12.7 Steady company\'s stock has a beta of 0.25. If the risk-free rate is 6.2% a

Question

12.7 Steady company's stock has a beta of 0.25.

If the risk-free rate is 6.2% and the market risk premium is 7.2%, what is an estimate of Steady Company's cost of equity?

Steady Company cost of equity in %? (Enter response as %, round to one decimal place)



12-13 PFD Company had debt with a yield to maturity of 7.5%, a cost of preferred stock of 9.5%. The market values of its debt, preferred stock, and equity are $10.5 million, $3.5 million, and $24.5 million, respectively, and its tax rate is 40%.

What is this firm's weighted average cost of capital (WACC)?



13-1 Starware Software was founded last year to develop software for gaming applications. The founder initially invested $900,000 and received 12 million shares of stock. Starware now needs to raise a second round pf capital, and it has identified a venture capitalist who is interested in investing. This venture capitalist will invest $1.40 million and wants to own 30% of the company after the investment is completed.

a) How many share must the venture capitalist receive to end up with 30% of the company? (round 3 decimal places) What is the implied price per share of this funding round? The price is? (round 2 decimal places and be sure to use the rounded solutions above)

b) What will the value of the whole firm be after this investment (the post-money valuation)? (round to 3 decimal places and be sure to use the rounded solutions above).


13-7 Three years ago, you founded Outdoor Recreation, Inc. a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your company has gone through three funding rounds:
Rounds: Series A, Series B, series C; Date: A=2/2005, B=8/2006, C=9/2007; Investors: A=You, B=Angels, C=Venture Captial; Shares: A=400,000, B=1,100,000, C=2,100,000; Share Prices: A=$.50, B=$1.50, C=$3.25
It is now 2008 and you need to raise additional capital to expand your business. You have decided to take your firm public through an IPO. You would like to issue an additional 6.0 million new shares through this IPO. Assuming that your firm successfully completes its IPO, you forecast that 2008 net income will be $7.0 million.

a)Your investment banker advises you that the prices of other recent IPOs have been set such that the P/E ratios based on 2008 forecasted earnings average 20.0. Assuming that your IPO is set at a price that implies a similar multiple, what will your IPO price per share be? (round 2 decimal places)

b) What percent of the firm will you own after the IPO? (Enter response as % rounded to one decimal place).

Explanation / Answer

12.7) 8% E = 6.2 + 0.25(7.2) E = 8% 12.13) 8.13% WACC = 0.095[3.5/(10.5+3.5+24.5)] + 0.095[24.5/(10.5+3.5+24.5)] + 0.075[10.5/(10.5+3.5+24.5)](1-0.4) WACC = 8.13% 13.1) a) 3,428,571.429 shares @ 41 cents b) $6,300,000 12,000,000 = 7x x = 3,428,571.429 1,400,000/x = 0.41 (12,000,000 + 3,428,571.429)*0.41 = 6,300,000 13.7) a) IPO Share Price = $1.46 P/E = 20 E = 7,000,000 So Market Cap = $14,000,000 Total Shares after IPO = 400,000 + 1,100,000 + 2,100,000 + 6,000,000 = 9,600,000 IPO Share Price = $1.46 b) You own 5.7% of the firm. You own 400,000 shares of a total of 7,000,000.

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