Question

David founds a company and goes through the investment rounds shown below: Round Source Price Number of Shares Class A Self $0.50 400,000 Class B Angel $1.00 500,000 Class C Venture Capital $1.50 300,000 Class D Venture Capital $2.25 400,000 He decides to take the company public through an IPO, issuing 2 million new shares. Assuming that he successfully completes the IPO, the net income for the next year is estimated to be $8 million. His banker informs him that the price of shares should be set using average price-earnings ratios for similar businesses, which is 15.0. What share of the company will David own after the IPO? Select one: A. 22% B. 16% C. 14% D. 11%

Answer 1

Answer:

D. 11%

Explanation:

Step 1. Given information.

• Cumulative shares:

400,000

500,000

300,000

400,000

2,000,000

Step 2. Formulas needed to solve the exercise.

• Addition of the cumulative shares = 400,000 + 500,000 + 300,000 + 400,000 + 2 million = 3.6 million.

• self share = 400000 = 0.4 million
• David Shares = self share / addition of cumulative shares

Step 3. Calculation. and Step 4. Solution.

David's share = 0.4/3.6 = 11%