Q4. With regard to Statement 3 and 4 on terminal value projections of the venture capital and LBO investments, respectively, Athos is:

A)   correct on both statements.

B)   incorrect on Statement 3 since the IRR method is useful in obtaining present value projections but cannot be used as a tool to compute the future expected wealth of a venture capital investor.

C)   incorrect on Statement 4 since the free cash flow method and the sales or earnings multiples are not useful for investments financed to a large extent by debt.

Q5. Based on information in the table above, management fees and carried interest, respectively, in 2007 will be closest to (in $ millions):

         Management Fee        Carried Interest

A)     $0.75                                $8.90

B)     $6.80                                $7.40

C)     $3.50                                $8.30

Q6. Carried interest to the fund’s partners will first be paid out in:

A)   2006.

B)   2008.

C)   2007.

Q7. The fund’s distributed to paid in capital (DPI) and residual value to paid in capital (RVPI) multiples, respectively, for 2008 will be closest to:

                  DPI                               RVPI

A)       0.30                               1.43

B)       0.64                              1.02

C)       3.00                              1.43

The ratio of NAV after distributions to paid-in capital is $511.1/$500 = 1.022 (Study Session 13, LOS 48.h,i)

Q8. Regarding the potential acquisition targets discussed by Athos and Brie, the venture capital firm’s discount rate adjusted for failure, and the LBO company’s equity beta, respectively, are closest to:

         Adjusted discount rate                LBO's equity beta

A)       92.31%                                         1.80

B)      71.43%                                          1.35

C)      71.43%                                              0.45

Q9. The pair of terms that correctly identifies the method of profit distribution between limited partners (LPs) and general partners (GPs), and the allocation of equity between shareholders and management of a portfolio company, respectively, is:

           Method of profit distribution               Equity allocation

A)           Ratchet                                    Carried interest

B)        Carried interest                           Distribution waterfall

C)       Distribution waterfall                Ratchet

Q10. The party in a private equity fund that has unlimited liability for the firm’s debts, and this party’s share in fund profits, respectively, is referred to as:

              Unlimited liability            Share in fund profits

A)     Limited partner              Distribution waterfall

B)        Manager                   Management fees

C)     General partner             Carried interest

Q11. RDO is a private equity fund with $50 million in committed capital and an investment in three portfolio companies totalling $30 million. The fund earned a healthy profit of $5 million after its first year on the sale of one of the companies but suffered a $2 million loss after its second year on the sale of the second company. The fund pays carried interest of 20% on a total return basis using committed capital and also has a clawback provision.
The clawback the general partner must pay at the end of the second year is:

A)   $400,000.

B)   $600,000.

C)   $0.