Answer:
Millennium Dairy Product
a) Share of the company that SBI Caps should require today to get a required rate of return of 50%.
= 50%
b) If the company had 1,000,000 (100,000 x10) shares outstanding before the private placement, SBI Caps should purchase
1,000,000 shares = 50% of (1,000,000 + 1,000,000) shares
Assuming the founding promoters are not giving up their shares, instead, new equity shares are being issued.
c) The price per share SBI Caps should agree to pay, if her required return was 50% is
Rs.50 per share, which will provide the required additional equity financing of (Rs.50 million) since Rs.50 x 1,000,000 equals Rs.50 million.
d) Pre money and post money valuations:
These are based on the calculated Market Price of Rs.1,000 per share from the Price/Earnings Ratio.
Pre money valuation will be Rs.1,000 x 1,000,000 shares = Rs.1 billion
Post money valuation will be Rs.1,000 x 2,000,000 shares = Rs.2 billion
e) Carried interests of the VC and the promoters
VC's carried interest = share of profits = 50% xRs.50 million = Rs.25 million
Promoters' carried interest = Rs.25 million
Step-by-step explanation:
a) Calculation of share in the company:
SBI Cap's required rate of return is 50%
If she invests Rs.50 million today, her expected return will be equal to Rs.50 million x 50% = Rs.25 million
Since rate of return = Net Income/Initial Investment or (Current value of investment - Initial Investment)/Initial Investment.
This return will be equal to 50% of the total net income of Rs.50 million
b) Price/Earnings P/E ratio = Market price per share/Earnings per share (EPS)
Since P/E ratio of similar companies = 20 times,
The company's P/E = 20 times x EPS
With calculated EPS = Rs.50 million /1,000,000 = Rs.50
Therefore, price per share = 20 x Rs.50 = Rs.1,000
Pre money valuation = Rs.1,000 x 1 million shares = Rs.1 billion
Post money valuation = Rs.1,000 x 2 million shares = Rs.2 billion
c) The carried interest is the share of profits to which the promoters and the Venture Capitalists are entitled. Their respective shares are 50% of the net income = Rs.25 million each.
d) The pre money and post money valuations: The pre money valuation is the valuation of the company before the additional equity financing. The post money valuation is the valuation of the company after the additional equity financing. There are many ways to value a company. In this case, we have used the P/E ratio as a basis for the valuation. However, we did not dilute the earnings per share post money, for simplicity.
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