EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 23, Problem 7P
Summary Introduction
To determine: The largest fraction of the firm that can be offered to avoid a down round.
Introduction: Pre-money valuation is the valuation of the firm before it receives new financing or investments.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
A firm is considering a new project which would be similar in terms of risk to its existing projects.
The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to
provide the necessary equity financing for the project. Also, the firm has 1,000,000 common shares
outstanding with a current market price of GH¢11 per share. Next year's dividend is expected to
be GH¢1 per share and the firm estimates dividends will grow at 5% per year for the next several
years. The firm also has 150,000 preferred shares outstanding with a current market price of
GH¢10 per share. Dividend of GH¢0.9 per share is paid on preferred stock. The firm has a total of
GH¢10,000,000 in debt outstanding. The debt stock is currently valued at of GH¢9,500,000. The
yield on the debt is 8%. The firm's tax rate is 20%. The project requires an initial capital investment
of GH¢500,000. However, the project is expected to generate GH¢100,000 annually in perpetuity.
Required:
i. Calculate the…
An investor is considering starting a new business. The company would require $500,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 15.0% return on the invested capital, which means that the firm must have an ROE of 15.0%. How much net income must be expected to warrant starting the business?
1) An investor is considering starting a new business. The company would require
$475,000 of assets, and it would be financed entirely with common stock. The
investor will go forward only if she thinks the firm can provide a 13.5% return on
the invested capital, which means that the firm must have a ROE of 13.5%. How
much net income must be expected to warrant starting the business?
Netincome =
2) Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The
new CFO wants to employ a debt ratio of 55%. How much debt must the company
add or subtract to achieve the target debt ratio?
29,6
Debt Ratio total debt
total Asset
3) Orono Corp.'s sales last year were $435,000, its operating costs were $362,500,
and its interest charges were $12,500. What was the firm's times interest earned
(TIE) ratio?
TIF = earning before tax or Int
29
I
=
362500
12500
4) Nikko Corp.'s total common equity at the end of last year was $305,000 and its net
income after taxes was $60,000. What…
Chapter 23 Solutions
EBK CORPORATE FINANCE
Ch. 23.1 - Prob. 1CCCh. 23.1 - Prob. 2CCCh. 23.2 - Prob. 1CCCh. 23.2 - Prob. 2CCCh. 23.3 - List and discuss four characteristics about IPOs...Ch. 23.3 - Prob. 2CCCh. 23.4 - Prob. 1CCCh. 23.4 - What is the average stock price reaction to an...Ch. 23 - Prob. 1PCh. 23 - What are the advantages and the disadvantages to a...
Ch. 23 - Prob. 3PCh. 23 - Suppose venture capital firm GSB partners raised...Ch. 23 - Prob. 5PCh. 23 - Prob. 6PCh. 23 - Prob. 7PCh. 23 - Prob. 8PCh. 23 - Prob. 9PCh. 23 - Prob. 10PCh. 23 - Prob. 11PCh. 23 - Prob. 12PCh. 23 - What is IPO underpricing? If you decide to try to...Ch. 23 - Prob. 14PCh. 23 - Prob. 15PCh. 23 - Prob. 16PCh. 23 - Prob. 17PCh. 23 - Prob. 18PCh. 23 - Prob. 19PCh. 23 - Prob. 20P
Knowledge Booster
Similar questions
- 2. During the discussion of the potential IPO and East Coast Yachts’ future, Dan states that hefeels the company should raise $60 million. However, Larissa points out that if the company needsmore cash soon, a secondary offering close to the IPO would be potentially problematic. Instead,she suggests that the company should raise $90 million in the IPO. How can we calculate theoptimal size of the IPO? What are the advantages and disadvantages of increasing the size of theIPO to $90 million?arrow_forwardA firm is considering a new project which would be similar in terms of risk to its existing projed The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand provide the necessary equity financing for the project. Also, the firm has 1,000,000 common shan outstanding with a current market price of GHe11 per share. Next year's dividend is expected be GHc1 per share and the firm estimates dividends will grow at 5% per year for the next sever years. The firm also has 150,000 preferred shares outstanding with a current market price GH¢10 per share. Dividend of GHe0.9 per share is paid on preferred stock. The firm has a total o GH¢10,000,000 in debt outstanding. The debt stock is currently valued at of GH¢9,500,000. Th yield on the debt is 8%. The firm's tax rate is 20%. The project requires an initial capital investmen of GHc500,000. However, the project is expected to generate GH¢100,000 annually in perpetuity. Required: i Calculate the WACC for this project?…arrow_forwardAn investor is considering starting a new business. The company would require $475,000 of assets, and itwould be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business? Please show work in excelarrow_forward
