In this workout, we're told that Target Co is being acquired by a PE fund and their management will stay with the company management have shares in the target prior to acquisition. That's a really important point. Some of those shares will be rolled over into the new company. We're asked to calculate the management equity role, PE fund investment, and the percentage ownership for both after the acquisition.

So how much is the PE fund spending? Well, they're going to buy the target company for 10,000, and that's our entry equity valuation.

But interestingly, the current shareholders of that target include management, their management ownership of the targets. Before the acquisition is 10%. They're going to be asked to roll 25% of that 10% into the new business. So they'll own 2.5% of the new business.

The good point here is that they get to exit some of their investment already. Some of that 10% gets to exit, they get the cashflow, but 2.5% will be rolled over into the new business and hopefully it'll explode in value as they work hard and they grow the business. So let's calculate that management equity role. So of the 10%, 25% of it is going to be rolled over, and we're going to multiply that by the 10,000 entry equity valuation.

So management will effectively have 250 of equity going into the new business. The PE fund investments must be the residual. So of the entry equity valuation of 10,000, management provided 250. The PE fund must be providing the rest, which is 9,750. In terms of their relative ownerships, their percentage well management have 250 out of 10,000. That's 2.5%, and the PE fund the rest giving 100% in total. So management will own 2.5% of the new business, and this will incentivize them to work hard.