MF8830: Entrepreneurial Finance and Venture Capital
Midterm Review
QianqianYu
Boston College
April 9, 2016
The list of problems we will cover
 Problem Set I: Problems 5 and 6
 Assignment 7: Problem 2
 Assignment 2: Problem 9
 Assignment 3: Problem 6
 Problem Set II: Problem 1
 A problem on convertible securities and term sheets
1
Problem Set I: Question 5
GCL Industries is an industrial conglomerate undergoing restructuring. As
part of its restructuring program GCL is considering the sale of its low
growth Whiftall unit. Whiftall is in the high volume-low margin meatpacking business. Whiftall’s volume sales are expected to decline in the
future and its long-term growth of dollar sales was not expected to exceed
3% per year. GCL wants to estimate the price it may get for Whiftall as of
January 1, 1993. Exhibit 1 contains operating projections for Whiftall.
Other data are presented in Exhibit 2. Given the uncertainty associated
with this evaluation, the CFO of GCL would like to base the estimation on
two alternative valuation approaches.
2
Problem Set I: Question 5
Exhibit 1. Whiftall Unit – 1993-1997 Projections
1992
1993
1994
1995
1996
1997
-------------------------------------------------------------------------------(million $)
Sales
2,223.2
2,245.6
2,284.2
2,308.0
2,550.0
2,616.7
Operating marg.
1.12%
1.14%
1.16%
1.20%
1.20%
1.20%
EBIT
24.9
25.6
Depreciation
32.0
32.6
34.2
30.9
30.0
30.0
CAPEX + WC incr.
38.2
40.2
40.0
30.5
30.0
30.0
Exhibit 2. Miscellaneous data
-----------------------------------------------------------------------------------------------------------Corporate tax rate: 40%
GCL estimates that the buyer can finance the acquisition with 45% debt,
which can be raised at 11%.
The beta of companies in Whiftall industry with similar capital structures is
1.33. The yield on long-term government bonds is 7.52% and the equity risk premium
over the government rate for small cap firms is estimated at 6%.
Valuation multiple: An examination of comparable companies yielded an
average EBIT multiple equal to 7.25 times current (1992) EBIT.
3
Problem Set I: Question 5
 The CFO of GCL would like to base the estimation on two alternative valuation
approaches as of January 1, 1993 (the end of 1992).
 1. PE multiple approach:
EBIT in 1992=24.9; P/E=7.25 in 1992
Firm Value=24.9*7.25=180.5
 2. Discounted cash flow approach:
 Free cash flow is known up to 1997
 Discount rate is determined by the riskiness of the business and how the
buyer financed the acquisition.
 Assumption for FCF beyond 1997: If the long-term growth of Whiftall is
expected to be similar to that of comparable companies, then their EBIT
multiple can be used.
4
Problem Set I: Question 5
 Discount rate: depends on how the acquirer financed the transaction.
 WACC = (D/V)(1 - T)RD +(E/V)RE
Debt
Equity
WACC
WACC (%)
Weight
Before-tax
After-tax
Weighted
cost
cost
cost
-------------------------------------------------------------------------45.00%
11.00%
6.60%
2.97%
55.00%
15.50%
15.50%
8.53%
----------11.50%
5
Problem Set I: Question 5
 EBIT=Sales × Operating Margin
 FCF: EBIT(1-Tax Rate) + Depreciation & Amortization - Change in
Net Working Capital - Capital Expenditure
1993
-----EBIT
25.6
Minus taxes (40%)
10.2
-----15.4
Plus depreciation
32.6
-----48.0
Minus CAPEX (& WC inc.) 40.2
-----Free cash flow
7.8
PV {FCF @ 11.5%}
1994
------26.5
10.6
------15.9
34.2
------50.1
40.0
------10.1
1995
------27.7
11.1
------16.6
30.9
------47.5
30.5
------17.0
1996
-----30.6
12.2
-----18.4
30.0
-----48.4
30.0
-----18.4
1997
-----31.4
12.6
-----18.8
30.0
-----48.8
30.0
-----18.8
50.2
6
Problem Set I: Question 5
 Assumption about residual value: If the long-term growth of Whiftall is
expected to be similar to that of comparable companies, then their EBIT
multiple can be used.
