SCENARIO B. (This is background information. See below for the specific questions) Elixir Pharmaceutical Corporation is an early stage biotechnology firm in the US. It is projected that by the time the firm goes public, in 5 years, its after tax net income will reach about $10 million. The firm has no debt and 500,000 shares outstanding.

Another closely related biotech firm traded in the NASDAQ has a beta of 2, a debt to equity ratio of 10%, and a price-earnings ratio of 9. The effective tax rate in this industry is around 20%.

A VC fund plans to invest $5 million in the biotech firm. The funds partners understand that early stage firms demand a very high additional risk premium. Based on surveys produced by the funds valuation consultant, the average difference in required rate of return between an early stage firm and a public firm in the same industry is around 20%. The risk-free interest rate is 3% and the equity market risk premium is 6.5%.

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(6 marks) Refer to Scenario B above. Calculate the rate of return that the fund is likely to require when investing in Elixir, based on the information provided? With no further information and assuming that the investment goes ahead, what is the pre-money valuation of Elixir? How much of Elixirs equity will the fund own? Make any other assumptions that you believe are necessary.