Deck 17: Alternative Investments

Question 1

Which one of the following is the amount of money that an investor has committed to invest in a fund over its entire life?

A)guaranteed funds
B)guaranteed capital
C)investor's capital
D)committed funds
E)committed capital

Answer 1

E

Question 2

If a hedge fund manager is engaged in trying to profit from global economic changes that have occurred due to government policy changes that affect currencies, interest rates, or commodity prices, which type of strategy is she following?

A)market neutral
B)arbitrage
C)distressed securities
D)macro
E)market timing

Answer 2

D

Question 3

__________ is a term used to indicate that the futures price is higher than the spot price.

A)Backwardation
B)Arbitrage
C)Leverage
D)Contango
E)Margin

Answer 3

D

Question 4

What is the minimum return that a private equity fund manager is required to create prior to receiving any carried interest?

A)opportunity cost
B)hurdle rate
C)interest hurdle
D)hurdle cost
E)opportunity hurdle

Question 5

A __________ memorandum details the characteristics of a proposed private equity fund and is distributed to potential investors.

A)shareholders'
B)prospectus
C)private placement
D)potential investor
E)private investor

Question 6

A provision that ensures performance fees are not earned until the value of a fund exceeds its previous highest level is referred to as which one of the following?

A)unearned income provision
B)low-fee provision
C)water mark
D)high-water mark
E)double-dip provision

Question 7

A hedge fund manager who is trying to find trends in overall global markets, or individual sectors, is engaging in which type of strategy?

A)market neutral
B)arbitrage
C)distressed securities
D)macro
E)market timing

Question 8

Which of the following best describes the 2/20 fee that is used by most hedge funds?

A)The fund pays a 2% management fee and gives 20% of the profits to the investor.
B)The fund pays a 2% management fee and keeps 20% of the profits.
C)The investor pays a 2% management fee and receives 20% of the profits.
D)The investor pays a 20% management fee and receives 80% of the profits.
E)The investor pays a 2% management fee and gives 20% of the profits to the fund manager.

Question 9

Which of the following is a document that lays out a proposed deal between a private equity fund and a firm selling equity or debt?

A)letter of intent
B)commitment document
C)letter of commitment
D)valuation letter
E)letter of valuation

Question 10

For which of the following strategies would a manager concentrate a hedge fund's investments in securities that are being offered at deep discounts?

A)market neutral
B)arbitrage
C)distressed securities
D)macro
E)market timing

Question 11

Which one of the following strategies is NOT exclusively available to the managers of alternative investment funds?

A)having highly concentrated positions
B)short selling
C)long selling
D)holding illiquid securities
E)being extremely leveraged

Question 12

What type of structure would the founders of a new alternative investment fund use to avoid the requirement to register with the SEC?

A)S-Corp
B)C-Corp
C)general partnership
D)limited partnership
E)sole proprietorship

Question 13

Which of the following strategies has a goal of offsetting risk by holding opposite positions in pairs of securities?

A)market neutral
B)arbitrage
C)distressed securities
D)macro
E)market timing

Question 14

Which one of the following is the performance fee earned by the manager of a private equity fund?

A)clawback provision
B)hurdle rate
C)carried performance fee
D)carried interest
E)clawback interest

Question 15

For which of the following strategies do fund managers try to identify mispricing relationships between securities that, in theory, should not exist?

A)market neutral
B)arbitrage
C)distressed securities
D)macro
E)market timing

Question 16

Hedge funds often institute a __________ period that requires investors to commit to a minimum time period before they can redeem any of their capital.

A)lockdown
B)tie-up
C)lockup
D)holding
E)takedown

Question 17

A hedge fund in which a significant proportion of its portfolio is invested in other hedge funds is referred to as which of the following?

