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23 February, 22:01

Use the following information for Problems 35 through 40 A potential investor is seeking to invest $1,000,000 in a venture, which currently has 2 million shares held by its founders, and is targeting a 50% return five years from now. The venture is expected to produce 1 million dollars in income per year at year 5. It is known that a similar venture recently produced $2,000,000 in income and sold shares to the public for $20,000,000. What is the percent ownership of our venture that must be sold in order to provide the venture investor's target return?

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  1. 23 February, 22:24
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    0.3797 or 37.97%

    Explanation:

    According to the scenario, computation of the given data are as follow:-

    Wants Rate on return on investment = 50%

    Expected value of return on investment = invested amount * (1+g) ^t

    = $1,000,000 * (1+50%) ^5

    = $1,000,000 * 7.59375

    = $7,593,750

    Similar venture would achieve valuation of $20,000,000 for $2,000,000. We can expect that company would achieve similar valuation of $20,000,000 in 5 years from now.

    Investor's share value at 5 years = $7,593,750 : $20,000,000

    = 0.3797 or 37.97%
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