3.Three years? ago, you founded Outdoor? Recreation, Inc., a retailer specializi
ID: 2620578 • Letter: 3
Question
3.Three years? ago, you founded Outdoor? Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as? camping, skiing, and hiking. So? far, your company has gone through three funding? rounds:
Round
Date
Investor
Shares
Share Price? ($)
Series A
Feb. 2013
You
??600,000
1.50
Series B
Aug. 2014
Angels
1,100,000
2.00
Series C
Sept. 2015
Venture Capital
2,200,000
3.25
It is now 2016 and you need to raise additional capital to expand your business. You have decided to take your firm public through an IPO. You would like to issue an additional 5.0 million new shares through this IPO. Assuming that your firm successfully completes its? IPO, you forecast that 2016net income will be $ 7.0million.
a. Your investment banker advises you that the prices of other recent IPOs have been set such that the? P/E ratios based on??2016 forecasted earnings average 20.4.
Assuming that your IPO is set at a price that implies a similar? multiple, what will be your IPO price per? share?
b. What percent of the firm will you own after the? IPO?
4. The firm you founded currently has 12 million? shares, of which you own 6 million. You are considering an IPO where you would sell 1million shares for $25
each. If all of the shares sold are from your? holdings, how much will the firm? raise? What will be your percentage ownership of the firm after the? IPO?
Round
Date
Investor
Shares
Share Price? ($)
Series A
Feb. 2013
You
??600,000
1.50
Series B
Aug. 2014
Angels
1,100,000
2.00
Series C
Sept. 2015
Venture Capital
2,200,000
3.25
Explanation / Answer
a. Price per share = EPS *P/E ratio
where, EPS = Total Earning/ Total number of shares
= 7000000/(600000+1100000+2200000+5000000)
= 7000000/8900000
= 0.7865
Price per Share = 0.7865*20.4
= 16.04
b. Own Holdings = 600000/8900000
= 6.74%
4. Considering this question as independent from the above questions, the firm will raise $25000000 (i.e. $25*1000000) assuming all the proceeds are invested in the firm.
Own Holding = 5/12 = 42%
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