10.14. The earnout equals (2.5)(0.15) = 0.375 times the difference between

(a) three yearly calls on revenue, each based upon the present value of the respective expected revenue and an exercise threshold equal to $50 million and

(b) three yearly calls (the caps), each with exercise price equal to 50 + 2/0.375 = $55.333 million. The value of the earnout is

$2.2 million.

10.20. (a)

13.3. Taking into account that the present value of the management options is $7.56 per option, and compounding it at 25% one gets an exit value of $23.07 or a total value of $23.07 × 500,000 options = $11.5 million. Subtracting its value from the exit value of equity yields the amount available to common equity and results in lower values for the stakes of the mezzanine investor and the sponsor. The sponsor should expect to get about $552 million or an IRR = (552/190)1/5 − 1 = 23.8%.