Six years ago, High-Tech Fund III made a $3 million investment in Internet Printing Company (IPC) and received 2 million shares of series A convertible preferred stock. Each of these shares is convertible into two shares of IPC common stock. Three years later, High-Tech III participated in a second round of financing for IPC and received 3 million shares of series B convertible preferred stock in exchange for a $15 million investment. Each series B share is convertible into one share of IPC common stock. Internet Printing Company is now planning an IPO, but prior to this announcement; the company will convert all its outstanding convertible preferred shares into common stock. After conversion, IPC will have 20 million common shares outstanding and will create another 2 million common shares for sale in the IPO. The underwriter handling IPC’s initial offering expects to sell these new shares for $45 each but has prohibited existing shareholders from selling any of their stock in the IPO. The underwriter will keep 7 percent of the offer as an underwriting discount. Assume that the IPO is successful and that IPC shares sell for $60 each immediately after the offering.

a. Calculate the total number of IPC common shares that High-Tech III will own after the IPO. What fraction of IPC’s total outstanding common stock does this represent?

b. Using the post-issue market price for IPC shares, calculate the (unrealized) compound annual return that High-Tech III earned on its original and subsequent investments in IPC stock.

c. Now assume that the second-round IPC financing had been made under much less favorable conditions and that High-Tech III paid only $1 million, instead of $15 million, for the 3 million series B shares. Assuming that all the other features of IPC’s initial offering described above hold true, calculate the (unrealized) compound annual return High-Tech III earned on this second investment in IPC stock.