A)pooled fund
B)container fund
C)short-sale fund
D)fund of funds
E)diversification fund

Question 18

Which of the following are investment strategies that may be associated with hedge funds?I. market neutral
II. arbitrage
III. distressed securities
IV. short selling
V. market timing

A)I, II, III and V
B)I, II, IV and V
C)I, III, IV and V
D)II, III, IV and V
E)I, II, III, IV and V

Question 19

__________ is a term that indicates that the futures price is lower than the spot price.

A)Backwardation
B)Arbitrage
C)Leverage
D)Contango
E)Margin

Question 20

Which of the following is the income after expenses generated by a property?

A)real estate income
B)gross operating income
C)net operating income
D)earnings before tax
E)earnings after tax

Question 21

In which of the following steps would a venture capitalist evaluate potential investment opportunities and ultimately present a letter of intent to a firm that has requested new funding?

A)valuation
B)deal structure
C)value creation
D)deal flow
E)exit

Question 22

In which one of the following approaches would NOI play an integral role in determining the value of an investment property?

A)real property approach
B)income approach
C)cost approach
D)real estate investment approach
E)sales comparison approach

Question 23

In which order do the following steps in the private equity fund and venture capital fund investment process normally occur?
1. Valuation
2. Deal structure
3. Value creation
4. Deal flow
5. Exit

A)4, 1, 2, 3, 5
B)2, 4, 1, 3, 5
C)4, 1, 3, 2, 5
D)2, 4, 3, 1, 5
E)2, 3, 1, 4, 5

Question 24

Which one of the following allows an investor to benefit from price changes in commodities without physically owning the commodity?

A)put option
B)call option
C)straddle option
D)commodity contract
E)futures contract

Question 25

Hedge funds may be referred to as __________ return funds, which implies that there is no relative benchmark against which to measure their performance.

A)relative
B)effective
C)absolute
D)weighted
E)elevated

Question 26

Which of the following is a good that is nearly identical to other goods of the same type?

A)derivative
B)clone
C)commodity
D)future
E)emulation

Question 27

In which of the following steps would a venture capitalist be most likely to assist with an initial public offering to raise additional capital for the underlying company?

A)valuation
B)deal structure
C)value creation
D)deal flow
E)exit

Question 28

A private equity firm that makes debt-based investments is referred to as a(an)__________ fund.

A)fixed income
B)fixed equity
C)orchestra
D)mezzanine
E)balcony

Question 29

In which of the following steps would a venture capitalist formalize and agree upon the terms of a financing deal?

A)valuation
B)deal structure
C)value creation
D)deal flow
E)exit

Question 30

Venture capitalists generally provide funding and expertise to companies at which stages of their development?
I. Seed stage
II. Early stage
III. Formative stage
IV. Late stage

A)I and II
B)III and IV
C)I, II, and III
D)II, III, and IV
E)I, II, III, and IV

Question 31

Venture capital funds and private equity funds are typically structured as which of the following types of business?

A)S-corporations
B)C-corporations
C)sole proprietors
D)general partnerships
E)limited partnerships

Question 32

What is the name of the valuation approach that involves the following steps: estimate the post-money valuation, determine the pre-money valuation, and determine the ownership fraction?

A)deal structure approach
B)deal alignment method
C)venture capital method
D)private equity method
E)hedge fund approach

Question 33

Which of the following are the primary ways for private equity funds or venture capital funds to exit an ongoing capital agreement?
I. Sale to another private equity fund
II. Sale to another firm in the industry
III. Failure of the firm
IV. Initial public offering

A)I, II, and IV
B)I and II
C)I and IV
D)II and IV
E)I, II, III, and IV

Question 34

Which of the following are the common approaches used to value a real estate asset?
I. Real property approach
II. Income approach
III. Cost approach
IV. Real estate investment approach
V. Sale comparison approach

A)I, II, and III
B)II, III, IV, and V
C)II, III, and V
D)I, III, and V
E)I, II, III, and IV

Question 35

In which of the following steps would a venture capitalist be most likely to evaluate deals using multiples of current cash flows?

