Consider a 1,000,000 fund with a 10% annual preferred return and a negotiated 70/30 split between the money and the sponsor. Suppose the fund earns a 15% return. The Frankin Fund has contributed a. Frankin Fund = 90,000; sponsor = 60,000 b. Frankin Fund = 94,500; sponsor = $55,500 c. Frankin Fund = $100,000; sponsor = $50,000 d. Frankin Fund = $150,000; sponsor = $0 I know this question is easy. Uppermark is not working for me to learn the formula though.
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which book/page is this on…
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Reading 18, LO 3-6 I think.
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The fund earned 15% = $150,000 Subtract out the 10% Pref Ret = ($150,000 - $15,000) = $135,000 Franklin Fund’s Share is = $135,000*.70 = $94,500 Sponsor’s Share is = ($135,000*.30) + $15,000 Pref Ret = $55,500
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The above solution came from an alternative waterfall structure: Sponsor: $100,000 x 0.7 + 50,000 x 0.7 x 0.7 = 94,500 Investor: $100,000 x 0.3 + (50,000 x 0.3 + 50,000 x 0.7 x 0.3) = 55,500 The question doesn’t provide enough information. For example, in the common waterfall structure, other than the split of 30/70% between fund sponsor and money, it also requires original % of equity contribution between outside investor (limited partners) and sponsor (general partners). Based on the Schweser material, the preferred return is the hurdle rate needed to be exceeded in order for sponsor to entitle the extra 30% from the $150,000 before the rest ($105,000 - 70% of profit) split between investors and sponsor based on the % of original capital contributed. In the question above, it doesn’t give this information. So it is assumed to be 70/30% also. The sponsor received [$150,000 x 0.3 + $150,000 x 0.7 x 0.3] = 76,500 and the investor received [$150,000 x (1-0.3) x 0.7] = 73,500. Problem with this question: 1. no % of original equity contribution 2. 30/70 is very high for the fund sponsor 3. waterfall structure is not given
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