Assuming that investors gave GSB partners the full $100 million up front, what is the IRR for GSB’s limited partners (that is, the IRR net of all fees paid)?

 

a. Venture capitalists must be able to receive five million shares in order to own 20%. This funding round’s implied price per share is $1,000,000 / 5,000,000 shares = $0.20

b. The value of the whole firm after the investment will be $1 million / (1 – 0.20) = $1,250,000.

  1. a. The investment returns of GSB Partners are 63.69%.

b. The IRR for GSB’s limited partners is 20.82%.

  1. a. From the IPO, $100 million was raised ($20 per share x 5,000,000 shares).

b. 500 million is the estimated market value after the IPO (10 million outstanding shares x $50/share + 5,000,000 new shares x50/share).

c. The share price for the firm’s shares would have been the same price as that of the IPO price if it could have directly issued them to investors at fair market value.

d. The total cost to the firm’s original investors due to market imperfections from the IPO is $300 million ($500 million – $200 million).

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