Private Equity

1. A private equity investor is considering investing in a venture capital firm. The investor values the firm
at $1.5. million following a $300,000 capital investment by the investor. The venture capital firm's pre-
money (PRE) valuation and the investor's proportional ownership, respectively, are:

2. A private equity investor is considering an investment in a venture capital firm, and is looking to
calculate the firm's terminal value. The investor determines that there is equal likelihood of the
following:
a. Expected firm earnings are $2.5 million with a P/E ratio of 8.
b. Expected firm earnings are $3.0 million with a P/E ratio of 10.
The firm's expected terminal value, and the analysis used by the investor, respectively, is:

3. The private equity firm Purcell & Hyams (P&H) is considering a $17 million investment in Eizak
Biotech. Eizak's owners firmly believe that with P&H's investment, they could develop their "wonder"
drug and sell the firm for $120 million in six years. Given the project's risk, P&H believes a discount
rate of 30% is reasonable. The pre-money valuation (PRE) and P&H's fractional ownership,
respectively, are closest to (in millions)

4. A private equity firm is guaranteed to receive 80% of the residual value of a leveraged buyout
investment, with the remaining 20% owing to management. The initial investment is $500 million, and
the deal is financed with 70% debt and 30% equity. The projected multiple is 2.0. The equity
component consists of:
$120 million preference shares.
$25 million private equity firm equity.
$5 million management equity.
At exit in 5 years, the value of debt is $150 million, and preference shares are $300 million. The payoff
multiple for the private equity firm and management, respectively, is closest to:

5. The Initial investment in a private equity transaction of GBP 5,000 MN. The transaction is financed with
50 per cent debt and 50 per cent equity. The GBP 2,500 MN equity investment is further broken into
GBP 2,400 MN of preference shares owned by the private equity fund, GBP 95 MN of equity owned by
the private equity fund and GBP 5 MN of management equity. The preference shares promised a 12%
annual return (paid at exit). Compounded return The Private equity firm equity is promised 95 per cent
of the residual Value of the firm after creditors and preference shares are paid. Management equity
holders are promised the remaining 5 %. The debt of GBP 900 MN is paid during the course of
operation. Assume that the exit value, five years after the investment is 1.6 times the original cost. Find
the payoff and IRR of equity claimants.

6. A PE firm values a deal of GBP 100 MN investment. Its expected exit value is 1.5 times of investment.
and the duration to exit is 4 years. The investment is financed with 70% debt and the remaining equity.
Out of equity, 75% is in the form of preference shares by the PE firm at the rate of 15% p.a. (paid at the
time of exit), 20% in the form of equity shares of the PE firm and the remaining in the form of equity
shares held by the management. Assume that 60% of the debt is paid during the operation. Find the
payoffs and IRR for each claimant (total equity).

7. The entrepreneur founders of Tiara Ltd. believe that in 5 years, they will be able to sell the company for
$60 million. However, they are currently in desperate need of $7 million. A VC firm interested in
investing in Tiara estimates that the discount rate commensurate with the relatively high risk inherent in
the firm is 45%. Given that current shareholders hold 1 million shares and that the venture capital firm
makes an investment of $7 million in the company,
calculate the following:
a. The future wealth required by the VC to attain its desired IRR.
b. Ownership percentage of the VC firm
c. The number of shares that must be issued to the VC firm
d. Stock Price per share
e. Post-money value
f. Pre-money value

8. A venture capital firm is considering investing in a private company involved in generating power
through alternative sources of energy. However, the venture capital firm believes that the founders of
the private company are too optimistic and that the chance of the company failing in any given year is
20%. The discount rate after accounting for systematic risk is 35%. Calculate the adjusted discount rate
that incorporates the company’s probability of failure. (optional )

9. Compute the terminal value estimate for Blue Horizons Pvt. Ltd. given the following scenarios and their
probability of occurrence:

a. The company’s earnings in Year 5 are $13 million and the appropriate exit price-to-earnings multiple is
8. XThe probability of occurrence of this scenario is 65%.
b. The company’s earnings in Year 5 are $6 million and the appropriate exit price-to-earnings multiple is
5. The probability of occurrence of this scenario is 25%.
c. The company fails to achieve its goals and has to liquidate its assets in Year 5 for $5 million. The
probability of occurrence of this scenario is 10%.