A)valuation
B)deal structure
C)value creation
D)deal flow
E)exit

Question 36

Which of the following has the effect of being a call option for a specified number of shares in a firm?

A)fixed income
B)mezzanine
C)hedge fund
D)warrant
E)derivative

Question 37

Which of the following is an issue arising from the fact that only successful hedge funds are able to report performance results?

A)shuttered bias
B)start-up bias
C)shutdown bias
D)survivorship bias
E)failure bias

Question 38

Private equity funds generally provide funding and expertise to companies at which stages of their development?
I. Seed stage
II. Early stage
III. Formative stage
IV. Late stage

A)I and II
B)III and IV
C)I, II, and III
D)II, III, and IV
E)I, II, III, and IV

Question 39

__________ market transactions result in an actual physical exchange of a commodity.

A)Stock
B)EFT
C)Options
D)Spot
E)Bond

Question 40

In which of the following steps would a venture capitalist apply business expertise, share industry contacts, and perhaps even become involved with the day-to-day operations of the underlying firm?

A)valuation
B)deal structure
C)value creation
D)deal flow
E)exit

Question 41

Richard invested $750,000 in a hedge fund with a 2/20 fee structure. The fund had a total of $15 million of assets under management and it returned 12% and 19% in the first and second years, respectively. Assume that management fees are paid at the beginning of each year and performance fees are paid at the end of each year in which they are applicable. How much will Richard pay in performance fees for the first two years, respectively?

A)$15,000; $16,171
B)$15,000; $14,640
C)$14,640; $26,877
D)$14,640; $134,383
E)$73,200; $26,877

Question 42

Platinum is currently trading at $979.45 per ounce with a carrying cost of $1.05 per ounce per month for storage and insurance. Given a current market price of $1,019.29 per ounce for a five-month futures contract, what is the potential carry trade profit per ounce if the interest rate is 4%?

A)$1.05
B)$5.20
C)$18.42
D)$20.33
E)$25.83

Question 43

Gold is currently trading at $1,645.50 per ounce with a carrying cost of $1.25 per ounce per month for storage and insurance. Given a current market price of $1,693.97 per ounce for a four-month futures contract, what is the potential carry trade profit per ounce if the interest rate is 3%?

A)$1.25
B)$4.97
C)$25.39
D)$27.16
E)$30.23

Question 44

API, Inc., is considering an investment in ETO, Inc. The EBITDA for ETO is currently $6.5 million, and similar deals have recently closed at a 4.5 multiple. The corporate tax rate is 21%. What is the estimated valuation for ETO, Inc.?

A)$292,500
B)$1,444,444
C)$2,925,000
D)$23,107,500
E)$29,250,000

Question 45

You have made a $500,000 investment in a hedge fund that has a 2/20 fee structure. The fund has a total of $25 million of assets under management and provides a return of 15% in the first year. Assume that management fees are paid at the beginning of each year and performance fees are paid at the end of each year in which they are applicable. How much will you pay in management and performance fees for the year?

A)$1,000; $11,250
B)$1,000; $12,700
C)$10,000; $11,250
D)$10,000; $12,700
E)$10,000; $15,000

Question 46

If the spot price for palladium is $2,526.40 per ounce, what should the futures contract price be for a three-month contract at an annual interest rate of 3.25%?

A)$2,546.68
B)$2,559.73
C)$2,563.23
D)$2,567.83
E)$2,571.45

Question 47

If the three-month futures contract price for silver is currently $18.83 per ounce, what should we expect the current spot price to be if the annual interest rate is 2.75%?

A)$18.65
B)$18.70
C)$18.73
D)$18.78
E)$18.81

Question 48

Liberty Group is considering making an investment in a new firm that it expects to be worth $45 million in three years, at which point Liberty plans to exit the venture. Liberty is willing to make an initial investment of $10 million, but has a required return of 55% for this risky venture. What ownership fraction will Liberty require in order to make the investment?

