Unscrupulous private equity firm

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You are a partner at an unscrupulous private equity firm. You have a potential acquisition mapped out where you can buy a mid-size enterprise software firm now for $200 million and sell it to Oracle in four years' time for $350 million. Your bonus will be $1 million per percent IRR that you earn on the deal.

Your limited partners (LPs) have lined up to contribute the $200 million. You are considering, however, taking out a two-year bank loan collateralized with the LPs' money (for simplicity assume no interest on the loan). You will buy the target firm with the cash from the loan, pay the loan back in year 3 with the LPs' money, and sell the firm as planned in year 5.

By how much will this plan increase your bonus?

Reference no: EM132007415

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