Use the Following Information to Answer the Question(s) Below

question 50

Multiple Choice

Use the following information to answer the question(s) below.

Suppose that Galt Ventures, a venture capital firm, raised $250 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay Galt's management fee. As is typical in the venture capital industry, Galt will only invest $200 million (committed capital less lifetime management fees) . At the end of 10 years, the investments made by the fund are worth $800 million. Galt also charges 20% carried interest on the profits of the fund (net of management fees) . Assume that Galt collects the $250 million of committed capital and invests $200 million of it immediately. Also assume that Galt collects all proceeds from its investments at the end of the ten-year life.

-The IRR on the investments made by Galt Ventures is closest to:

• A)9.9%.
• B)12.4%.
• C)14.9%.
• D)15.8%.

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Definitions:

New Securities

Financial instruments recently issued by a corporation or government entity to raise funds from investors.

Cost of Equity

The theoretical payment a company offers to its shareholders as compensation for the risk they assume by investing their funds.

Equity Investors

Individuals or entities that invest money into a company in exchange for ownership shares, hoping to gain returns through future profits or stock appreciation.

Investment

The allocation of resources, such as capital or time, in expectation of future returns, typically in the form of income or profit.