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: It is currently 2011 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 6.5 million shares through this IPO. Assuming that your firm successfully completes its IPO, you forecast that 2011 net income will be $7.5 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 2011 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? (b) What percentage of the firm will you own after the IPO?

    a) Rights forecasted in 2011 = $ 7.5 mn

    Average PE homogeneity forecasted = 20.0

    Sum equity high in 2011 = PE multiple * rights = 20.0 * 7.5 = $ 150 mn

    Sum divides issued including IPO spherical =

    500,000 (Series A) + 1,000,000 (Series B) + 2,000,000 (Series C) + 6,500,000 (IPO )

    = 10,000,000 divides   = 10 mn divides

    IPO appraisement per divide = sum equity high succeeding IPO/ sum shares issued including IPO spherical

                                   =   150 mn/10 mn

                                  = $15 (Answer)

    b)

    Succeeding Series A Funding:

    Investor Shares Issued Divide Appraisement ($) Funds Invested($) Equity High ($) Percent Divide
    You 500,000 1.00 500,000 500,000 100%
    Total 500,000 500,000
    Latest appraisement per divide 1.00

    Equity High = Latest appraisement per divide * divides issued

    Percent Divide = Equity high of the appertaining investor /Total Equity High

    Succeeding Series B Funding:

    Investor Shares Issued Divide Appraisement ($) Funds Invested($) Equity High ($) Percent Divide
    You 500,000 1.00 500,000 1,000,000 33.33%
    Angels 1,000,000 2.00 2,000,000 2,000,000 66.67%
    Total 1,500,000 3,000,000
    Latest appraisement per divide 2.00

    For Investor Angels , Equity high = Latest appraisement per divide * shares issued

                                                                    = 2.00 * 1,000,000 = $ 2,000,000

    For Investor Angels , Percent Divide = Equity high of the appertaining investor /Sum Equity High

                                                                    = 2,000,000/3,000,000 = 66.67%

    Succeeding Series C Funding, sagacious as above:

    Investor Shares Issued Divide Appraisement ($) Funds Invested($) Equity High ($) Percent Divide
    You 500,000 1.00 500,000 1,750,000 14.28%
    Angels 1,000,000 2.00 2,000,000 3,500,000 28.57%
    Venture High 2,000,000 3.50 7,000,000 7,000,000 57.15%
    Total 3,500,000 12,250,000
    Latest appraisement per divide 3.50

    Succeeding IPO Funding:

    Investor Shares Issued Divide Appraisement ($) Funds Invested($) Equity High ($) Percent Divide
    You 500,000 1.00 500,000 7,500,000 5.00%
    Angels 1,000,000 2.00 2,000,000 15,000,000 10.00%
    Venture High 2,000,000 3.50 7,000,000 30,000,000 20.00%
    6,500,000 97,500,000 65.00%
    Total 10,000,000 150,000,000
    Latest appraisement per divide 15

    Percent divide of You succeeding IPO = Equity high of You /Total Equity High

                                                          = 7,500,000/150,000,000

                                                          = 5.00% (Answer)