Private Equity investors often require internal rates of return of more that 25% on the investments...

Private Equity investors often require internal rates of return of more that 25% on the investments they make. 1.How are these required rates of return justified? 2.Explain how the practice of demanding a high risk premium is inconsistent with using expected cash flow forecasts that include a realistic view of the possible downside of the investment to value a business.

Expert Solution

Answers

Ans 1)

Rate of return of 25% is considered extremely optimistic and these are only be demanded when there is a higher risk associated with the overall market and there will always be a higher risk free rate than the market premium would also be higher and if it is a higher beta, then such higher expected return is acceptable.

Ans 2)

Practice of demanding a high risk premium is inconsistent with using expected cash flow forecast because there would always be a irregular cash flows to the overall business and the demand of risk premium is only justified when there would be a very high risk free rate and there would be element in the business that it will go insolvent or there is junk rated business so risk premium should always be expected in a certain range which is justified,and it should not be expected a very high rate because those higher rate of return can not be fulfilled by the market always, because there are always downside which are related to the companies as business is not hedged with systematic risk.

ekkarill92 answered 2 years ago

An institutional investor has 45% of their assets in private investments – private equity and private...

An institutional investor has 45% of their assets in private investments – private equity and private debt. These investments do not trade daily and do not have daily pricing. (Buying and selling these investments is somewhat difficult.) This allocation has allowed them to achieve top performance over the past decade. How is this a challenge to managing their rebalance policy if there is a substantial recession? How could this help or hurt them?

Question 1 Risk and Return (TOTAL: 25 MARKS) 1.1 Investors often use a method called the...

Question 1 Risk and Return (TOTAL: 25 MARKS) 1.1 Investors often use a method called the capital asset pricing method (CAPM) to measure the required rate of return. a) Define the capital asset pricing method b) Explain how CAPM is useful for measuring the required rate of return 1.2 Using an example, discuss how diversification of investments affects the riskiness and expected rate of return of a portfolio. 1.3 Explain how COVID-19 impacts the profitability, liquidity, and cash flow projections...

Question 1 Risk and Return (TOTAL: 25 MARKS) 1.1 Investors often use a method called the...

Question 1 Risk and Return (TOTAL: 25 MARKS) 1.1 Investors often use a method called the capital asset pricing method (CAPM) to measure the required rate of return. a) Define the capital asset pricing method b) Explain how CAPM is useful for measuring the required rate of return 1.2 Using an example, discuss how diversification of investments affects the riskiness and expected rate of return of a portfolio. 1.3 Explain how COVID-19 impacts the profitability, liquidity, and cash flow projections...

How can investors in venture capital increase the return potential of their investments? Discuss whether investors...

How can investors in venture capital increase the return potential of their investments? Discuss whether investors should contribute funds to relatively inexperienced partnerships . Briefly describe the performance of distressed securities in the last 5 years (1 mark). Discuss two factors that may motivate a distressed investor . Discuss two regulatory concerns that may be faced by a distressed investor .

A private equity firm is evaluating two alternative investments. Although the returns are random, each investments...

A private equity firm is evaluating two alternative investments. Although the returns are random, each investments return can be described using normal distribution. The first investment has a mean return of $2,250,000 with a standard deviation of $125,000. The second investment has a mean return of $2,525,000 with a standard deviation of $500.000. B). How likely is it that the Second investment will return $2,100,000 or less? The probability is _______ C). If the firm would like to limit the...

The stock price of Alps Co. is $67. Investors require a return of 10.5 percent on...

The stock price of Alps Co. is $67. Investors require a return of 10.5 percent on similar stocks. If the company plans to pay a dividend of $4.25 next year, what growth rate is expected for the company’s stock price? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

If investors require a 20% return on CO stock, what will the price be in 5 years?

CO Corp just paid a dividend (today) of $1.00 per share on its stock. The dividends are expected to grow at a constant 10% per year indefinitely. If investors require a 20% return on CO stock, what will the price be in 5 years? (5 years from today) Please put your answer on the blank line on the answer sheet. Please record your answer in dollars and cents (like I did for the dividend of $1.00)

A stock's current price is $56. Investors require a 14% rate of return and dividends are...

A stock's current price is $56. Investors require a 14% rate of return and dividends are expected to grow at 2% indefinitely. What is the expected price of the stock next year? A firm is not expected to pay a dividend for the next three years. If the expected share price of the firm in three years is $54 and investors require a 10% rate of return, what is the expected share price today?

Investors require a 10.80% rate of return on Levine Company'sstock. What is its value if...

Investors require a 10.80% rate of return on Levine Company's stock. What is its value if the previous dividend was $1.30 and investors expect dividends to grow at a constant annual rate of –6.10%?

Investors require a 15% rate of return on Levine company’s stock (that is, ????= 15%). (1)...

Investors require a 15% rate of return on Levine company’s stock (that is, ????= 15%). (1) What is its value if the previous dividend (??0 ) was $2, and investors expect dividends to grow at a constant rate of (ⅰ) -5%, (ⅱ) 0%, or (ⅲ) 5%? (2) Using data from part (1) (??0=$2), what would the Gordon (constant growth) model value be if the required rate of return was 15% and the expected growth rate was 20%? Is this a...

Question

Private Equity investors often require internal rates of return of more that 25% on the investments...

Solutions

Expert Solution

Related Solutions

An institutional investor has 45% of their assets in private investments – private equity and private...

Question 1 Risk and Return (TOTAL: 25 MARKS) 1.1 Investors often use a method called the...

Question 1 Risk and Return (TOTAL: 25 MARKS) 1.1 Investors often use a method called the...

How can investors in venture capital increase the return potential of their investments? Discuss whether investors...

A private equity firm is evaluating two alternative investments. Although the returns are random, each investments...

The stock price of Alps Co. is $67. Investors require a return of 10.5 percent on...

If investors require a 20% return on CO stock, what will the price be in 5 years?

A stock's current price is $56. Investors require a 14% rate of return and dividends are...

Investors require a 10.80% rate of return on Levine Company'sstock. What is its value if...

Investors require a 15% rate of return on Levine company’s stock (that is, ????= 15%). (1)...