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FIN 516 Week 4 Homework Problem

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FIN 516 Week 4 Homework Problem

Problem 23-3 on Implied Price of Funding Based on Chapter 23

Starware Software was founded last year to develop software for gaming applications. Initially, the founder invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second round of capital, and it has identified an interested venture capitalist. This venture capitalist will invest $1 million and wants to own 20% of the company after the investment is completed.

a) How many shares must the venture capitalist receive to end up with 20% of the company? What is the implied price per share of this funding round?

b) What will the value of the whole firm be after this investment (the post-money valuation)?

Problem 23-4 on IRR of Venture Capital Based on Chapter 23

(Excel file included)

Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay GSB’s management fee.

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...

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