BADM 634 INVESTING IN NEW VENTURES

MIDTERM (Covers materials from chapter 1 through 6)

QUESTION 1. Discuss the background of founding the first Venture capital company in USA. How much

was the rate of return for the first year?

Question 2. What is Venture Capital? What do Venture Capitalists do?

Question 3. Suppose that a $200M VC fund has a management fee of 2.5 percent per year for the first

five years, with a reduction of 0.25 percent (25 basis points) in each year thereafter. All fees are paid on

committed capital, and the fund has a ten-year life. What are the lifetime fees and investment capital for

this fund?

Question 4. (This is a little bit tricky.) Suppose that a $1000M VC fund has fees of 2.0 percent per year in

all years, with these fees paid on committed capital in the first five years and on net invested capital for

years 6 through 10. You can assume the fund is fully invested by the beginning of year 6, and then

realizes 20 percent of its investment capital in each of the following five years. What are the lifetime fees

and investment capital for this fund? (Make assumptions for any information that you think is still

missing from the problem.)

Question 5. True, False, or Uncertain:

5.a) Private equity is a substitute for public equity (i.e., if a country has a relatively active public-

equity market, then private-equity activity will be relatively low). Please attach any work in

support of your reasoning.

.

5.b) True, False, or Uncertain: Countries with common-law based legal systems have relatively

weak protections against investor expropriation. Please attach any work in support of your

reasoning.

Question 6. What is CAPM? What is ‘Alpha’ and ‘Beta’ in CAPM?

Question. You are considering an investment decision where you need to investment today (Year

zero = Y 0 ) $2m and over next five years, your expected cash flow is as follows:

Y 1 = $591000

Y 1 = 691000

Y 1 = 791000

Y 1 = 491000

Y 1 = 391000

Your friend offered you a guaranteed rate of return as 15%, so use this rate as the discount rate

when calculating NPV of this project. Will you invest in the project? What is the IRR of the

project?