Cavalier Corp. is a private firm with no cash on hand but lots of great ideas. T

Question

Cavalier Corp. is a private firm with no cash on hand but lots of great ideas. The firm currently has 1,000,000 shares outstanding. All of these shares are held by the firm's founders, executives, and employees. The management of Cavalier Corp. believes that if they can raise $1 million in cash to fund promising projects, the firm will be worth $5 million. If they cannot raise this cash, they will sell the firm to an acquirer who is offering $3 million for the firm's assets. If Cavalier raises $1 million in equity financing by selling shares to a venture capitalist, what is the lowest stock price that Cavalier management would be willing to accept?

Explanation / Answer

The firm can sell its all assets for $3,000,000 and currently total number of shares outstanding is 1,000,000. Thus, the current price of shares is $3 ($3,000,000 / 1,000,000).

Therefore, the firm shall not offer its shares to venture capitalist for price less than $3 per share.

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