 Terminal Value (or Residual value): 31.4*7.25=227.7 (EBIT*P/E ratio)
 PV of the residual value = 132.1 (Terminal Value discounted at 11.5%)
 Value of the firm: PV(FCF)+PV(Terminal Value)=50.2+132.1=182.3
1993
-----EBIT
25.6
Minus taxes (40%)
10.2
-----15.4
Plus depreciation
32.6
-----48.0
Minus CAPEX (& WC inc.) 40.2
-----Free cash flow
7.8
PV {FCF @ 11.5%}
50.2
Terminal EBITx
1997 market capital
PV {’97 market capital} 132.1
------1/93 Firm Value
182.3
-------
($ million)
1994
1995
------------26.5
27.7
10.6
11.1
------------15.9
16.6
34.2
30.9
------------50.1
47.5
40.0
30.5
------------10.1
17.0
1996
-----30.6
12.2
-----18.4
30.0
-----48.4
30.0
-----18.4
1997
-----31.4
12.6
-----18.8
30.0
-----48.8
30.0
-----18.8
7.25
227.7
7
Problem Set I: Question 6
 A prospective buyer of Whiftall would like to finance the acquisition
entirely with equity capital and not use debt financing in the future. The
buyer would like to determine the maximum price to pay for Whiftall.
The buyer estimates that the cost of equity of companies with 45% debt
ratio is about 15.5%, including a risk premium based upon a beta
coefficient of 1.33 and a market risk premium of 6%. Furthermore, the
government bond rate is 7.52% and the corporate tax rate is 40%. Value
the market capital of Whiftall under this financial structure. Is the result
different from that obtained on Problem 5?
8
Problem Set I: Question 6
 We will use equity cash flow approach to value this firm.
 Since this is an all equity firm, equity cash flow (ECF) is equal to
free cash flow (FCF), which is the same as what we calculated in
Question 5.
 Equity cash flows are discounted at the cost of equity to get
equity value.
Note when you compute:
 Cost of equity (discount rate):
 Riskiness of business is the same
 Capital structure is different
 Terminal value:
 FCF approach
 Multiple approach (problems?)
9
Problem Set I: Question 6: Discount Rate
 Beta of equity for a levered firm (with 45% debt and 55% equity) is 1.33
 Use the formula for unlevered beta:




1
U  
E

D
1  (1  t ) 

E
 Therefore, the unlevered beta is:




1
U  
 1.33  0.89
0.45 
1  (1  0.4) 

0.55 

 The discount rate (cost of equity) ku is:
ku  rf  u  equity risk premium
=7.52%+0.89  6%
=12.86%
10
Problem Set I: Question 6: Residual Value
 Assume ECF (same as FCF) grows at a constant rate, 3%, which
is the growth rate for sales, after 1997.
Residual equity=FCF 
1 g
1.03
 18.8 
 196.4
kg
0.1286  0.03
 Why not multiple approach?
 The capital structure is different in this case, so we cannot
simply use the multiple 7.25 in this question.
11
Problem Set I: Question 6: Final Answer
1993
-----EBIT
25.6
Minus taxes (40%)
10.2
-----Net income
15.4
Plus depreciation
32.6
-----Cash flow
48.0
Minus CAPEX (& WC inc.) 40.2
-----Free cash flow
7.8
To equity (ECF)
PV {ECF @ 12.86%}*
1997 residual equity
PV {’97 equity}
1/93 value of equity
Debt
Firm Value
1994
------26.5
10.6
------15.9
34.2
------50.1
40.0
------10.1
1995
------27.7
11.1
------16.6
30.9
------47.5
30.5
------17.0
1996
-----30.6
12.2
-----18.4
30.0
-----48.4
30.0
-----18.4
1997
-----31.4
12.6
-----18.8
30.0
-----48.8
30.0
-----18.8
48.27
196.4**
107.26
--------155.53
0.00
--------155.53
12
Assignment 7: Problem 2 of Chapter 9 in LM
[Sustainable Growth Rates] Petal Providers Corporation opens and
operates “mega” floral stores in the U.S. The idea behind the super store
concept is to model the U.S. floral industry after its European counterparts
whose flower markets generally have larger selections at lower prices.
Petal Providers Corporation is interested in estimating its sustainable sales
growth rate. Last year revenues were $1 million, the net profit was
$50,000, the investment in assets was $750,000, payables and accruals
were $100,000, and equity at the end of the year was $450,000 (i.e.,
beginning of year equity of $400,000 plus retained profits of $50,000).