A)45%
B)55%
C)70%
D)83%
E)91%

Question 49

If a hedge fund has a 2/20 fee structure and $15 million of assets under management, how much will its annual management fee be?

A)$300
B)$3,000
C)$30,000
D)$300,000
E)$3,000,000

Question 50

Washington Capital is conducting its due diligence to determine what ownership fraction it would require in order to provide $18.5 million in venture capital to a small healthcare firm for a four-year period. Washington Capital has a 46% required return and expects the value of the underlying firm to reach $150 million within the next four years. What ownership fraction would Washington Capital require?

A)56%
B)63%
C)72%
D)85%
E)96%

Question 51

If the spot price for platinum is $979.15 per ounce, what should the futures contract price be for a three-month contract at an annual interest rate of 3%?

A)$963.93
B)$973.82
C)$979.15
D)$986.41
E)$1,036.45

Question 52

If the five-month futures contract price for gold is currently $1,671.39 per ounce, what should we expect the current spot price to be if the annual interest rate is 3.75%?

A)$1,645.95
B)$1,658.47
C)$1,668.58
D)$1,671.39
E)$1,699.23

Question 53

If the spot price for silver is $18.56 per ounce, what should the futures contract price be for a three-month contract at an annual interest rate of 3.5%?

A)$18.60
B)$18.68
C)$18.72
D)$18.75
E)$18.77

Question 54

A private equity fund has established a 2/20 fee structure. The fund currently has assets under management of $220 million. What is the yearly management fee for this fund?

A)$440
B)$4,400
C)$44,000
D)$440,000
E)$4,400,000

Question 55

Kimberlee invested $1.5 million in a hedge fund that has a 2/20 fee structure. The fund had a total of $26 million of assets under management and it returned 19% and 27% in the first and second years, respectively. Assume that management fees are paid at the beginning of each year and performance fees are paid at the end of each year in which they are applicable. How much will Kimberlee pay in performance fees for the first two years, respectively?

A)$30,000; $33,989
B)$30,000; $49,860
C)$33,989; $83,137
D)$33,989; $415,683
E)$49,860; $83,137

Question 56

Ingenious Corporation is evaluating an opportunity to make an investment in Binary Bits, Inc. The EBITDA for Binary Bits is currently $19 million, and similar deals have recently closed at a 6.0 multiple. The corporate tax rate is 21%. What is the estimated valuation for Binary Bits, Inc.?

A)$114,000
B)$900,600
C)$1,140,000
D)$114,000,000
E)$542,857,143

Question 57

If the six-month futures contract price for platinum is currently $986.41 per ounce, what should we expect the current spot price to be if the annual interest rate is 3.5%?

A)$965.78
B)$969.59
C)$973.51
D)$983.41
E)$996.54

Question 58

Cripple Creek Funds (CCF)is exploring an opportunity to make a $10 million investment to help a small technology firm to expand to a value of $75 million over the next three years. What ownership fraction must CCF get in order to meet its required return of 50%?

A)45%
B)59%
C)68%
D)75%
E)82%

Question 59

Richmond Funds has decide to investment in a new firm that it expects to be worth $50 million in four years when Richmond plans leave the venture. Richmond has established a 45% required return for this project and is planning to make an initial investment of $8 million. What ownership fraction will Richmond Funds require in order to make the investment?

A)45%
B)65%
C)71%
D)83%
E)91%

Question 60

Mr. Dowdy invests $2 million in a hedge fund with a 2/20 fee structure. The fund has a total of $33 million of assets under management and the return in the first year is 23%. Assume that management fees are paid at the beginning of each year and performance fees are paid at the end of each year in which they are applicable. What is the amount of the performance fee that Mr. Dowdy will pay in the first year?

A)$40,000
B)$82,160
C)$90,160
D)$400,000
E)$410,800

Question 61

The API Fund currently has assets under management of $450 million. If the company uses a 2/20 fee structure, what is the yearly management fee?

