Analysis of NX Spirit's Venture Financing and Capital Structure

Analysis to get your answers and do NOT only show the final number of each question. There is no word limit for the calculation problem set.

NX Spirit is seeking financing from venture capitalists. The founder of NX Spirit expects to sell the company for 30 million in five years. NX Spirit decides to first raise $2 million and then raise the remaining 1.5 million after two years. The founder also decides that, whatever valuation he would get, he wants to own million shares. Assume that the WACC for comparable business is. The survival probability is for each year during the first two years and for each year during the remaining three years.

1. What is the discount rate to apply considering survival risk for each year?
2. How many shares will be sold for the first and second round investors?
3. What are prices per share to sell for the first and second round investors?
4. An investment project requires an initial investment of 500 at time zero. If the firm invests in the project, there is Chance that a competitor will enter. The firm estimates that it will receive cash flows of 700 at t = 1if the competitor enters and 1,200 if not.

In the case where the competitor does not enter at this point, there is also a chance that the competitor will enter. The firm estimates that it will receive cash flows of the competitor enters and if not. Meanwhile, the firm has the option to expand operations by investing an additional. If the manager decides to expand at t = there is still a chance that a competitor will enter. The firm estimates that it will receive cash flows of at if the competitor enters and 2,400 if not.

1. What is the NPV at 0 if the option to expand does not exist?
2. What is the NPV at 0 if the option to expand exists?
3. Blaine Kitchenware was a mid-sized producer of home appliances. You are provided with the following table to summarize Blaine’s financials in 2020. and bond ratings based on S&P. The risk-free rate at that time. The equity risk premium was. The marginal corporate tax rate was. CEO decided to change the capital structure and make the new debt level to.

Assume that this change in capital structure only involves debt-to-equity swap and does not affect the total firm value.

1. What is the new cost of equity with of debt ratio?
2. What is the new pre-tax cost of debt?
3. What is the new WACC?