This case reviews the life cycle of a successful business from angel financing, through the venture capital stage, and IPO liquidity event. It also covers shorter-term borrowing decisions and requires computations to determine the lowest cost of borrowing.
1. The 1-year Treasury bill rates for 2002 through 2006 are given below:
How much interest did MR Venture Capital receive each year? What was the average interest rate paid by AK Web Developers over the 5-year period?
2. Brooks Brothers Investment Bankers has offered AK Web Developers 2 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, AK will offer 5,000,000 shares to the public at $20 per share. Brooks Brothers is willing either to make a best efforts offering and keep 4% of the retail sales, or make a firm commitment offer of $95,000,000. If AK Web Developers expects to sell at least 95% of the shares, which offer should it accept?
3. Describe the steps the investments bankers and the firm must take before and after the initial public offering.
4. The provider of the original angel financing lent AK Web Developers $2,000,000 at the end of 1994. At the end of 2001, AK 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?
5. If MR Venture Capital sold its shares at the end of 2007 for the same $22 price, what was the rate of return on its investment? Include the interest payments calculated in question 1.
6. Assume that AK Web Developers is a typical investment for MR Venture Capital, but only one investment in six is actually successful. What is MR’s average overall rate of return? For the sake of simplicity, assume that the 5 out of 6 investments that fail never make any payments to MR.
7. AK Web Developers also needs to raise $2,000,000 in short-term loans for working capital needs.
a) Interbank offers an annual percentage rate of 6%, but the loan must be repaid in 12 equal monthly installments. This arrangement is acceptable to AK because the need for working capital will decline during the year. Compute the monthly payment and the EAR for this loan.
b) Bancnet offers a one year loan discounted at 6%. How much would AK need to borrow in order to meet its initial need for $2,000,000? What is the EAR for this loan?
c) Webster Bank offers a one year loan at 6% add-on interest with a compensating balance of 10%. How much would AK need to borrow in order to meet its initial need for $2,000,000? What is the EAR for this loan?