Question

A VC investor (VC) enters a company at the P0/E0-multiple (P/E=price/Earnings per share, at time 0) of 10 when E0=EPS0 is 0,75€/share. Earnings are projected to grow by 10% p.a. and 70% of EPS are re-invested annually. VC expects to be able to exit at P5/E5-multiple of 15. What would be the annual IRR for VC?

a. 16,8% b. 12,4% c. 23,4% d. 15,5%

Answer 1

The Values of EPS, Dividends, Initial price paid and final price received are shown in the table below along with the cashflows to the VC

Year	0	1	2	3	4	5
EPS (growing by 10%)	0.75	0.825	0.9075	0.99825	1.098075	1.207883
Dividend@30%	0.225	0.2475	0.27225	0.299475	0.329423	0.362365
Initial price paid (10 times EPS in year 0	-7.5
Final price received (15 times EPS in year 5)					18.11824
Cashflows	-7.5	0.2475	0.27225	0.299475	0.329423	18.4806

The IRR to VC (r) is given by

-7.5+0.2475/(1+r)+0.27225/(1+r)^2+0.299475/(1+r)^3+0.329423/(1+r)^4+18.4806/(1+r)^5 = 0

Finding the IRR by Solver , we get r =22.13% (c being the closest option should be correct)