The venture did not pay out any dividends and does not expect to pay
dividends for the foreseeable future.
13
Assignment 7: Problem 2 of Chapter 9 in LM
A. Estimate the sustainable sales growth rate for Petal Providers
based on the information provided in this problem.
 Sustainable growth rate is the rate supported without external
equity capital (i.e., through the retention of profits).
g
E Ending  E Beginning
E Beginning

450,000  400,000
 12.5%
400,000
 Or:
g = (Net Income/Common equity beginning) x Retention rate
= 50,000/400,000 x 1.00 = .125 x 1.00 = .125 = 12.5%
Retention rate is equal to 1 as the venture does not expect to pay dividends.
14
Assignment 7: Problem 2 of Chapter 9 in LM
B. How would your answer in Part A change if economic growth is
average (30%) and Petal Providers’ net profit margin is 7 percent?
 Note (Historical View): The 12.5% sustainable growth rate in Part
A is based on last year’s operating performance and financial
policy relationships holding for this year. If we just revise last
year’s operating and financial relationships to reflect a net profit
margin increase from 5% to 7%, we would have:
 Net income = 1,000,000 x .07 = 70,000
 Other operating performance and financial policy relationships are
assumed to remain the same
 g = [(400,000 + 70,000) – 400,000]/400,000 = 70,000/400,000 =
17.5%
15
Assignment 7: Problem 2 of Chapter 9 in LM
 Note (Forward-Looking View): If sales grow at 30% (average
economic growth rate, which is mentioned in Problem 1 of
Assignment 7) this year to $1,300,000 ($1,000,000 x 1.30), Petal
Providers will need to improve its operating performance, change
its financial policies, and/or obtain additional equity funds to
support the “gap” between a forecasted growth rate of 30% and
the 12.5% sustainable growth rate calculated in Part A.
 Looking forward and assuming the 30% sales growth rate can be
funded this year and the asset turnover ratio will remain the same,
the sustainable sales growth rate for next year can be estimated as
follows:
16
Assignment 7: Problem 2 of Chapter 9 in LM
 Expected sales = 1,000.000 x 1.30 = 1,300,000
 Expected net income = 1,300,000 x 7% = 91,000
 Expected total assets = 750,000 x 1.30 = 975,000
 Expected retained profit = 91,000 x 1.0000 = 91,000
 Beginning equity this year (last year’s ending equity) = $450,000
 g = [(450,000 + 91,000) – 450,000]/450,000 = 91,000/450,000 = .2022
= 20.22%
17
Assignment 7: Problem 2 of Chapter 9 in LM
 Or use the expanded model:
NI NS
TA
g


 RR
NS TA CEbeg
91, 000 1,300, 000 975, 000



1
1,300, 000 975, 000
45, 000
 20.22%
18
Assignment 2: Problem 9 of LM Chapter 6
9. [Cash Conversion Cycle] Castillo Products Company, described below,
improved its operations from a net loss in 2012 to a net profit in 2013.
While the founders, Cindy and Rob Castillo, are happy about these
developments, they are concerned with trying to understand how long
the firm takes to complete its cash conversion cycle in 2013. Balance
sheet items should reflect the averages of the 2012 and 2013 accounts.
19
Assignment 2: Problem 9 of LM Chapter 6
A. Calculate the inventory-to-sale conversion period for 2013.
 Inventory-to-Sale Conversion Period
= Avg. Inventory/Avg. Daily COGS
= (($400,000 + $500,000)/2)/($900,000/365) = 182.50 days
Income Statement
2012
2013
Net Sales
$900,000
$1,500,000
Cost of Goods Sold
540,000
900,000
Gross Profit
360,000
600,000
Marketing
90,000
150,000
General & Administrative
250,000
250,000
Depreciation
40,000
40,000
EBIT
-20,000
160,000
Interest
45,000
60,000
Earnings Before Taxes
-65,000
100,000
Income Taxes
0
25,000
Net Income (Loss)