- There is a firm, which we have identified to buy. It has $100 million, $30 and $70 m assets, equity and debt respectively. It also has $40 m of cash. We want to buy a majority interest in the firm by using a lot of debt and as little equity as possible on our part. If we assume that there will be a 20% premium increase once we start bidding for the firm, how much should we borrow, if we can use the cash of the target itself to fund our acquisition?arrow_forwardA successful software company is approached by two larger firms for a possible buyout. The current value of the company based on recent financial statements is $5 million. The two bids from the two larger firms are $3 million and $6 million. Both offers are bona fide real offers. What is the market value of the company? What is book value?arrow_forward1. You want to invest in a company that guarantees your money's interest payments and returns at the maturity date as an investor. Which is the best option for this investment? 2. The ABC Incorporated paid a dividend of Php142.60 per share last year. Yesterday's last price is Php2,300 with the current yield of 6.2%. This problem is an example of _____. 3. Suppose that you have a stable job and you are thinking about your family's future once you retire from your job. What is an appropriate investment for retirees? a. bonds b. stocks c. stocks and bonds d. neither stocks nor bondsarrow_forward
- You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $24 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $5.2 million. Investors are willing to provide you with $5.2 million in initial capital in exchange for 30% of the unlevered equity in the firm. a. What is the total market value of the firm without leverage? b. Suppose you borrow $0.6 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional $4.6 million you need? c. What is the value of your share of the firm's equity in cases (a) and (b)?arrow_forwardYou are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $28 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2.6 million. Investors are willing to provide you with $2.6 million in initial capital in exchange for 30% of the unlevered equity in the firm. a. What is the total market value of the firm without leverage? b. Suppose you borrow $0.3 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional you need? $2.3 million c. What is the value of your share of the firm's equity in cases a and b?arrow_forwardYou are considering investing in a start up company. The founder asked you for $210,000 today and you expect to get $1,070,000 in 11 years. Given the riskiness of the investment opportunity, your cost of capital is 28%. What is the NPV of the investment opportunity? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. What is the NPV of the investment opportunity? The NPV of the investment is $ (Round to the nearest dollar.) Should you undertake the investment opportunity? Since the NPV is the deal! (Select from the drop-down menus.) Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The IRR is%. (Round to two decimal places.) The maximum deviation allowable in the cost of capital is%. (Round to two decimal places.) www you shouldarrow_forward
- You work for the CEO of a new company that plans to manufacture and sell a new type of laptop computer. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $690,000. Other data for the firm are shown below. How much higher or lower will the firm's expected EPS be if it uses some debt rather than only equity, i.e., what is EPSL - EPSU? 0% Debt, U 60% Debt, L Oper. income (EBIT) $690,000 $690,000 Required investment $2,500,000 $2,500,000 % Debt 0.0% 60.0% $ of Debt $0.00 $1,500,000 $ of Common equity $2,500,000 $1,000,000 Shares issued, $10/share 250,000 100,000 Interest rate NA 10.00% Tax rate 35% 35% Select one: a. $1.29 b. $1.97 c. $2.23 d. $1.63 e. $1.72arrow_forwardYou are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $26 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2.8 million. Investors are willing to provide you with $2.8 million in initial capital in exchange for 30% of the unlevered equity in the firm. a. What is the total market value of the firm without leverage? b. Suppose you borrow $0.5 million. According to M&M, what fraction of the firm's equity will you need to sell to raise the additional $2.3 million you need? c. What is the value of your share of the firm's equity in cases (a) and (b)? C a. What is the total market value of the firm without leverage? The market value without leverage is $ million. (Round to one decimal place.) b. Suppose you borrow $0.5 million. According to M&M, what fraction of the firm's equity will you need to sell to raise the additional $2.3 million you need? The fraction of the…arrow_forwardYou work for the CEO of a new company that plans to manufacture and sell a new type of laptop computer. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $810,000. Other data for the firm are shown below. How much higher or lower will the firm's expected EPS be if it uses some debt rather than only equity, i. e., what is EPSL - EPSU? 0% Debt, U 60% Debt, L Oper. income (EBIT) $810,000 $810,000 Required investment $ 2,500,000 $2,500,000 % Debt 0.0% 60.0% $ of Debt $0.00 $1,500,000 $ of Common equity $2,500,000 $ 1,000,000 Shares issued, $10/share 250,000 100, 000 Interest rate NA 10.00% Tax rate 25% 25% a. $0.75 b. $ 2.52 c. $3.36 d. $4.10 e. $2.90arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education