Vail Venture Investors, LLC is trying to decide how much percent equity ownership in Black Hawk Products, Inc. it will need in exchange for a $5 million investment. Vail Venture Investors has a target compound rate of return of 20 percent on venture investments like Black Hawk Products. Depending on the success of products currently under development, Vail Venture's investment in Black Hawk could turn out to be a complete failure (black hole), barely surviving (living dead), or wildly successful (venture utopia). Vail Venture assigns probabilities of .20, .50, and .30, respectively, to the three possible outcomes. Following are the 3 cash flow scenarios or outcomes for the Black Hawk Products investment that Vail Venture expects to exit at the end of five years. Outcome Black Hole Living Dead Venture Utopia Yr1 Yr2 Yr3 Yr4 Yr5 0 0 0 0 0.00 0 0 0 0 0 0 $ 10,000,000.00 0 0 $ 40,000,000.00 Now assume under the venture utopia scenario that, in addition to the $40 million cash inflow in year 5, there will be an annual $1million preferred dividend (to be paid to Vail Venture Investors but not other equity investors). Vail Venture expects to receive this $1 million dividend under the venture utopia scenario in each of the five years that the Black Hawk investment will be maintained. No preferred annual cash flows are expected under either the black hole or the living dead scenarios. Calculate the acquired percentage of final ownership of Black Hawk Products that Vail Venture Investors would need to earn a 20 percent compound rate of return on its investment. Use the "mean flow method" described in the chapter. [Hint: use "goal seek" in a spreadsheet software program to find the necessary percentage ownership.] 60.05% 49.84% 59.45% 72.66% 51.64%
Vail Venture Investors, LLC is trying to decide how much percent equity ownership in Black Hawk Products, Inc. it will need in exchange for a $5 million investment. Vail Venture Investors has a target compound rate of return of 20 percent on venture investments like Black Hawk Products. Depending on the success of products currently under development, Vail Venture's investment in Black Hawk could turn out to be a complete failure (black hole), barely surviving (living dead), or wildly successful (venture utopia). Vail Venture assigns probabilities of .20, .50, and .30, respectively, to the three possible outcomes. Following are the 3 cash flow scenarios or outcomes for the Black Hawk Products investment that Vail Venture expects to exit at the end of five years. Outcome Black Hole Living Dead Venture Utopia Yr1 Yr2 Yr3 Yr4 Yr5 0 0 0 0 0.00 0 0 0 0 0 0 $ 10,000,000.00 0 0 $ 40,000,000.00 Now assume under the venture utopia scenario that, in addition to the $40 million cash inflow in year 5, there will be an annual $1million preferred dividend (to be paid to Vail Venture Investors but not other equity investors). Vail Venture expects to receive this $1 million dividend under the venture utopia scenario in each of the five years that the Black Hawk investment will be maintained. No preferred annual cash flows are expected under either the black hole or the living dead scenarios. Calculate the acquired percentage of final ownership of Black Hawk Products that Vail Venture Investors would need to earn a 20 percent compound rate of return on its investment. Use the "mean flow method" described in the chapter. [Hint: use "goal seek" in a spreadsheet software program to find the necessary percentage ownership.] 60.05% 49.84% 59.45% 72.66% 51.64%
Chapter11: Venture Capital Valuation Methods
Section: Chapter Questions
Problem 10EP
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you