-$65,000
$75,000
Balance Sheet
2012
Cash
$50,000
Accounts Receivables
200,000
Inventories
400,000
Total Current Assets
650,000
Gross Fixed Assets
450,000
Accumulated Depreciation -100,000
Net Fixed Assets
350,000
Total Assets
$1,000,000
2013
$20,000
280,000
500,000
800,000
540,000
-140,000
400,000
$1,200,000
20
Assignment 2: Problem 9 of LM Chapter 6
B. Calculate the sale-to-cash conversion period for 2013.
 Sale-to-Cash Conversion Period
= Avg. Receivables/Avg. Daily Sales
= (($200,000 + $280,000)/2)/($1,500,000/365) = 58.40 days
Income Statement
2012
2013
Net Sales
$900,000
$1,500,000
Cost of Goods Sold
540,000
900,000
Gross Profit
360,000
600,000
Marketing
90,000
150,000
General & Administrative
250,000
250,000
Depreciation
40,000
40,000
EBIT
-20,000
160,000
Interest
45,000
60,000
Earnings Before Taxes
-65,000
100,000
Income Taxes
0
25,000
Net Income (Loss)
-$65,000
$75,000
Balance Sheet
2012
2013
Cash
$50,000
$20,000
Accounts Receivables
200,000
280,000
Inventories
400,000
500,000
Total Current Assets
650,000
800,000
Gross Fixed Assets
450,000
540,000
Accumulated Depreciation -100,000
-140,000
Net Fixed Assets
350,000
400,000
Total Assets
$1,000,000
$1,200,000
21
Assignment 2: Problem 9 of LM Chapter 6
C. Calculate the purchase-to-payment conversion period for 2013.
 Purchase-to-Payment Conversion Period
= (Avg. Payables + Avg. Accruals)/Avg. Daily CGS
= (($130,000 + $160,000)/2 + ($50,000 + $70,000)/2)/($900,000/365)
= 83.14 days
Balance Sheet
2012
Cash
$50,000
Accounts Receivables
200,000
Inventories
400,000
Total Current Assets
650,000
Gross Fixed Assets
450,000
Accumulated Depreciation -100,000
Net Fixed Assets
350,000
Total Assets
$1,000,000
2013
$20,000
280,000
500,000
800,000
540,000
-140,000
400,000
$1,200,000
Accounts Payable
$130,000
Accruals
50,000
Bank Loan
90,000
Total Current Liabilities
270,000
Long-Term Debt
300,000
Common Stock ($.05 par)
150,000
Additional Paid-in-Capital 200,000
Retained Earnings
80,000
Total Liab. & Equity
$1,000,000
$160,000
70,000
100,000
330,000
400,000
150,000
200,000
120,000
$1,200,000
Income Statement
Net Sales
Cost of Goods Sold
Gross Profit
Marketing
General & Administrative
Depreciation
EBIT
Interest
Earnings Before Taxes
Income Taxes
Net Income (Loss)
2012
$900,000
540,000
360,000
90,000
250,000
40,000
-20,000
45,000
-65,000
0
-$65,000
2013
$1,500,000
900,000
600,000
150,000
250,000
40,000
160,000
60,000
100,000
25,000
$75,000
22
Assignment 2: Problem 9 of LM Chapter 6
D. Determine the length of the Castillo Product’s cash conversion cycle for
2013.
 Length of the Cash Conversion Cycle
= (Inventory-to-Sale Conversion Period) + (Sales-to-cash Conversion
Period) – (Purchase-to-Payment Conversion Period)
= 182.50 days + 58.40 days – 83.14 days = 157.76 days
23
Assignment 3: Problem 6 of LM Chapter 4
6. [Statement of Cash Flows and Cash Burn or Build] Cindy and Robert
(Rob) Castillo founded the Castillo Products Company in 2011. The
company manufactures components for personal decision assistant (PDA)
products and for other hand-held electronic products. Year 2012 proved to
be a test of the Castillo Products Company’s ability to survive. However,
sales increased rapidly in 2013 and the firm reported a net income after
taxes of $75,000. Depreciation expenses were $40,000 in 2013. Following
are the Castillo Products Company’s balance sheets for 2012 and 2013.
