Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 23, Problem 4P
Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the 10- year life of the fund, 2% of this committed capital will be used to pay GSB’s management fee. As is typical in the venture capital industry, GSB will only invest $80 million (committed capital less lifetime management fees). At the end of 10 years, the investments made by the fund are worth $400 million. GSB also charges 20% carried interest on the profits of the fund (net of management fees).
- a. Assuming the $80 million in invested capital is invested immediately and all proceeds were received at the end of 10 years, what is the
IRR of the investments GSB partners made? That is, compute IRR ignoring all management fees. - b. Of course, as an investor, or limited partner, you are more interested in your own IRR-that is, the IRR including all fees paid. Assuming that investors gave GSB partners the full $100 million up front, what is the IRR for GSB’s limited partners (that is, the IRR net of all fees paid).
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
A certain company must raise SR 220 million to fund its next project. 25% of the funds will come from
a bank loan, which is charging 6.5%. 45% of the funds will come from issuing corporate bonds, at a
rate of 4.5%. The remaining funds will be raised by selling preferred stock, with a promise of dividend
payments of 7.8%.
WACC:
The Seattle corporation has been presented with an investment opportunity that will yield cash flow of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?
Mary, Inc. is considering a project for next year, which will cost $5 million. Mary plans to use the following combination of debt and equity to finance the investment. Issue $1.5 million of 10-year bonds at a price of 101, with a coupon/contract rate of 4%, and flotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings. The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The beta coefficient for Mary, Inc. is estimated to be .70. Mary is subject to an effective corporate income tax rate of 30 percent. Compute Mary's expected rate of return using the Capital Asset Pricing Model (CAPM). Please show calculations.
Chapter 23 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 23.1 - Prob. 1CCCh. 23.1 - Prob. 2CCCh. 23.2 - Prob. 1CCCh. 23.2 - Prob. 2CCCh. 23.3 - List and discuss four characteristics about IPOs...Ch. 23.3 - Prob. 2CCCh. 23.4 - Prob. 1CCCh. 23.4 - What is the average stock price reaction to an...Ch. 23 - Prob. 1PCh. 23 - What are the advantages and the disadvantages to a...
Ch. 23 - Prob. 3PCh. 23 - Suppose venture capital firm GSB partners raised...Ch. 23 - Prob. 5PCh. 23 - Prob. 6PCh. 23 - Prob. 7PCh. 23 - Prob. 8PCh. 23 - Prob. 9PCh. 23 - Prob. 10PCh. 23 - Prob. 11PCh. 23 - Prob. 12PCh. 23 - What is IPO underpricing? If you decide to try to...Ch. 23 - Prob. 14PCh. 23 - Prob. 15PCh. 23 - Prob. 16PCh. 23 - Prob. 17PCh. 23 - Prob. 18PCh. 23 - Prob. 19PCh. 23 - Prob. 20P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The white oak company's annual sales are 219 million van average of 9 days elapses between when a customer malls its payment and when the funds become usable by the firm. a. If the company could speed up the collection of funds by 2 days, what would be the increase in the firm’s average cash balance? b. Assuming that these additional funds can be invested in the marketable securities that yield 7 percent per year, determine the increase in white Oak’s annual (pretax) earningsarrow_forwardSisters Ltd is planning to invest in a capital project, which will generate cash inflows of $15,000 in the 1st year, $22,000 in the 2nd year, and $25,000 in the 3rd year. The project ends after year 3. The company’s current debt to equity ratio is 0.8 with the cost of debt of 8% p.a. compounded annually. Sisters Ltd stock has a beta of 1.2. The risk-free rate is3% p.a. compounded annually and the expected market return is 12% p.a. compounded annually. The cost of equity of 10.5% p.a. compounded annually. The new debt to equity ratiois 1. What is the total present value of the project’s cash inflows?arrow_forwardA private equity firm is aiming to buy a company. Under private equity ownership, the company will earn an annual cash flow of $10mln up to infinity. The first cash flow is expected next year. The estimated IRR is 13%. What is the investment outlay (in millions) closest to?arrow_forward
