YOYOYO Inc. was founded five years ago using 80% venture capital and 20% equity contributed by Fred and Steve (10% each). The venture capitalist now wants to take the company public. Given the following data, what is the likely amount that the VC firm will gross (before transaction costs)? Justify your response. 

• Will issue 10mm shares - Fred and Steve will receive 1mm each and the other 8mm sold to the public 

• Current year (2019) CF is $650K - Next year (2020) CF expected to be $900K - The CF in 2021 jumps to $1.5mm and subsequent years will grow 5% 

• The expected return of the VC is 40%, but they estimate that the Public offering would result in an 18% E(r). 

• YOYOYO has no debt and is in the 25% tax bracket. 

The actual return on investment for the VC was 70% per year. What was their initial investment?

Answer rating: 100% (QA)

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