# Entrepreneurial Finance Assignment 1

Problem 4.4.

Introduction

The CAPM model can be used to analyze the performance of a portfolio of investments. The model should be calculated by comparing the return of assets (Ri) minus the return of risk-free cash (Rf) of the fund against those numbers of a known index with historical data (Rm). With least-squares regression, a straight line has to be drawn through the points to finish the model. Alpha represents the point where the graph starts and beta the slope of the regression line. Alpha is the number that represents the fact of how well the fund did against the CAPM model. A positive alpha means the fund did better than CAPM predicted and negative the opposite. R² represents the ‘fit’ of the

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It is supposed that the following four funds—all with committed capital of $100M—have combined to form a syndicate to invest in Newco:

(I) ABC Fund, management fees of 2.5 percent per year of committed capital for all 10 years.

(II) DEF Fund, management fees of 2.5 percent per year for the first 5 years, then decreasing by 25 basis points per year in each year from 6 to 10. All fees calculated based on committed capital.

(III) UVW fund, management fees of 2.0 percent per year. During the first 5 years of the fund, these fees are charged based on committed capital. Beginning in year 6, the fees are charged based on net invested capital. UVW expects to be fully invested by the beginning of year 6, and also to have realized 25 percent of all investment capital by this time. In each of the subsequent 5 years, UVW expects to realize about 15 percent of all investment capital.

(IV) XYZ fund, management fees of 2.0 percent per year of committed capital for all 10 years. The XYZ fund expects to make all exits very quickly and to reinvest capital back into new investments. The total amount of investments is limited to $100M.

(a)Suppose that each fund in the syndicate invests $5M in Newco. What is the LP cost for each fund?

The LP (limited partner) cost of an investment represents the gross cost (including fees) of an investment of an investment to the LP’s of the