Use the table for the question(s)below.
The founders and owners of a private company have funded it through the following rounds of investment:
The owners decide to take the company public through an IPO,issuing 1 million new shares.Assuming that they successfully complete the IPO,the net income for the next year is estimated to be $5 million.The price of shares is set using average price-earnings ratios for similar businesses of 17.0.
-What portion of the company will be owned by the angel investor after the IPO?

Question

Use the table for the question(s)below.
The founders and owners of a private company have funded it through the following rounds of investment:
  The owners decide to take the company public through an IPO,issuing 1 million new shares.Assuming that they successfully complete the IPO,the net income for the next year is estimated to be $5 million.The price of shares is set using average price-earnings ratios for similar businesses of 17.0.
-What portion of the company will be owned by the angel investor after the IPO?

Quizplus · Accepted Answer

First, we need to calculate the total number of shares after the IPO. The founders and owners currently own 10 million shares, and they are issuing 1 million new shares. So the total number of shares after the IPO will be 11 million.

Next, we need to calculate the total value of the company after the IPO. We are given that the net income for the next year is estimated to be $5 million, and the average price-earnings ratio for similar businesses is 17.0. So the total value of the company after the IPO will be:

Total value = net income x P/E ratio
Total value = $5 million x 17.0
Total value = $85 million

Now we can calculate the value of each share:

Value per share = total value / total number of shares
Value per share = $85 million / 11 million
Value per share = $7.7273

The angel investor currently owns 2 million shares, which is 20% of the company (2/10). After the IPO, there will be 11 million shares, and the angel investor will own:

New ownership = 2 million / 11 million
New ownership = 0.1818 or 18.18%

However, we must consider that the founders and owners are issuing 1 million new shares, which dilutes the angel investor's percentage of ownership. The proportionate ownership of the angel investor after the IPO will be:

Proportionate ownership = New ownership / (1 + new shares issued/old shares outstanding)
Proportionate ownership = 0.1818 / (1 + 1/10)
Proportionate ownership = 0.16 or 16%

Therefore, the answer is B) 16%.

Use the Table for the Question(s)below