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D. The following information is for pedagogical purposes only and unlike earlier
questions does not deal with real terms of the deal. In 2013 EMC, VMware and
General Electric (GE) announced a Joint Venture called Pivotal. GE has invested $ 105
M in the venture in return for 10% ownership in the form of convertible preferred shares.
In 2014 Pivotal posted $ 58 M in revenues demonstrating 24% annual growth. GE
anticipates that Pivotal will go public by the end of 2018. Applying Price/Sales ratio of
16, what is the estimated 2018 value of GE's share in Pivotal? What is the GE's implied
cost of capital that justified the $ 105 M investment? How would your answers change if
the annual growth were only 20%? What is the advantage of having convertible preferred
instead of common equity? 2013 Investment $
2013 Investor's Ownership 105,000,000
10% 2014 Revenue $
Revenue annual growth 58,000,000
24% Price / Revenue ratio 16 What is the estimated 2018 value of GE's share in Pivotal?
2018 estimated revenue
2018 value of investor's share What is GE's implied cost of capital that justified $ 105 M investment?
Implied Cost of Capital
How will your answers change if the annual growth were only 20%?
Revenue annual growth 20% 2018 estimated revenue
2018 value of investor's share
Implied Cost of Capital What is the advantage of having convertible preferred instead of common equity? Value given in problem
Qualitative analysis or Short answer
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