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TE 567 Final ExamInstructor: Sanjiv Chopra1. This is a take home exam. You can refer to all class lecture presentations and course readings.2. You are free to use Excel spreadsheets or calculators for calculating your answers.3. Answer ALL questions on standard 8.5” x 11” paper.4. Maximum points for the exam are 100.5. Keep your answers short and crisp. Keep your papers neat and legible. 6. Make and state your assumptions if unclear about something.The case Walnut Venture Associates depicts the series of events from initial review of business plan toterm sheet for a software firm (RBS Group) by the Walnut group, a set of potential angel investors.The (A) case includes some background on the Walnut Group – a Boston-area group of angel investors.The bulk of the case is a well-prepared business plan from the RBS Group, a firm that developsaccounting software for software firms. The case describes the interest that Walnut has in investing inRBS and asks the question: What issues need to be resolved prior to writing a check?The (D) case consists of the draft term sheet that Walnut offers RBS.Case (A) is designed to put students in the shoes of potential investors, and force them to really dig into abusiness plan / business model. It raises the issue of what detailed work needs to be done once apotential investment appears promising. Although the case asks students to assume the role of potentialinvestors, it is only a short leap of logic to understand as an entrepreneur what you need to prove thatyour opportunity is worthy of investment by a VC or Angel investor.The (D) case asks students to step into the Entrepreneur’s role and negotiate over a term sheet thatWalnut has offered. The term sheet raises several key issues including; valuation, type of security, controlrights of management versus investors, and vesting of managerial stock. Please read both the cases and answer the following questions. Assignment Question for (A) Case:1. Evaluate the potential investment in RBS from Walnut’s point of view? (10 points)2. As a Walnut investor, what critical issues do you see as requiring more investigation / duediligence on your part prior to investing? List the various categories of issues and the questions thatneed answered through the due diligence phase and how would you accomplish this task? (25points)Assignment Question for (D) Case:1. What is the post money valuation of RBS in the proposed Walnut deal? (10 points)2. Assume that RBS is liquidated after 5 years from the time of investment. If the deal proposed inthe term sheet is accepted, how will the funds received from the liquidation be split between the“Walnut round” and the remaining investors (UST, Other shareholders, and Management). Fillin the values for the various liquidation scenarios as indicated in the table below (30 points)Exit Value in Year 5 $2,000,000 $3,000,000 $10,000,000 $20,000,000 $30,000,000 $50,000,000Total proceeds to “Walnut round”% of proceeds to “Walnut roundTotal proceeds to “Other shareholders”% of proceeds to “Other shareholders”IRR of “Walnut round”13. What proposed terms do you find most troubling and why? What would you try andrenegotiate, and what may you be willing to give up? (10 points)4. Who will control the company if this deal is done on the terms described? (10 points)5. How do the securities proposed by Walnut impact the risk and reward of existing investors? (5points)Notes:1. Redeemable Preferred stock is a type of security that carries the provision that the issuer has theright to call in the stock at a certain price and retire it.2. Convertible Preferred stock is a security that includes an option for the holder to convert thepreferred shares into a fixed number of common shares.3. As noted in the term sheet dividends accrue on the preferred at the rate of 8% per annumcompounded annually. That is an investment of $1,000,000 after 2 years will be worth

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UIUC TE 567 - TE 567 Final Exam

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