24
Assignment 3: Problem 6 of LM Chapter 4
 Balance sheet provided in the problem:
CASTILLO PRODUCTS COMPANY
2012
2013
Cash
Accounts Receivables
Inventories
Total Current Assets
Gross Fixed Assets
Accumulated Depreciation
Net Fixed Assets
Total Assets
$50,000
200,000
400,000
650,000
450,000
-100,000
350,000
$1,000,000
$20,000
280,000
500,000
800,000
540,000
-140,000
400,000
$1,200,000
Accounts Payable
Accruals
Bank Loan
Total Current Liabilities
Long-Term Debt
Common Stock ($.01 par)
Additional Paid-in-Capital
Retained Earnings
Total Liabilities & Equity
$130,000
50,000
90,000
270,000
300,000
150,000
200,000
80,000
$1,000,000
$160,000
70,000
100,000
330,000
400,000
150,000
200,000
120,000
$1,200,000
25
Assignment 3: Problem 6 of LM Chapter 4
A. Calculate Castillo’s cash flow from operating activities for 2013.
 Net income: 75,000; Depreciation: 40,000 (mentioned in the problem)
CASTILLO PRODUCTS COMPANY
Note: Because Retained Earnings increased by only $40,000 and Net
Income was $75,000, Cash Dividends paid must have been $35,000.
Parts A-D:
Statement of Cash Flows ($ Thousands)
2013
Cash from Operating Activities:
Net income
75
Depreciation
40
Increase in accounts receivable
-80
Increase in inventories
Increase in accounts payable
Increase in accrued liabilities
Net from Operating Activities
-100
30
20
-15
B. Calculate Castillo’s cash flow from investing activities for 2013.
Cash from Investing Activities:
Increase in gross fixed assets
Net from Investing Activities
-90
-90
26
Assignment 3: Problem 6 of LM Chapter 4
C. Calculate Castillo’s cash flow from financing activities for 2013.
Net Income is 75,000 and Retained Earnings increases by 40,000 →
dividends paid must be 35,000.
Cash from Financing Activities:
Increase in bank loan
Increase in long-term debt
Cash dividends paid
Net from Financing Activities
10
100
-35
75
D. Statement of Cash Flow
 See next slide.
27
Assignment 3: Problem 6 of LM Chapter 4
CASTILLO PRODUCTS COMPANY
Note: Because Retained Earnings increased by only $40,000 and Net
Income was $75,000, Cash Dividends paid must have been
$35,000.
Parts A-D:
Statement of Cash Flows ($ Thousands)
2013
Cash from Operating Activities:
Net income
75
Depreciation
40
Increase in accounts receivable
-80
Increase in inventories
-100
Increase in accounts payable
30
Increase in accrued liabilities
20
Net from Operating Activities
-15
Cash from Investing Activities:
Increase in gross fixed assets
Net from Investing Activities
Cash from Financing Activities:
Increase in bank loan
Increase in long-term debt
Cash dividends paid
Net from Financing Activities
Total net cash increase (decrease)
Cash at beginning of period
Total net cash increase (decrease)
Cash at end of period
-90
-90
10
100
-35
75
-30
50
-30
20
28
Assignment 3: Problem 6 of LM Chapter 4
E. Use your calculation results from Parts A and B above to determine
whether Castillo was building or burning cash during 2013 and indicate
the dollar amount of the cash build or burn.
 Cash from Operating Activities (-15) + Cash from Investing Activities
(-90) = -105 (annual net cash burn)
F. If Castillo had a net cash burn from operating and investing activities in
2013, divide the amount of burn by 12 to calculate an average monthly
burn amount. If the 2014 monthly cash burn continues at the 2013 rate,
indicate how long in months it will be before the firm runs out of cash if
there are no changes in financing activities.
 Monthly burn rate = annual burn/12 =-105/12=-8.75
 Time to Out of Cash = Cash at end of period / Monthly burn
rate=20/8.75=2.3 months
29
Problem Set II: Question 1
You are a venture capitalist considering a $2 million investment in Floating
Line Electronics Apparatus, Inc. (FLEA), which is expected to require no
additional capital through year 4. FLEA is expected to earn $1.5 million
after taxes in year 4. You expect to get your investment plus return at that
time by selling your stock. In your opinion, FLEA should at that time be
comparable to companies priced at a price–earnings multiple of 13 FLEA
has $1 million debt outstanding and plans to pay no dividends in year 1
through 4. There are already 500,000 shares outstanding which are owned
by the entrepreneur and other investors. You require a 40% rate of return
from this type of investment.
30
Problem Set II: Question 1
(a) What equity participation (percent ownership) would you demand?
