A potential investor is seeking to invest $500,000 in a venture, which currently has 1,000,000 million shares held by its founders, and is targeting a 50% return five years from now.The venture is expected to produce half a million dollars in income per year at year 5.It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $10,000,000.
-What is the number of shares that must be issued to the new investor in order for the investor to earn his target return?

Question

Quizplus · Accepted Answer

The correct answer is A.The investor is seeking a 50% return on his investment of $500,000, which means he expects to receive $750,000 in total. The venture is expected to produce $500,000 in income per year at year 5, so the investor can expect to receive $250,000 in income over the five-year period. This means that the investor needs to receive $500,000 in capital gains in order to achieve his target return.The similar venture recently sold shares to the public for $10,000,000, and produced $1,000,000 in income. This means that the venture was valued at 10 times its annual income. If the new venture is expected to produce $500,000 in income per year, then it should be valued at $5,000,000.The investor is investing $500,000 in the new venture, which means that he should receive 10% of the shares. This means that the new venture should issue 10% of its 1,000,000 shares to the investor, which is 100,000 shares.However, the investor is also expecting to receive $500,000 in capital gains, which means that the new venture should issue additional shares to the investor. The investor should receive 50% of the $500,000 in capital gains, which is $250,000. This means that the new venture should issue 250,000 shares to the investor.Therefore, the new venture should issue a total of 350,000 shares to the investor.

A Potential Investor Is Seeking to Invest $500,000 in a Venture