Quiz 6: based on chapter 14 materials: Valuation of preferred Stock (Metrick and

Question

Quiz 6: based on chapter 14 materials: Valuation of preferred Stock (Metrick and Yasuda textbook) o1. Suppose EBV is considering a $5m series A investment in Newco. EBV proposes to st investment as RP with APP of $4m plus 5million shares of common stock. (we refer to this basket of RP plus commo stock. Following the Series- A investment, Newco will have 20million common shares outstanding n as "Series A".). The employees of Newco have claims on 15 million shares of common a. b. c. d. e. Compute the LP cost for this investment; Solve for the LP valuation equation for this investment Suppose the total valuation is $30m. What is the LP valuation? Find the breakeven valuation for the investment under base-case assumption; Perform a sensitivity analysis for this breakeven valuation

Explanation / Answer

a) LP cost = committed capital/investment capital * $I

= (100)/(100-0.2*100) * 5

= 6.25 Million

b) Partial valuation = V – (15/20)*C(4)     ------- (Where 15/20 is Newco percentage claim on common stocks and 4 is the APP)

= V – ¾*C(4)

LP valuation = Partial valuation – GP valuation

GP valuation = GP% * partial valuation

GP% = 0.20 *(2.5*80 - 100)/(2.5* 80) = 0.10

So, LP valuation = (1-0.1)* V – ¾*C(4)

= (0.9)*( V – ¾*C(4))

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