 Initial investment = $2 million
 Required value in 4 years = 2 x (1.4) 4 = $7.683 million
 Value of the firm equity in 4 years = 1.5 x 13 = $19.5 million (using PE
multiple approach)
 VC required ownership = 7.683 / 19.5 = 39.4%
(b) How many new shares need to be issued?
 New shares / (Old shares + New shares) = 39.4%
→ New shares/(500,000+New shares)=39.4%
→ New shares=325,100
31
Problem Set II: Question 1
(c) What price would you pay for each share now?
 Price per share = $2 million / 325,100 = $6.152
(d) What is the implicit “after-the-money” (i.e. after-your-money)
valuation of the enterprise equity? (same as “post-money valuation”)
 Post-money valuation = $6.152 x 825,100 = $5.08 million
 or Post-money valuation = $ 2 million / .394 = $5.08 million
 Capitalization Table:
FLEA Post-Money Valuation (millions)
----------------------------------------------------------------------------------Cash from new equity
$2.00
Debt
$1.00
Other assets
4.08
New equity
2.00
Old equity
3.08
--------------Assets
6.08
6.08
---------------
32
Question on Securities and Term Sheets
Newco raises $5,000,000 from the VC fund Early Bird Ventures I (“EBV”)
in exchange for 5,000,000 Series A convertible preferred shares. See prefinancing capitalization table in the next slide.
A. What are the original purchase price (OPP) and aggregate purchase
price (APP) for the Series A securities?
 Price per share =$1 (original purchase price, OPP)
 Aggregate purchase price (APP) = OPP*shares purchased = $5,000,000
B. What pre-transaction is the fully diluted share count?
 Pre-transaction share count (fully diluted) = 10,000,000
C. What is the proposed ownership percentage?
 The investment implies ownership of 33.33% of the company on a fully
diluted basis (assuming that all preferred stock is converted and that all
options are exercised).
 Proposed ownership percentage by VCs = 33.33%
33
Question on Securities and Term Sheets
 C. Write down the capitalization table of Newco after the series A
financing.
Pre-Financing
Security
Common – Founders
Common – Employee Stock Pool
Issued
Unissued
Series A Preferred
Total
# of Shares
7,750,000
Post-Financing
%
# of Shares
%
77.5
2,250,000
300,000
1,950,000
22.5
3.0
19.5
0
0.0
10,000,000
100
34
Question on Securities and Term Sheets
 Completed Capitalization Table:
Pre-Financing
Security
Common – Founders
Common – Employee Stock Pool
Issued
Unissued
Series A Preferred
Total
# of Shares
7,750,000
Post-Financing
%
77.5
# of Shares
7,750,000
%
2,250,000
300,000
1,950,000
22.5
3.0
19.5
2,250,000
300,000
1,950,000
15.0
2.0
13.0
0
0.0
5,000,000
33.3
10,000,000
100
15,000,000
100
51.7
35
Question on Securities and Term Sheets
 Post-money valuation = price per share * fully diluted share count
 Post-money valuation = $1 * 15,000,000 = $15,000,000
 Post-money valuation = $investment/proposed ownership percentage
 Post-money valuation = $5,000,000/0.3333 = $15,000,000
 Pre-money valuation = Post-money valuation - $investment
 Pre-money valuation = $15,000,000 - $5,000,000 = $10,000,000
 Pre-money valuation = price per share * pre-transaction (fully diluted)
share count
 Pre-money valuation = $1 * 10,000,000 = $10,000,000
36
Question on Securities and Term Sheets
D. Assume that the convertible preferred equity used in the above financing
is ordinary convertible preferred with a liquidation preference of $6
million. If the financing goes through and Newco is acquired for a price of
$15 million a few months after the financing, what will be payoff to series
A convertible preferred equity holders? What will be the payoff to series A
investors if the acquisition price paid for Newco was actually $21 million
(instead of the $15 million specified earlier)?
 If Newco is acquired for $15 million:
 By NOT converting to common shares, series A share holders get $6
million (liquidation preference).
 By converting to common shares, they will get 33%*15=$5million.
 Therefore, series A share holders will not convert and will get $6
million.
37
Question on Securities and Term Sheets
 If Newco is acquired for $21 million:
 By NOT converting to common shares, series A share holders get $6
million (liquidation preference).
 By converting to common shares, they will get 33%*21=$7million.
 Therefore, series A share holders will convert and will get $7 million.
38