The Value Equation by Christopher H. Volk

Author:Christopher H. Volk [Volk, Christopher H.]
Language: eng
Format: epub
ISBN: 9781119875659
Publisher: Wiley
Published: 2022-05-10T00:00:00+00:00

Taking on OPM Equity

You need $250,000 in equity to contribute to the development of your second restaurant, but you only have $159,375 after-tax cash in the bank from your first year of operations. You are short $90,625, or 36.25% of the equity you require. Since you are doubling the size of your company, you will need a total of $500,000 in equity, of which 18.1% will have to come from OPM equity ($90,625 ÷ $500,000).

The question is, how much of the company will you have to give to your new minority shareholders?

The answer: Approximately 4.26%, which is computed by dividing the portion of equity you need (18.1%) by 4.25 (your equity valuation multiple).

Owning 95.74% of your company (100% – 4.26%) while only personally investing 81.9% of the equity dollars (100% – 18.1%) will increase your personal rates of return. How much will your equity rate of return be on the portion of the business you own?

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