QUESTION 4 (20 MARKS) Organic and More is a early-stage business and in 2019, they need to raise additional $3,000,000 to funding their expansion on the Western area of Australia but currently, no party could lend them such amount. The company is now considering about a funding of $2,000,000 from Caros Ventures. Unfortunately, they have reached the limits of what their banker can finance and have put all their personal financial resources into the business. In short, they need more equity capital, and they cannot provide it themselves. Their banker recommended that they contact a venture capital (VC) firm in Australia that sometimes makes investments in ventures such as Caros Ventures. He also recommended that they prepare for the meeting by organizing their financial fore- cast for the next five years. The banker explained that VCs generally target a five-year term for their investments, so it was important that they provide the information needed to value the firm at the end of five years. After a careful analysis of their plans, Organic and More estimate that EBITDA last year would be $600,000 million and the EBITDA will grow by 35% for each of the next five years. In additio, Organic and More estimate that they will need to borrow $1.4 million by 2024 to fund additional expansion of their operations. Their banker indicated that his bank could be counted on for $1 million in debt, assuming they were successful in raising the needed equity funds from the VC. Furthermore, the remaining $400,000 would be in the form of accounts payable. Finally, Organic and More believe that their cash balance will reach $250,000 at the end of five years. Organic and More ultimately end up on the deal of funding from Caros Ventures after that evaluation.

a. If the VC estimates that the winery should have an enterprise value equal to five times estimated EBITDA in five years, what do you estimate the value of the winery to be in three years? What will the equity in the firm be worth?

b. Caros Ventures offers the way of funding through convertible debts that pay 8% annual interest with 35% rate of return. If the option convertible debt provides 45% ownership of the firm's common stock at the end of Year 5, which is the required return that the VC should demand on their investment?

c. If Caros Ventures offers the way of funding through convertible perferred stocks that pay 10% fixed dividend and the right to convert the preferred stock into 40% ownership of the firm's common stock at the end of Year 5, what rate of return does the VC require for this option? d. What is the pre- and post-money value of the firm based on the two sets of deal terms offered by the VC?