As is typical in the venture capital industry , GSB will only invest $ 80 million ( committed capital less lifetime management fees ). At the end of 10 years , the investments made by the fund are worth $ 400 million . GSB also charges 20 % carried interest on the profits of the fund ( net of management fees ).
a ) Assuming the $ 80 million in invested capital is invested immediately and all proceeds were received at the end of 10 years , what is the IRR of the investments GSB partners made ? That is , compute IRR ignoring all management fees .
b ) Of course , as an investor or limited partner , you are more interested in your own IRR ( that is , the IRR including all fees paid ). 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 )?
Problem 23-13 on IPO Based on Chapter 23
Your firm has 10 million shares outstanding , and you are about to issue 5 million new shares in an IPO . The IPO price has been set at $ 20 per share , and the underwriting spread is 7 %. The IPO is a big success with investors , and the share price rises to $ 50 on the first day of trading .
a ) How much did your firm raise from the IPO ? b ) What is the market value of the firm after the IPO ?
c ) Assume that the post-IPO value of your firm is its fair market value . Suppose your firm could have issued shares directly to investors at their fair market values in a perfect market with no underwriting spread and no underpricing . What would the share price have been in this case , if you raise the same amount as in part a )?
d ) Comparing part b ) and part c ), what is the total cost to the firm ’ s original investors due to market imperfections from the IPO ?