David Founds a Company and Goes Through the Investment Rounds

question 90

Multiple Choice

David founds a company and goes through the investment rounds shown below: $$\begin{array} { l l c c } \text { Round } & \text { Source } & \text { Price } & \text { Number of Shares } \\\hline \text { Class A } & \text { Self } & \$ 0.50 & 400,000 \\\text { Class B } & \text { Angel } & \$ 1.00 & 500,000 \\\text { Class C } & \text { Venture Capital } & \$ 1.50 & 300,000 \\\text { Class D } & \text { Venture Capital } & \$ 2.25 & 400,000\end{array}$$ He decides to take the company public through an IPO, issuing 2 million new shares. Assuming that he successfully completes the IPO, the net income for the next year is estimated to be $8 million. His banker informs him that the price of shares should be set using average price-earnings ratios for similar businesses, which is 15.0. What will be the IPO price per share?

• A) $60.00
• B) $33.33
• C) $3.40
• D) $20.25

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Definitions:

Cash Flows

The inflow and outflow of cash and cash equivalents, representing the operating, investing, and financing activities of an entity over a period.

Indirect Method

In finance, it refers to a cash flow statement approach that adjusts net income for the effects of transactions that do not involve cash, to calculate net cash flow from operating activities.

Income Statement

A financial document that provides a summary of a company's revenues, expenses, and profits/losses over a specified period of time.

Net Cash

An accounting term that represents the amount of cash remaining after all operating, investing, and financing activities are accounted for in a given period.