10. The Milat Private Equity Fund (Milat) makes a $35 million investment in a promising venture capital
firm. Milat expects the venture capital firm could be sold in four years for $150 million and determines
that the appropriate IRR rate is 40%. The founders of the venture capital firm currently hold 1 million
shares. Milat’s fractional ownership in the firm and the appropriate share price, respectively, is closest
to:

11. Wizplus is a young start-up company, and the founders estimate that they will be able to sell the
company for $80 Million in six years. At this time, they need to be able to raise $10 Million. MGL
venture (a venture capitalist) considers this business risky and wants to apply a discount rate of 30%.
The founder of Wizplus owns 2,000,000 shares. Calculate pre and post money valuation, percentage
ownership of VC and Founders and price per share. ( HW)

12. Wizplus is a young start-up company, and the founders estimate that they will be able to sell the
company for $80 Million in six years. It will raise $6 Million today and another $4 Million 2 years from
now. MGL ventures will be the investor for the first round, and Camelot Capital is a potential investor
for the second round. The discount rate for such a risky start-up is 30%. The founder of Wizplus owns
2,000,000 shares.
calculate the no of shares to be given to the 1st round of funding and calculate the price per share.
calculate the no of shares to be given to the 2nd round of funding and calculate the price per share.

13. Suppose Tiara Ltd. intended to raise $10 Mn. However, doing so in a single round of financing would
not have been feasible as it would have led to a pre-money valuation of -$0.639 Mn. Therefore, the
company decided to undertake an initial financing round worth $7 Million and to follow that up with
another financing round worth $3 Million after 4 years. The entrepreneur founders of Tiara Ltd. believe
that in 5 years, they will be able to sell the company for $60 million at the end of five years. Given that
investors in the second financing round feel that a discount rate of 25% is appropriate, Calculate the
price per share after a second round of financing. Note: For the first round of funding 45% Discount rate.
Founders hold 1,000,000 Shares.

14. The private equity firm Purcell & Hyams (P&H) is considering a $17 million investment in Eizak
Biotech, of which $10 million is invested today and $7 million in four years. Eizak's owners firmly
believe that with P&H's investment, they could develop their "wonder" drug and sell the firm for $120
million in six years. Given the project's risk, P&H believes a discount rate of 50% is appropriate for the
first four years and 30% for the last two years. The fractional ownership for P&H at the time of the
initial investment would be closest to
15. The Nishan private equity fund was established five years ago and currently has a paid-in capital of $300
million and total committed capital of $500 million. The fund paid its first distribution three years ago of
$50 million, $100 million the year after and $200 million last year. The funds distributed to paid-in
capital (DPI) multiple is closest to:

16. The founders of a small technology firm are seeking a $3 million venture capital investment from
prospective investors. The founders project that their firm could be sold for $25 million in 4 years. The
private equity investors deem a discount rate of 25% to be appropriate, but believe there is a 20% chance
of failure in any year. Calculate the adjusted pre-money valuation (PRE) of the technology firm.
(optional)

17. XYZ Private Equity Partners purchases ABC @ 200 million Target Company for 5.0x Forward 12
months (FTM) Forward Multiple EBITDA at the end of Year 0. The debt-to-equity ratio for the LBO
acquisition will be 60:40. Assume the weighted average interest rate on debt is 10%. ABC expects to
reach $100 million in sales revenue with an EBITDA margin of 40% in Year 1. Revenue is expected to
increase by 10% year-over-year (y-o-y). EBITDA margins are expected to remain flat during the term of
the investment. Capital expenditures are expected to equal 15% of sales each year. Operating working
capital is expected to increase by $5 million each year. Depreciation is expected to equal $20 million
each year. Assume a constant tax rate of 40%. XYZ exits the target investment after Year 5 at the exact
EBITDA multiple used at entry (5.0x FTM EBITDA). Assume all debt pay-down occurs at the moment
of sale at the end of Year 5

18. a. Take an entrepreneur who is looking to raise $500,000. Given the size of its market and the industry,
the entrepreneur’s company expects to reach sales of $80 million over the investment horizon. A typical
revenue multiple for a revenue-generating business in its industry is 2×. If the VC firm’s ROI is 20× and
the entrepreneur’s company has no debt, then what is the pre-money valuation? And what is the VC
firm’s fractional ownership?

