In this workout, we're being asked to calculate the gross distributable value to management, their IRR and their MOIC or multiple on invested capital. So we really want to see how incentivized management are, how much of a turn they're going to receive, do they feel like they've done a good job? We've got three scenarios. We've got a MOIC of 1.25 as the minimum hurdle, and then 2 and then 3. We've got lots of numbers given to us. We'll come back to them in a minute. But let's have a quick look at some of the value that management will be getting out. And the first one is the gross option value. They've got some options which have turned into shares. If we look at the A column, they've got two shares from their options. Each of those are now worth 139.7. Fantastic. So I can press enter. I can see their options, have given them a value of 285.1. Great. Before I copy it to the right, just going to go and lock that row 20, copy it to the right, and then I can copy it down and copy it down. Let's just check what we're linking to here. There we go. We've got the extra B options multiplied by the diluted equity value per share, and then same in scenario C. So my total gross option value, I summed the three cells above copy to the right management are gonna get lots of value from their options.

But hang on, management had to pay for these options, so we really need to calculate the net return that they're getting. So let's take off the option cost paid by management, and that was 255.1 copy to the right.

And now I can calculate the management net option value. Well, it's worth 285 in option A option. They pay 255. Okay, so they get a return here of 30 from their options.

But we also have a return to management called management role.

If we assume that we're exiting in year 5, and we've owned this target company for 5 years. The management here, they had shares in the target company before those 5 years started. They agreed to roll some of those shares into this new company. The number of shares they got was 2.5 Those 2.5 shares, they're now going to be able to sell them and they're each valued at 139.7. So management role great gives them lots more money.

So the total distributable value to management is the sum of those 2 items above the net option value and the management role. Let's compare that to what management invested at the beginning. The amount that they invested, it's up near the top. It was that management equity role. The worth of those shares at the beginning was 250. I'm going to look onto that so I can copy that to the right. So the multiple on invested capital, we take their exit investment, the amount they're getting out, we divide it by the management investment, the amount they put in.

And we can see here they had a MOIC of 1.52. If I copy it to the right, we can see that number really shooting up. The IRR, it's a very similar calculation I'm going to open a bracket. I'm going to put their exit return divided by their investment. Great. But to calculate the IRR or internal rates of return, I just need to take that to the power of open bracket 1 divided by the number of years of investments. In this case it's been 5 years, and I'll lock onto that.

I close the bracket and subtract 1.

In scenario A, they've got themselves an 8.7% return. So not too bad, but it could have been better if we copy it to the right though into scenario B.

Wow, they've received an annual return of 31.4% over five years, 31, 31, 31 each year getting that return. That's amazing. But if they managed to sell a company for a really high price and we managed to achieve that scenario C High MOIC hurdle, the IRR suddenly jumps to 52.3% or that multiple invested capital is 8.2.

So management are heavily incentivized here to try and do well for the company, try and exit for a really high sale price, and then they will get these very high returns for themselves.