Question: Below is the proposal of a company seeking capital from a venture capital firm:
Investment (INV) = $5 million
Terminal value (VT) = $20 million
Time (t) = 4 years
Discount rate (r) = 20%
Shares retained (Se) = 500
IRR = 25%
The venture capital firm decides that it is best that the company receive $3 million up front and then $2 million in the second year.
What is the pre-money valuation of the first financing period?
Select an Answer: $6,121,086 $4,014,321 $5,256,173 $3,143,000
Rationale:
First, compute POST2 = VT / (1 + R2), where R2 is the compounded discounted factor from the beginning of the projection to the second financing; in this case it is 1.202 − 1 = 0.44.
POST2 = $20,000,000 / 1.44
= $13,888,889
Next, find PRE2 = POST2 − INV2
= $13,888,889 − $2,000,000
= $11,888,889
Now find POST1 = PRE2 / (1 + R1), where R1 is the compounded discount factor from the beginning of the projection to the second financing, in this case it is 1.202 = 0.44.
POST1 = $11,888,889 / 1.202
= $8,256,173
Finally, compute PRE1 = POST1 − INV1
= $8,256,173 − $3,000,000
= $5,256,173
2024-04-24
Question: The dividend yield on the market index is 3.54%, the long-term expected annual growth rate is 2.78%, and the current government long bond yield is 4.23%.
To reduce this bias from using the historical approach, find the equity risk premium using the Gordon growth model approach.
Select an Answer: 2.09% 4.99% 10.55% 3.47%
Rationale:
The GGM formula is as follows:
DY + g − LB
Where:
DY = annual dividend yield on the index based on year-ahead forecasted dividends g = consensus long-term earnings annual growth rate LB = current long-term government bond yield per year
3.54% + 2.78% − 4.23% = 2.09%
2024-04-23
Question: The following are details on TQD Private Equity Investors:
Vintage: 2005
Fund size (millions): 500
Management fees: 2%
Carried interest: 20%
Hurdle rate: 10%
Term: 2015
The GP will only receive carried interest according to the total return method after the fund has returned all committed capital to the LPs.
Below are two tables. The first provides year-by-year data on capital called, operating results, and distributions for the firm while the second tracks various components of the firm's performance.
2005
2006
2007
2008
2009
Called down
300
150
25
20
5
Realized results
0
0
50
60
80
Unrealized results
-40
60
30
-10
75
Distributions
0
0
110
120
150
2005
2006
2007
2008
2009
Called down
300
150
25
20
5
Paid in Capital
300
450
475
495
500
Mgmt fees
6
9
9.5
9.9
10
Operating results
-40
60
80
50
155
NAV before distributions
254
455
550.5
610.6
760.6
Carried interest
x
x
x
x
x
Distributions
0
0
110
120
150
NAV after distributions
254
455
430.4
478.58
580.6
Using the above data, what is the value of the first eligible interest payment that the GP can receive?
Select an Answer: $30 million $12.02 million $10.1 million $9.5 million
Rationale:
The GP can only start receiving carried interest when the LPs receive all of their committed capital of $500 million. Therefore, the GP is eligible to receive carried interest in 2007 where the NAV before distributions is $550.5 million.
To find the carried interest, subtract the committed capital from the NAV and multiply the difference by the carried interest rate of 20%.
In 2007, the carried interest is:
($550.50 − $500) × (0.20)
= $10.1 million
2024-04-22
Question: The following are details on TQD Private Equity Investors:
Vintage: 2005
Fund size (millions): 500
Management fees: 2%
Carried interest: 20%
Hurdle rate: 10%
Term: 2015
The GP will only receive carried interest according to the total return method after the fund has returned all committed capital to the LPs.
Below are two tables. The first provides year-by-year data on capital called, operating results, and distributions for the firm while the second tracks various components of the firm's performance.
2005
2006
2007
2008
2009
Called down
300
150
25
20
5
Realized results
0
0
50
60
80
Unrealized results
-40
60
30
-10
75
Distributions
0
0
110
120
150
2005
2006
2007
2008
2009
Called down
300
150
25
20
5
Paid in Capital
300
450
475
495
500
Mgmt fees
6
9
9.5
9.9
10
Operating results
-40
60
80
50
155
NAV before distributions
254
455
550.5
610.6
760.6
Carried interest
0
0
10.1
12.02
30
Distributions
0
0
110
120
150
NAV after distributions
254
455
430.4
478.58
580.6
Using the above data, find the gross IRR.
Select an Answer: -12.63% 8.42% -5.43% 9.54%
Rationale:
To find the gross IRR, it can be helpful to construct a table similar to the one below:
EOY
CFs for Gross IRR
2004
-300
2005
-190
2006
35
2007
60
2008
45
2009
155
IRR
-12.63%
To start, our first capital contribution of $300 million is given at the end of 2004 which gives us a -$300 million cash flow.
For the end of 2005 cash flow, we take the called down contribution of $150 million (see 2006) plus the operating loss of $40 million in 2005 to give us -$190 million.
The rest of the years would follow the same format. Then using a financial calculator, we find the Gross IRR to be -12.63%.
2024-04-21
Question: When using the historical approach to find data for the equity risk premium, what should an analyst be concerned about regarding the data?
I. Survivorship bias
II. Disproportionate representation from certain economic cycles
III. Appropriate years used for projections
Select an Answer: I and II II and III I, II, and III I and III
Rationale:
When using historical data for equity risk premium, the analyst should be aware of the potential for biases in the data. In particular, survivorship bias (by not accounting for delisted stocks) may result in higher equity risk premium estimates.
Another potential problem is the years from which the data was culled - are the years used appropriate for use in projections? Do they contain disproportionate representation from certain types of economic cycles? The analyst should ensure data is free of bias, or make appropriate adjustments.
