Vail Venture Investors, LLC is trying to decide how much percent equity ownership in Black Hawk Products, Inc. it will need in exchange for a $5 million investment. Vail Venture Investors has a target compound rate of return of 20 percent on venture investments like Black Hawk Products. Depending on the success of products currently under development, Vail Venture's investment in Black Hawk could turn out to be a complete failure (black hole), barely surviving (living dead), or wildly successful (venture utopia). Vail Venture assigns probabilities of .20, .50, and .30, respectively, to the three possible outcomes. Following are the 3 cash flow scenarios or outcomes for the Black Hawk Products investment that Vail Venture expects to exit at the end of five years. Outcome Black Hole Living Dead Venture Utopia Yr1 Yr2 Yr3 Yr4 Yr5 0 0 0 0 0.00 0 0 0 0 0 0 $ 10,000,000.00 0 0 $ 40,000,000.00 Now assume under the venture utopia scenario that, in addition to the $40 million cash inflow in year 5, there will be an annual $1million preferred dividend (to be paid to Vail Venture Investors but not other equity investors). Vail Venture expects to receive this $1 million dividend under the venture utopia scenario in each of the five years that the Black Hawk investment will be maintained. No preferred annual cash flows are expected under either the black hole or the living dead scenarios. Calculate the acquired percentage of final ownership of Black Hawk Products that Vail Venture Investors would need to earn a 20 percent compound rate of return on its investment. Use the "mean flow method" described in the chapter. [Hint: use "goal seek" in a spreadsheet software program to find the necessary percentage ownership.] 60.05% 49.84% 59.45% 72.66% 51.64%
Vail Venture Investors, LLC is trying to decide how much percent equity ownership in Black Hawk Products, Inc. it will need in exchange for a $5 million investment. Vail Venture Investors has a target compound rate of return of 20 percent on venture investments like Black Hawk Products. Depending on the success of products currently under development, Vail Venture's investment in Black Hawk could turn out to be a complete failure (black hole), barely surviving (living dead), or wildly successful (venture utopia). Vail Venture assigns probabilities of .20, .50, and .30, respectively, to the three possible outcomes. Following are the 3 cash flow scenarios or outcomes for the Black Hawk Products investment that Vail Venture expects to exit at the end of five years. Outcome Black Hole Living Dead Venture Utopia Yr1 Yr2 Yr3 Yr4 Yr5 0 0 0 0 0.00 0 0 0 0 0 0 $ 10,000,000.00 0 0 $ 40,000,000.00 Now assume under the venture utopia scenario that, in addition to the $40 million cash inflow in year 5, there will be an annual $1million preferred dividend (to be paid to Vail Venture Investors but not other equity investors). Vail Venture expects to receive this $1 million dividend under the venture utopia scenario in each of the five years that the Black Hawk investment will be maintained. No preferred annual cash flows are expected under either the black hole or the living dead scenarios. Calculate the acquired percentage of final ownership of Black Hawk Products that Vail Venture Investors would need to earn a 20 percent compound rate of return on its investment. Use the "mean flow method" described in the chapter. [Hint: use "goal seek" in a spreadsheet software program to find the necessary percentage ownership.] 60.05% 49.84% 59.45% 72.66% 51.64%
Chapter11: Venture Capital Valuation Methods
Section: Chapter Questions
Problem 10EP
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Question
![Vail Venture Investors, LLC is trying to decide how much percent equity ownership in Black Hawk Products, Inc. it will need in
exchange for a $5 million investment. Vail Venture Investors has a target compound rate of return of 20 percent on venture
investments like Black Hawk Products. Depending on the success of products currently under development, Vail Venture's
investment in Black Hawk could turn out to be a complete failure (black hole), barely surviving (living dead), or wildly successful
(venture utopia). Vail Venture assigns probabilities of .20, .50, and .30, respectively, to the three possible outcomes. Following are
the 3 cash flow scenarios or outcomes for the Black Hawk Products investment that Vail Venture expects to exit at the end of five
years.
Outcome
Black Hole
Living Dead
Venture Utopia
Yr1
Yr2
Yr3
Yr4
Yr5
0
0
0
0
0.00
0
0
0
0
0
0
$
10,000,000.00
0
0
$ 40,000,000.00
Now assume under the venture utopia scenario that, in addition to the $40 million cash inflow in year 5, there will be an annual
$1million preferred dividend (to be paid to Vail Venture Investors but not other equity investors). Vail Venture expects to receive
this $1 million dividend under the venture utopia scenario in each of the five years that the Black Hawk investment will be
maintained. No preferred annual cash flows are expected under either the black hole or the living dead scenarios.
Calculate the acquired percentage of final ownership of Black Hawk Products that Vail Venture Investors would need to earn a 20
percent compound rate of return on its investment. Use the "mean flow method" described in the chapter. [Hint: use "goal seek" in
a spreadsheet software program to find the necessary percentage ownership.]
60.05%
49.84%
59.45%
72.66%
51.64%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2ce8a53a-4004-46d0-99bb-007be7574a2b%2F67676e48-a9af-411f-b062-ffe99b367577%2F0rdm8m4_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Vail Venture Investors, LLC is trying to decide how much percent equity ownership in Black Hawk Products, Inc. it will need in
exchange for a $5 million investment. Vail Venture Investors has a target compound rate of return of 20 percent on venture
investments like Black Hawk Products. Depending on the success of products currently under development, Vail Venture's
investment in Black Hawk could turn out to be a complete failure (black hole), barely surviving (living dead), or wildly successful
(venture utopia). Vail Venture assigns probabilities of .20, .50, and .30, respectively, to the three possible outcomes. Following are
the 3 cash flow scenarios or outcomes for the Black Hawk Products investment that Vail Venture expects to exit at the end of five
years.
Outcome
Black Hole
Living Dead
Venture Utopia
Yr1
Yr2
Yr3
Yr4
Yr5
0
0
0
0
0.00
0
0
0
0
0
0
$
10,000,000.00
0
0
$ 40,000,000.00
Now assume under the venture utopia scenario that, in addition to the $40 million cash inflow in year 5, there will be an annual
$1million preferred dividend (to be paid to Vail Venture Investors but not other equity investors). Vail Venture expects to receive
this $1 million dividend under the venture utopia scenario in each of the five years that the Black Hawk investment will be
maintained. No preferred annual cash flows are expected under either the black hole or the living dead scenarios.
Calculate the acquired percentage of final ownership of Black Hawk Products that Vail Venture Investors would need to earn a 20
percent compound rate of return on its investment. Use the "mean flow method" described in the chapter. [Hint: use "goal seek" in
a spreadsheet software program to find the necessary percentage ownership.]
60.05%
49.84%
59.45%
72.66%
51.64%
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