The venture capital fund, BBC Ventures, made a $8 million investment in Rearden Company 10 years ago and, in return, received 2 million shares of series A convertible preferred shares. Each of these shares is convertible into 3 Rearden ordinary shares. Five years later, BBC Ventures participated in a second round of financing for Rearden 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 Rearden ordinary shares.

Currently, it is 2022 and Rearden is planning to take the firm public through an IPO, but it must convert all its outstanding convertible preferred shares into ordinary shares before the offering. After conversion, Rearden will have 30 million ordinary shares outstanding and will create another 8 million new ordinary shares for sale in the IPO. The underwriter handling Reardens initial offering charges 7% of the gross proceeds as an underwriting fee. Reardenforecasts that the 2022 cash flow from operations will be $380 million. Assume that the underwriter has prohibited existing shareholders (including BBC Ventures) from selling any of their shares in the IPO.

1. The underwriter advises Rearden that the prices of other recent IPOs have been set such that the average cash flow multiple based on the 2022 forecasted cash flow from operations is 2.5. Assuming Rearden is set at a price that implies a similar multiple, what will Reardens IPO price per share be? How much will Rearden raise from the IPO?

(3 marks)

2. If Rearden successfully completes its IPO, what is the fraction of Reardens total outstanding ordinary equity that BBC Ventures will own after the IPO?

(2 marks)

3. Assume that the IPO is successful and that Rearden shares sell for $35 each immediately after the offering. Using the post-issue market price for Rearden shares, calculate the (unrealised) compound annual return that BBC Ventures earned on its original and subsequent investments in Rearden shares.

(3 marks)

[Total for Question 1: 8 marks]