In this question do not round your intermediate steps. Round your share answers to the nearest share.Suppose you hold all of the $9.99 million in convertible notes in a start-up (this includes accrued interest). Your notehas a $18 million cap and a 20% discount.There are 3 million founders' shares and the option pool contains an additional 3 million shares.A VC is making an A-round investment and requires 25% of the exit value of the firm. (There are no future financingrounds). The VC is investing $11 million and requires a 50% return (annually). The firm will exit in 3 years.a. How many shares do you (the note holder) receive if you convert using the cap? (if your answer is 1 million,record 1,00,000. Round to the nearest share.)b. How many shares does the VC need to secure the required 25% ownership stake?O 2,217,550О 3110,000O 2,110,000O 3,217,550

Explanation: A convertible memo is a loan that can be turned into stock (usually at the next round…

Answered: Suppose you hold all of the $9.99…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter18: Initial Public Offerings, Investment Banking, And Capital Formation

Section: Chapter Questions

Problem 9MC

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Hager’s Home Repair Company, a regional hardware chain, which specializes in “do-it-yourself” materials and equipment rentals, is considering an acquisition of Lyon Lighting (LL). Doug Zona, Hager’s treasurer and your boss, has been asked to place a value on the target and he has enlisted your help. LL has 20 million shares of stock trading at $12 per share. Security analysts estimate LL’s beta to be 1.25. The risk-free rate is 5.5% and the market risk premium is 4%. LL’s capital structure is 20% financed with debt at an 8% interest rate; any additional debt due to the acquisition also will have an 8% rate. LL has a 25% federal-plus-state tax rate, which will not change due to the acquisition. The following data incorporate expected synergies and required levels of total net operating capital for LL should Hager’s complete the acquisition. The forecasted interest expense includes the combined interest on LL’s existing debt and on new debt. After 2024, all items are expected to grow at a constant 6% rate. Note: aDebt is added on the first day of the year, so the 2019 debt is LL’s debt prior to the acquisition. Hager’s management is new to the merger game, so Zona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Zona has developed the following questions, which you must answer and then defend to Hager’s board: Why can’t we estimate LL’s value to Hager’s by discounting the FCFs at the WACC? What method is appropriate? Use the projections and other data to determine the LL division’s free cash flows and interest tax savings for 2020 through 2024. Notice that the LL division’s sales are expected to grow rapidly during the first years before leveling off at a sustainable long-term growth rate.
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