Please answer the following questions about Smith and Jones, a startup company. The company needs $ 4 million capital. Assume the valuation date is the end of year 5, projected earnings will in year 5 will be $25 million, and an appropriate price-to-earnings ratio for valuing these earnings is 20 times. Assume that there are 500,000 shares outstanding. The required return for the investors is 50%.
a) What are the total post-investment shares? How did you determine this?
b) How many shares are issued to new investor? How did you determine this?