- BHS Incorporated determines that sales will rise from $400,000 to $550,000 next year. Spontaneous assets are 60% of sales, and spontaneous liabilities are 30% of sales. BHS has an 8% profit margin and a 40% dividend payout ratio. What is the level of required new funds?arrow_forwardStrategic Systems Inc. expects to have net income of P800,000 during the next year. Its target, and current, capital structure is 40 percent debt and 60 percent common equity. The Director of Capital Budgeting has determined that the optimal capital budget for next year is P1.2 million. If Strategic uses the residual dividend model to determine next year's dividend payout, the expected dividend payout ratio would be %arrow_forwardStrategic system Inc. expects to have net income of 800000 during the next year. Its target and current capital structure are 40 percent debt and 60 percent equity. The director of capital budgeting has determined that the optimal capital budget for next year is 1.2 million. If strategic uses residual dividend model to determine next year dividend payout. What is the expected payout ratio?arrow_forward
- Assume you are the CIO (chief investment officer) for Dragon Industries, LLP (LLP stands for Limited Liability Partnership). There is $1,000,000 set aside in a reserve fund to purchase new equipment. If $300,000 is invested at 30%, $200,000 at 25%, and the remaining $500,000 at 20% per year, what is the overall rate of return on the entire $1,000,000?arrow_forwardThe Investments Fund sells Class A shares with a front-end load of 4.5% and Class B shares with 12b-1 fees of 1% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolo (untill the fifth year). Assume that you have $1,000 to invest and the portfolio rate of return net of operating expenses is 15% annually. a-1. If you invest in each fund and sell after 4 years, how much will you receive from each sale? (Round your answers to 2 decimal places.) Amounts Class A Class B a-2. ass B shares better for you? Class A O Class B b-1. If you invest in each fund and sell after 15 years, how much will you receive from each sale? (Round your answers to 2 decimal places.) Amounts Class A Class B b-2. Are Class A or Class B shares the better choice for you? O Class A O Class Barrow_forwardYou invest $10,000 today in the S&P 500 and expect to have a 8.25% return. After the Iinitial $10,000 investment you invest an additional $1000 per year but this $1000 will increase by 5% each year. Using excel show account balances from years 0 to 350 and assume this investment is put into a triple-levered Nasdaq index fund instead of the S&P 500 and the annual returns are 13.4%arrow_forward
- Jacob Inc. is considering a capital expansion project. The initial investment of undertaking this project is $188,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $28,500, $38,780, $58,960, $77,680 and $95,380 respectively. Jacob has a weighted average cost of capital of 18%. What is the modified internal rate of return if Jacob undertakes this project. Assuming that the positive cash inflow from undertaking this project will be reinvested at the weighted average cost of capital.arrow_forwardRieger International is evaluating the feasibility of investing $113,000 in a piece of equipment that has a 5-yearlife. The firm has estimated the cash inflows associated with the proposal as shown in the following tableYear Cash inflows1 40,0002 40,0003 25,0004 30,0005 40,000The firm has a cost of capital of 8%. a. Calculate the payback period for the proposed investment. b. Calculate the discounted payback period for the proposed investment. c. Calculate the net present value (NPV) for the proposed investment. d. Calculate the probability index for the proposed investment. e. Calculate the internal rate of return (IRR) for the proposed investment. f. Calculate the modified internal rate of return (MIRR) for the proposed investment. g. Evaluate the acceptability of the proposed investment using NPV, IRR, and MIRR.arrow_forwardThere are two LBO funds set up for ten years with $1 billion committed capital each. Fund A has the following characteristics: A constant management fee of 2% and carried interest of 80-20. Fund B is as follows: A decreasing management fee (2% in the first 4 years, 1% for the rest), preferred return of 8% per year, 100% catch-up, and carried interest of 70-30. 1. What is the investment capital of fund A and B, respectively? 2. Suppose all investment capitals are invested at t=0 and both funds have the same internal rate of return (per year) of 12% on investment capital. The LP maximizes payoff in year 10. Which fund is better for the LP and how much more can the LP get by choosing the better fund? 3. What is the total payoff (including all fees) for the GP of fund A and B, respectively?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License