ROI = Value of Equity at Exit / Post-Money Valuation

b. If the period is 5 years, then it translates into ROI in the IRR term

19. Take an entrepreneur looking to raise $500,000 (Series A). Given the size of its market and the industry,
the entrepreneur’s company expects to reach sales of $80 million over the investment horizon. A typical
revenue multiple for a revenue-generating business in its industry is 2×. If the VC firm’s ROI is 20× and
the entrepreneur’s company has no debt, imagine that one year later, the firm raises $2 million in a Series
B financing at 10× ROI. The exit of all investors is expected to coincide, and Series B investors were
projecting an exit valuation of $300 million. Compute each financing round's ownership structure and the
implied ROI for the Series A and B financings.

20. Mavis Krager, manager of alternative investments for the Richmond Group, is considering the merits of
some private-equity opportunities. Richmond Group likes to invest in private-equity funds but will also
do its own deals if the opportunity is right. One deal on the table is an equity stake in Melton Motors, a
privately held auto dealerships chain. The company is well-run but has had hard times lately because of
credit problems. Krager thinks Melton will solve its financial problems and become profitable again. She
is considering investing $7 million in the company. Also under discussion is The Apple House, a large
privately held orchard in Wisconsin. Richmond Group is considering investing $5 million. To determine
whether the deals are worthwhile, Krager estimates a price for each company based on a post-money
valuation, using a discount rate of 13.7%. The investment firm prefers to focus on companies willing to
 price their stocks at least 20% below their actual value and fund the investments only once. To calculate
her valuations, Richmond uses the data below:
Details Melton Motors The Apple House
Stock Price offered $17 $42
Number of Shares held by current owners 1.5 MN 80,000
The estimated value of the company at the end of the investment period $51 MN $29 MN
Expected length of the investment 5 years 10 years

Just as Krager finishes her assessment of the two private-equity deals, a contact at The Apple House
calls her and says the management team is considering a leveraged buyout (LBO) and wants Richmond
Group to help finance it. Since the firm hasn‘t financed an LBO for years, Krager gets out a book she
has
not read since college to bone up on the valuation equations and reacquaint herself with terms specific
to LBOs. What action should Richmond Group take with regard to:
a. investment would be closest to:

b .  B)
c .  C)
d. Question #2 of 41 Question ID:
434451
e .  A)
f .  B)
g .  C)
h. Question #3 of 41 Question ID:
416054
i .  A)
j .  B)
k .  C)
l.For a given set of underlying real
estate properties, the type of real
estate index that is most likely to
have the lowest standard
m. deviation is a(n):
n. REIT trading price index.
o. appraisal index.
p. repeat sales index.
q. Explanation
r. Appraisal index returns are based
on estimates of property values.
Because estimating values tends to
introduce smoothing into
s. returns data, appraisal index
returns are likely to have lower
standard deviations than index
returns based on repeat sales or
t. trading prices of REIT shares.
u. Historical data on returns of assets
valued with appraisal methods are
to exhibit:
v. downward-biased Sharpe
measures.
w. smoothing.
x. overstated correlations with other
asset classes.
y. Explanation
z. Appraisal methods tend to
produce smoothed return patterns
understate standard deviations of
returns. This causes correlations
aa. with other asset classes to be
understated and Sharpe ratios to be
biased upward.
bb. A British hedge fund has a value of
£100 million at the beginning of the
year. The fund charges a 2%
management fee based on
cc. assets under management at the
end of the year and a 20% incentive
fee with a soft hurdle rate of LIBOR +
2.5%. Incentive fees
dd. are calculated net of management
fees. If the relevant LIBOR rate is
2.5% and the fund's Value at the end
of the year before fees
ee. is £120 million, the net return to
investors