Let's take a look at the returns to the mezzanine stakeholders. The mezzanine return is comprised of two components. The first is the value of the mezzanine loan being repaid, and that loan is growing in value thanks to the PIK interest component. The second component to the mezzanine return is going to be the warrant that was negotiated. And that warrant is a 5% stake in the exit equity value.

So if it's a good deal, the mezzanine stakeholders will have the right to exercise that warrant and be returned 5% of the residual equity value. And, of course, if it's not a good deal, they're not obligated to exercise that warrant. And so they would simply let it expire. So the first thing we're going to do is find the equity value of the warrants. And that is simply going to be based on, again, that 5% times the equity stake in the company. And we only want this to show if it's a positive equity value, because if it's a negative equity value, the warrant would expire and it would not detract from the value of the loan that is to be repaid to the mezzanine stakeholder. So that's going to be in year one, the max of the 5% stake, anchored, times the equity value in that year.

And in the first year, it is in fact negative, because the deal has not had a chance to generate any value for the equity holders. And we will set that against zero. So again, in the first year, we are showing a zero value, because it's a negative equity value. The value of the mezzanine loan is the value of the loan with the PIK accrual. So it's the ending value at the end of that year. And I'm flipping it to be a positive to show that it is in fact a positive cash flow return to the stakeholder. The mezzanine cash flows will then be the sum of those two. And now, here, because I'm going to drive the IRR formula off of this row, I only want there to be value if in fact we have a deal. And the deal, of course, is linked to the exit year. I will say equals if the year that we are in, which is the year count, is equal to the exit year assumption, and I'll anchor that.

Then, I want the sum of these two cash flows.

If not, I want a zero.

And when I copy this to the right, it will show that, in year four, it shows that I have a mezzanine cash flow of 488.9, which is a combination of 5% of the 336.2, that's 16.8 plus the value of the loan being repaid at 472.1. And now I can calculate the IRR, but in order to do that, I have to show the initial investment. And that's going to be equal to, and I'm gonna show this as a negative to show that it is cash being invested equal to the amount of the mezzanine loan, which is the negative 300. And now the IRR will be the IRR of all of these cash flows. And I can create this formula all the way to the end of the forecast. It will basically stop the calculation once it hits the return year. And that shows an IRR of 13%. And what this is saying is that the mezzanine lenders lent at 12% according to the terms of the deal, but through the additional stake in the equity, they were able to bump up their returns to 13% or 100 basis points. That would, in theory be a little bit higher because of the fees that are involved in the mezzanine loans. But, in general, that is what mezzanine lenders are looking to do when they take on an equity stake is to enhance that yield by 1 to 200 basis points.