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

question 38

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 value of the venture at the end of year 5 using direct capitalization?

• A)$500,000
• B)$5,000,000
• C)$1,000,000
• D)$100,000

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Definitions:

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