what the hell CFAI, 150 pages of readings and all we get are 12 PE questions? booo.
The private equity firm “Nova crushes Duke” is considering a $17 million investment in Big East Rules. Big East’s owners firmly believe that with Nova’s investment they could develop their “wonder” drug and sell the firm in six years for $120 million. Given the project’s risk, Nova believes a discount rate of 30% is reasonable. The pre-money valuation (PRE) and Villanova’s fractional ownership, respectively, are closest to (in millions): PRE Fractional ownership A) $7.86 0.68 B) $24.86 0.68 C) $7.86 0.14
120 / (1.3^6) = 24.86 POST INV = 17 PRE - 7.86 Percent ownership = 17/24.86 = 68% A
ahahahahha
B… 120M/1.30^6 = 24,865,312… 1 million shares 24.86 a share 17M/24 = 68% share
cfadreams - pre money eval was asked…
It’s too bad I wasn’t American, or else I would follow NCAA.
POST = 24.86114532 INV = 17 PRE = 7.86114532 PFO = 0.68379794177 A
D’oh…thanks for pointing that out… I only responded because i love the big east and thought the question was great… Stupid mistakes i cant afford on exam day or else I will “happily fail the exam”
I found all of the Venture capital problems (pre money and post money valuation) to be very intuitive. You dont even have to memorize any equation for post and pre money valuation problems except 1. if q is the probability of failure for any given year, then the risk adjusted discount rate w = (1+r)/(1-q) where r = discount rate thats it.
A is right but you get HUGE points for loving the big east in my book. Note i clearly changed the names but p&h was nova and the other one was the co being invested in Step 1: The exit value must first be discounted at the appropriate discount rate to its present value to arrive at the post-money (POST) valuation (all dollar figures in millions): POST = ($120) / (1.30)6 = $24.86 million. Step 2: The pre-money valuation is Eizak’s current value without P&H’s investment: PRE = $24.86 million − $17 million = $7.86 million. Step 3: P&H’s fractional ownership is the value of its investment as a fraction of Eizak’s POST valuation: f = INV / POST = $17 / $24.86 = 0.68.
I looked only at the numbers… oh maan … I am going to crash and burn …
Round 2 because you guys have studied PE so much… you know it’ll be on real estate: Discontinuous pricing, lack of rental data, and the fact that gross rents may distort appraised values are all limitations of which of the following valuation techniques? A) The direct income capitalization approach. B) The market extraction technique. C) The gross income multiplier approach.
B) The market extraction technique.
C?
I won’t keep you gents waiting for other guessers: Your answer: B was incorrect. The correct answer was C) The gross income multiplier approach. The direct income capitalization approach does not use gross rents. The market extraction technique is not a valuation technique per se. It is a technique used to determine capitalization rates for the direct income capitalization valuation approach.
GIM - C?
i start Alt. tonight. PE seems intuitive…or maybe that’s coz i’ve had exposure. woot!
Round 3 because you guys have studied PE so much… you know it’ll be on time series: Q3. Breusch-Pagan t stat = 17.7 Durban-Watson = 1.8 The p-value of the Breusch-Pagan test is 0.0005. the lower and upper limits for the Durban-Watson test are 0.40 and 1.90, respectively. Based on this data and the information in the above table, there is evidence of: A. only Serial Correlation B. Both Serial Correlation & Heteroskedasticity C. only Heteroskedasticity
only serial correlation. p_value of breusch pagan is 0.0005 … so too small to be significant. 1.8 is between 0.4 and 1.9 DL and DU --> so serial correlation (positive).