SmartBackPack (SBP) is a startup company which was established in early 2011 by its founders, who invested $500,000 at that time and received 2.5 million shares of series A stocks. In the following years, the company received additional financing in two different rounds: Year Round Price ($) Number of Shares Investor 2013 Series B 0.58 500,000 Angels 2016 Series C 2.70 280,000 Venture Capitalists In the end of 2018, all series of preferred shares were converted in common stocks on a 1 for 1 basis. Then in 2019 the company went public through an IPO: 2.8 million shares were sold to the public: the Series C shares as secondary shares and the rest as primary (new) shares. The shares were issued at $8.40, the cost of the issue was $0.52 per share plus $657,600 of direct expenses. In the end of Feb. 2020, the stock price is $15.16. At that time, the only debt of the company is a $18 millions bond issue which will mature in 3 years. The coupon rate is 5.5% and it will be repaid at par ($100) at maturity. Its YTM is currently 5.9%. To finance its development, the company needs to raise an additional financing of $6 million (net proceeds). The CFO considers these financing opportunities: 

• Raising new common stocks through an SEO. The issuing price would be $13.80 per share and the issuing costs will represent 2.549% of the gross proceeds of the issue. 

• A 4-years convertible bonds issue. Coupon rate would be 2.5% and each bond would be convertible into 4 common stocks at any time. In case the bonds are not converted, they would be repaid at par. The bonds issuing price and face value would be $85 and the issuing costs will be 2.6369% of the gross proceeds of the issue. 

1. Give the pre- and post-money valuations of the company for each round of its private financing. What was the ownership % of the owners just before the 2019 IPO? What was the ownership % of the public (the float) right after the IPO? (4 points) 

2. What were the net proceeds of the 2019 IPO to the company? What was the company post-money valuation after the IPO? (2 points) 

3. The unlevered beta of the sector is 1.09, the tax rate 1/3, the risk free rate 1.82% and the market risk premium 8.05% for 2020. The company can borrow at its debt YTM. What was the WACC of the company before the new financing of 2020? (3 points) 

4. How many new stocks should be issued in the SEO for the net proceeds to be the required amount? How many rights would be necessary to buy a new stock? What is the rights theoretical value? (3 points) 

5. What is the minimum required annual compound growth (in %) on the stock price for the convertible bond to be in the money before being repaid? (2 points) 

6. What is the convertible bond option value at the time of its issue? Use the YTM of the company’s classical bonds. (1 point) 

7. What should be the stock price at the time of the convertible bond repayment for the NPV in investing in the CB to be exactly zero if the required rate of return is the WACC before the new financing?  

8. What will be the cost of equity of the company if it chooses the SEO as the new financing?