This interactive case study is based on two chapter 14) Raising equity capital,15) Debt Financing
Part 5- Long term financing
On May 8, 1984, Hannah Eisenstat graduated from Louisiana State University. She set to work opening a coffee shop in Baton Rouge called HannaH and found a perfect location in a new development. Using a $50,000 inheritance to finance the venture together with her own sweat equity, she started the business on August 1, 1984 as a sole proprietorship. The shop was profitable in the first year. Hannah found, however, that the quality of her coffee was not as high as she had initially envisioned. She discussed this issue with one of her regular customers, Natasha Smith. On the spot, Natasha offered to help finance the purchase of a roasting machine. By roasting the beans herself, Hannah could produce higher-quality coffee and, in addition, expand the business by offering beans for sale. continuing
1. Natasha is an example of what kind of an investor?
2. At each funding stage prior to the IPO , calculate the pre-money and post-money valuation of the equity of the company.
3. What fraction of the IPO was a primary offering and what fraction was a secondary offering?
Debt = $ 500000
4. Immediately following the IPO the shares traded at $14.50.
Ans:
Hannah Eisenstat owns= (600000/6730000)X100= 8.92 %
5. Address the following questions related to the SEO:
Ans:
Hannah Eisenstat owns = ( 400000 X 20 ) (1-.05)
6. Immediately following the SEO, the stock price remained at $20 per share
Ans:
Shares = 7980000 X 20 = $ 1596000
7. Assume the LBO was successful.
8. A year after the LBO, just after the second payment was made, the convertible debt traded for a price of $950.
9. Assume that in the five years following the LBO Hannah was able to turn the company around. Over the course of this period, all the bank debt was repaid and the company went public again. The price per share was now $60/share. Predict what the holders of the convertible debt would do. What would their investment be worth?
Part 5- Long term financing
On May 8, 1984, Hannah Eisenstat graduated from Louisiana State University. She set to work opening a coffee shop in Baton Rouge called HannaH and found a perfect location in a new development. Using a $50,000 inheritance to finance the venture together with her own sweat equity, she started the business on August 1, 1984 as a sole proprietorship. The shop was profitable in the first year. Hannah found, however, that the quality of her coffee was not as high as she had initially envisioned. She discussed this issue with one of her regular customers, Natasha Smith. On the spot, Natasha offered to help finance the purchase of a roasting machine. By roasting the beans herself, Hannah could produce higher-quality coffee and, in addition, expand the business by offering beans for sale. continuing
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Case Questions:
Ans:
Angel
Investor.
2. At each funding stage prior to the IPO , calculate the pre-money and post-money valuation of the equity of the company.
Ans:
IPO = 200000 Shares
Natasha Smith shares = 1m + 1.2m+ 1.5m = 3.7mX0.10 = 370000
Shares
7-37000/2= 81.5 %
Secondary Shares = 1-.815 = 18.5 %
3. What fraction of the IPO was a primary offering and what fraction was a secondary offering?
Debt = $ 500000
Equity = 14.54 X 6.73 = $ 97.585 m
Value of the company = $ 500000 + $97585000
= $ 980850004. Immediately following the IPO the shares traded at $14.50.
Ans:
Hannah Eisenstat owns= (600000/6730000)X100= 8.92 %
Worth = 600000 X 14.5 = $ 8.7m
Equity = 60m – 48.5 = $ 11.5 m
D/E = 48.5/ 11.5 = 4.22
5. Address the following questions related to the SEO:
Ans:
Hannah Eisenstat owns = ( 400000 X 20 ) (1-.05)
6. Immediately following the SEO, the stock price remained at $20 per share
Ans:
Shares = 7980000 X 20 = $ 1596000
7. Assume the LBO was successful.
Ans :
Shares = 7400000 X 7.5 = $ 53.5
Bond = $ 30.0m
Equity = $ 7 m
= $ 18.5m –Bank debt
8. A year after the LBO, just after the second payment was made, the convertible debt traded for a price of $950.
Ans:
Value =8 mX 7.5 = $ 60 m
Debt = 30m + 8.5 m = $48.5 m
Ans:
30000000/1000=30000x50=1.5mx60=$ 90m.
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