Office helpers is a private firm that manufacturers and sells office supplies. T

Question

Office helpers is a private firm that manufacturers and sells office supplies. The firm has limited capital and is estimated to have a value of $80million with capital constraints. A venture capitalist is willing to contribue $20million to the firm in exchange for 30% of the value of the firm. With this additional capital, the firm will be worth $120 million.

a. Should the firm accept the venture capital?

b. At what percentage of firm value would you as the owner of the private firm break even on the venture capital financing?

Assume market risk premium is 5.5% and tax rate of 40%

Explanation / Answer

The venture capital is asking for 30% of the value of firm after the infusion the value of the firm increases to $120mn

his share is 30%*120=$36mn

and share of the owner is $120-36=$84mn

In terns of book vaue it is total $100mn and venture capital share is $30mn and owner is 70% it is $70mn

a)Yes it should accept as the value of the firm is increasing overall as well as his personal share in it

b)120=20+x and x=100

x=100/120=83.33%

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