Suppose that 5 out of 10 investments made by a venture capital (VC) fund result in total
loss, meaning that the return on each of them is -100%. And of the 10 investments, 3
break even, earning a 0% return. Assume that the fund managers require a 40%
compound annual return on their investment and the risk-free rate is 6%.

a) What rate of return must the fund earn on the 2 most successful deals to achieve a
portfolio return equal to expectations?
b) Assume that an entrepreneur is seeking â?¬10 million from this fund which thinks
that the company is likely to be ready to go public in five years. At that time, the
company is expected to have a value of â?¬450 million. What fraction of the
company will the fund request in exchange for its investment? Assume that there
will be no need for additional equity financing before the IPO.

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Suppose that 5 out of 10 investments made by a venture capital (VC) fund result in total loss, meaning that the return on each of them is -100%. And of the 10 investments, 3 break even, earning a 0% return. Assume that the fund managers require a 40% compound annual return on their investment and the risk-free rate is 6%.

a) What rate of ...

Solution Summary

This post shows how to calculate rate of return and the fraction of the company

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