The venture capital fund, AAA, made a $8 million investment in CCC Company 10 years ago and in retum, received 2 million shares of Series A convertible preferred shares. Each of these shares is convertible into 3 CCC ordinary shares. Five years later. AAA participated in a second round of financing for CCC and received 4 million shares of Series B convertible preferred shares in exchange for a $50 million investment. Each Series B share is convertible into 2 CCC ordinary shares. CCC is now planning an IPO, but it must convert all its outstanding convertible preferred shares into ordinary shares before the offering. After conversion, CCC will have 30 million ordinary shares outstanding and will create another 8 million new ordinary shares for sale in the IPO. The underwriter handling CCC's initial offering expects to sell these new shares for $50 each. AAA has chosen to exercise its demand registration rights and will sell its ordinary shares alongside the newly created shares - in CCC's IPO. The underwriter will keep 7% of the offer as an underwriting spread. Assume that the IPO is successful and that CCC shares sell for $80 each immediately after the offering. (a) Calculate the compound annual retum that AAA eamed on its original and subsequent investments in CCC shares. (b) What is the amount that CCC raised during the IPO, net of underwriting fees? What is the firm's market value after IPO? (c) Assume that the post-IPO value of CCC is its fair market value. Suppose CCC could have issued shares directly to investors at their fair market value, in a perfect market with no underwriting spread and no underpricing. What would the share price have been in this case if CCC raises the same amount as in part (b)? The venture capital fund, AAA, made a $8 million investment in CCC Company 10 years ago and in retum, received 2 million shares of Series A convertible preferred shares. Each of these shares is convertible into 3 CCC ordinary shares. Five years later. AAA participated in a second round of financing for CCC and received 4 million shares of Series B convertible preferred shares in exchange for a $50 million investment. Each Series B share is convertible into 2 CCC ordinary shares. CCC is now planning an IPO, but it must convert all its outstanding convertible preferred shares into ordinary shares before the offering. After conversion, CCC will have 30 million ordinary shares outstanding and will create another 8 million new ordinary shares for sale in the IPO. The underwriter handling CCC's initial offering expects to sell these new shares for $50 each. AAA has chosen to exercise its demand registration rights and will sell its ordinary shares alongside the newly created shares - in CCC's IPO. The underwriter will keep 7% of the offer as an underwriting spread. Assume that the IPO is successful and that CCC shares sell for $80 each immediately after the offering. (a) Calculate the compound annual retum that AAA eamed on its original and subsequent investments in CCC shares. (b) What is the amount that CCC raised during the IPO, net of underwriting fees? What is the firm's market value after IPO? (c) Assume that the post-IPO value of CCC is its fair market value. Suppose CCC could have issued shares directly to investors at their fair market value, in a perfect market with no underwriting spread and no underpricing. What would the share price have been in this case if CCC raises the same amount as in part (b)

Answer rating: 100% (QA)

The Answer is in the image, click to view ... View the full answer