private investors, and corporate partners in order to fund their first space launch of equipment. The company is looking at several methods for raising finance private financing through an angel or venture capitalist, issuing debt through bonds, as well as potentially going public with an initial public offering. As the newly hired CFO, you have been asked to investigate the options and calculating out the different scenarios for both equity and debt. You decide to address the potential of equity financing first. You know that from equity financing from the company founders, as well as Series A funding from friends and family, the company has 10 million in outstanding shares. Using an angel investor or venture capitalist will require Rogue to issue additional stocks. To attract investors, you decide to offer 15% equity in the company to an investor for $1.5 million. What will be the number of shares that you must issue in order to provide an angel/VC with 15% equity in the company? What is the implied price per share with this additional issuance of equity? What will the value of the whole company be after an investor accepts your offer? Total Shares outstanding: 10,000,000 Number of Shares to be issued: Implied price per share with issuance of equity: Value of Company after investor: Your second option to raise funding is to go public with an IPO. To do this, you can either use an Auction IPO or a firm commitment IPO. You decide to run the scenario for both options. You put your feelers out to get an idea of the bids you could receive if you choose to use an auction IPO. You would like to sell 1 million shares in the company. The information you receive reveals the following soft offers. Price Number of Shares 32.42 175,000 32.25 195,000 32 150,000 31.99 200,000 31.4 165,000 31 275,000 30.75 250,000 30.5 100,000 Based on this data, what would be the auction offer price per share? Price Number of Shares Cumulative Demand $32.42 175,000 $32.25 195,000 $32.00 150,000 $31.99 200,000 $31.40 280,000 $31.00 270,000 $30.75 250,000 $30.50 100,000 Auction Price per share: With a firm commitment IPO, you can work to set the share price for your 1 million shares. This will result in a total of 11 million outstanding shares. You would like to set the share price at $31 per share. There is an underwriting spread of 5%. How much could you potentially raise from the IPO? What would be the market value of Rogue after the IPO? Value raised by IPO: Market value after IPO: Next, you look into the potential of issuing a bond to raise debt funding. To get an idea of potential bond performance, rates, and other data, you decide to look at the US Treasury bonds market. You find that in January of 2010, the US treasury issued a 10-year inflation-indexed note with a coupon of 4%, which pays semiannually. When the bond was issued, the CPI was 400, but now, 10 years later, the CPI is at 300. Assume that the face value is $1000 and that the bond is protected against deflation. What was the principle and coupon payment made on the bond in 2020? How does performance of this bond relate to potential performance of your bond, should Rogue use this method of financing? CPI Index Depreciation: Coupon Payment: Principle Amount: How does performance of this bond relate to potential performance of your bond, should Rogue use this method of financing? (Use 3 sentences to address the question.) You contemplate issuing a callable, 10-year, 5% coupon bond with annual coupon payments. The bond can be called after 5 years, and it has a price of $95 with a face value of $100. What would be the bonds yield to maturity? What would be the bonds yield to call? Yield to Maturity: Yield to Call: Armed with your data, you are ready to report back about your recommendation for raising capital. As the CFO of Rogue Space, what funding method would you present to management as the most feasible method of raising capital? Support your response by referring to the data you have calculated, using a minimum of 3 sentences to address the question.