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Implied Returns

Assume you sell for $100,000 a 10 percent ownership stake in a future payment one year from now of $1.5 million.

A. What are you saying about the implied return for the 10 percent owner?

B. What is the present value of the entire $1.5 million, using the implied return from Part B?

C. What is 10 percent of the value determined in Part B?

D. Does it matter whether you grow the $100,000 at 50 percent to $150,000 and note it is 10 percent of $1.5 million, or discount the $1.5 million at 50 percent to get $1 million and not that $100,000 is 10 percent of this value?

Solution Preview

Assume you sell for $100,000 a 10 percent ownership stake in a future payment one year from now of $1.5 million.

A. What are you saying about the implied return for the 10 percent owner?

Return after 1 year = 10% x $1.5 million = ...

$2.19