Question

1. Mario and Luigi each own half of a mushroom pizza parlor. They want to expand by purchasing a second brick oven for $30,000. They give Koopa Fund a 10% stake in the pizza parlor in exchange for the necessary capital. From this, we can infer that Luigi must have valued his stake in the business to be worth no more than x. What is x ? 2. Catherine is choosing between two colleges. Graduates of college H expect to earn $60,000 upon graduation and receive annual raises of 3%. Graduates of college M expect to earn $50,000 upon graduation, but receive annual raises of 3.5%. Assuming Catherine discounts her future income at a rate of 6% and expects to work for 40 years, which college should she choose? 3. Venture capital firms have required rates of return as high as 50%, whereas private equity firms require a comparatively modest 20%. Why, then, don't entrepreneurs seek PE rather than VC funding? 4. True or False, and justify your answer: The entrepreneur's goal is to maximize the value of her company. 5. True or False, and justify your answer: All else equal, large increases in net working capital makes a company more valuable. 6. Provide two limitations of applying multiples taken from publicly traded companies to a young, private business.

Answer 1

The questions cover topics including the valuation of a pizza parlor, college investment decisions, venture capital versus private equity funding, company value maximization, net working capital impacts, and the limitations of applying multiples to private businesses.

Step-by-step explanation:

This set of questions revolves around concepts related to early-stage corporate finance and the decision-making involved in starting and expanding a business, comparing investment options, and maximizing company value.

1. Mario and Luigi's pizza parlor is valued at $300,000 based on the 10% stake sold for $30,000. Therefore, Luigi's share should be valued at no more than $150,000, as he owns half of the business.
2. To determine the better college option financially for Catherine, a present value calculation of future earnings from both colleges would be necessary, taking into account the different initial salaries and raise rates as well as the discount rate.
3. Entrepreneurs may choose VC funding over PE due to various factors such as the stage of the company, the amount of funding needed, and the venture capital firms' willingness to invest in riskier ventures.
4. True, the entrepreneur's goal is typically to maximize the value of her company to ensure the longevity and financial success of her business.
5. False, large increases in net working capital may not necessarily make a company more valuable as it can indicate that the company is not efficiently using its short-term assets and liabilities.
6. Applying multiples from publicly traded companies to a young, private business might not be accurate due to differences in market exposure and liquidity, as well as variations in risk profiles and growth potential.