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CA Final · Advanced Financial Management · Startup Finance

A founder pitches Zest Foods with expected year-5 revenue of Rs 50 crore and a sector exit multiple of 4x revenue. The venture investor requires a 40% annual return (IRR) on Rs 5 crore invested today, with no dilution. What stake must the investor receive today? (1.4^5 = 5.378)

The investor needs about 13.5%. Exit value is Rs 200 crore (Rs 50 crore revenue at 4x). Rs 5 crore compounded at 40% for five years becomes about Rs 26.89 crore, and dividing that by Rs 200 crore gives roughly 13.45%.

  1. AApproximately 13.5%Correct
  2. BApproximately 5.0%
  3. CApproximately 25.0%
  4. DApproximately 2.5%

Explanation

Exit value = 50 × 4 = Rs 200 crore. Required future value of investment = 5 × 5.378 = Rs 26.89 crore. Stake = 26.89/200 = 13.45%, about 13.5%. Using no compounding (5/200) gives 2.5%, which is wrong.

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