A Potential Investor Is Willing to Provide $500,000 in First-Round

question 28

Multiple Choice

A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 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?

• A)3,156,276
• B)1,578,138
• C)4,156,276
• D)2,578,138

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Definitions:

Cross Elasticity

An indicator of the sensitivity of demand for a product to fluctuations in the price of a different product.

Antique Reproductions

Replicas or copies of antique items, often made to mimic the style and appearance of the original pieces but created with modern materials or techniques.

Supply Curve

A graphical representation that shows the relationship between the price of a good or service and the quantity of that good or service that a supplier is willing and able to supply in the market.

Bumper Crops

Exceptionally large harvests of crops, usually resulting from favorable growing conditions.