Tutorial 8 LTF S1 2020 Probs PDF

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Tutorial 8: Long Term Financing 1. What are some of the alternative sources from which private companies can raise equity capital?

2. Starware Software was founded last year to develop software for gaming applications. The founder initially invested $1,000,000 and received 12 million shares of stock. Starware now needs to raise a second round of capital, and it has identified an interested venture capitalist. This venture capitalist will invest $1 million and wants to own 38% of the company after the investment is completed. a. How many shares must the venture capitalist receive to end up with 38% of the company? What is the implied price per share of this funding round? b. What will the value of the whole firm be after this investment (the post-money valuation)?

3. Three years ago, you founded your own company. You invested $110,000 of your money and received 5.5 million shares of Series A preferred stock. Since then, your company has been through three additional rounds of financing.

a. What is the pre-money valuation for the Series D funding round? b. What is the post-money valuation for the Series D funding round? c. Assuming that you own only the Series A preferred stock (and that each share of all series of preferred stock is convertible into one share of common stock), what percentage of the firm do you own after the last funding round?

4. What are the main advantages and disadvantages of going public?

5. Do underwriters face the most risk from a best-efforts IPO, a firm commitment IPO, or an auction IPO? Why? 6. What is IPO underpricing? If you decide to try to buy shares in every IPO, will you necessarily make money from the underpricing?

7. Chen Brothers, Inc., sold 4 million shares in its IPO, at a price of $18.50 per share. Management negotiated a fee (the underwriting spread) of 7% on this transaction. What was the dollar cost of this fee?

8. What are the advantages to a company of selling stock in an SEO using a cash offer? What are the advantages of a rights offer?

9. MacKenzie Corporation currently has 11 million shares of stock outstanding at a price of $42 per share. The company would like to raise money and has announced a rights issue. Every existing shareholder will be sent one right per share of stock that he or she owns. The company plans to require five rights to purchase one share at a price of $42 per share. a. Assuming the rights issue is successful, how much money will it raise? b. What will the share price be after the rights issue? (Assume perfect capital markets.) Suppose instead that the firm changes the plan so that each right gives the holder the right to purchase one share at $6 per share. c. How much money will the new plan raise? d. What will the share price be after the rights issue? e. Which plan is better for the firm’s shareholders? Which is more likely to raise the full amount of capital?

10. Suppose an H1200 supercomputer has a cost of $300,000 and will have a residual market value of $75,000 in four years. The risk-free interest rate is 6.1% APR with monthly compounding. a. What is the risk-free monthly lease rate for a four-year lease in a perfect market? b. What would be the monthly payment for a four-year $300,000 risk-free loan to purchase the H1200?

11. Suppose the risk-free interest rate is 5.7% APR with monthly compounding. If a $2.8 million MRI machine can be leased for five years for $48,000 per month, what residual value must the lessor recover to break even in a perfect market with no risk?...