TTMARHedge Fund has a 1.5 and 30 fee arrangement, with no hurdle rate and an NAV of $200 million at the start of the year. At the end of the year, before fees, the NAV is $253 million. Assuming that management fees are computed on start-of-year NAVs and are distributed annually, find the annual manage-ment fee, the incentive fee, and the ending NAV after fees, assuming no redemp-tions or subscriptions. 

 

Consider a $1 billion hedge fund with a 20% incentive fee at the start of a new incentive fee computation period. If the hedge fund computes incentive fees annually and begins the year very near its high-water mark, what would be the value of the incentive fee over the next year for annual asset volatilities of 10%, 20%, and 30% using the at-the-money incentive fee approximation formula? 

 

Shares of closed-end fund ABC were selling at a premium of 10% and then fell to $44 per share while ABC's net asset value held constant at $50 per share. What were the previous market price, subsequent discount, NAV-based return, and market-price return for ABC? 

 

4. A convertible preferred stock with a par or face value of $100 per share is convertible into four shares of common stock. What is the conversion ratio, and what is the conversion price? What would be the conversion ratio if the conversion price were $20? 

 

5. A VC fund manager raises $100 million in committed capital for his VC fund. The management fee is 2.5%. To date, only $50 million of the raised capital has been called and invested in start-ups. What would be the annual manage-ment fee? 

 

6. Consider a publicly traded firm that is viewed by a private equity firm as a potential target, since it is failing to use its potential to generate earnings. The company has equity with a market value of $500 million and debt with a face value of $100 million. The company is currently generating earnings before interest, taxes, depreciation, and amortization (EBITDA) of $80 million, which represents the free cash flow from operations that is available for the owners and debtors of the company. This equates to a 13.3% before-tax return on assets for the company's shareholders and debt holders. An LBO fund uses $700 million to purchase the equity of the company and pay off the outstanding debt. The debt is paid off at a face value of $100 million, while the remaining $600 million is offered to the equity holders to entice them to tender their shares to the LBO fund (i.e., a 20% premium is offered over the current market value). 

1) Returning to the previous example, suppose that all other facts remain the same except that the discount rate used at the end of seven years is 15%.

2) Returning to the original example, suppose that all other facts remain the same except that the investment requires eight years to exit. 

3) Returning to the original example, suppose that all other facts remain the same except that the $120 million cash flow estimate given is a year 7 cash flow that is anticipated to grow by year 8.