A)$140,000
B)$1,400,000
C)$1,440,000
D)$14,000,000
E)$14,400,000

Question 62

Mr. Banks has asked you to estimate the value of an income-producing property that he estimates to have gross potential income of $393,000 and a vacancy rate of 10%. The operating costs are expected to be $193,000 per year. You have found that a similar property with an NOI of $55,000 recently sold for $375,000.

A)$160,700
B)$375,000
C)$1,095,682
D)$1,123,392
E)$1,883,277

Question 63

What is the estimated value of an income-producing property with an NOI of $65,000 and a cap rate of 11.5%?

A)$7,475
B)$65,000
C)$72,475
D)$73,446
E)$565,217

Question 64

If the seven-month futures contract price for rhodium is currently $12,100 per ounce, what should we expect the current spot price to be if the annual interest rate is 2.2%?

A)$11,656.92
B)$11,942.39
C)$11,947.37
D)$11,948.39
E)$12,254.58

Question 65

Mr. Tyson is deciding whether to purchase an investment property that he estimates to have operating costs of $325,000 per year, gross potential income of $500,000, and a vacancy rate of 7.5%. A similar property with an NOI of $122,000 recently sold for $1,000,000. What is the estimated value of this building?

A)$137,500
B)$325,000
C)$1,122,392
D)$1,125,343
E)$1,127,049

Question 66

You are considering the purchase of a commercial building that is nearby a comparable property that recently sold for $275,000. What is the cap rate for the property you are considering if the comparable property has an NOI of $35,000?

A)10.94%
B)12.73%
C)13.49%
D)16.81%
E)19.71%

Question 67

A property that is similar to one that you are considering buying has just sold for $393,000 and you estimate that it has an NOI of $70,000. Based on this information, what is the cap rate?

A)10.39%
B)12.03%
C)15.92%
D)17.81%
E)18.71%

Question 68

A low-rise apartment building in your town has come available for sale and you estimate that it would generate a gross potential income of $350,000 per year and would have operating costs of $300,000 per year. What is the NOI for this property if the vacancy rate is expected to be 12%?

A)$8,000
B)$50,000
C)$80,000
D)$80,888
E)$88,800

Question 69

Mr. Fury is deciding whether to purchase an office building that he estimates to have operating costs of $750,000 per year, gross potential income of $2,000,000, and a vacancy rate of 10%. A similar property with an NOI of $1,000,000 recently sold for $10,000,000. What is the estimated value of this building?

A)$750,000
B)$1,050,000
C)$2,000,000
D)$10,500,000
E)$11,000,000

Question 70

What is the estimated value of an office building if the market capitalization rate is 9% and the NOI is $110,000?

A)$99,000
B)$119,900
C)$1,119,000
D)$1,222,222
E)$1,323,933

Question 71

Judah invests $7 million in a hedge fund with a 2/20 fee structure. The fund has a total of $93 million of assets under management and the return in the first year is 22%. Assume that management fees are paid at the beginning of each year and performance fees are paid at the end of each year in which they are applicable. What is the amount of the performance fee that Mr. Dowdy will pay in the first year?

A)$273,840
B)$276,300
C)$283,900
D)$300,000
E)$1,369,200

Question 72

You are considering whether you should purchase a rental property that you estimate to have a gross potential income of $93,000 per year. You expect the operating costs to be $39,000 per year. What is the NOI if the occupancy rate is expected to be 90%?

A)$44,700
B)$46,392
C)$47,933
D)$54,000
E)$93,000

Question 73

Ms. Kline estimates that a commercial building she is thinking of purchasing has gross potential income of $47,000 and a vacancy rate of 7%. She estimates that the operating costs are $25,000 per year and a nearby property with an NOI of $7,500 just sold for $65,000. What is the estimated value of this building?

A)$65,000
B)$162,153
C)$163,932
D)$165,393
E)$1,639,320

Question 74

A commercial building that you are considering investing in has a gross potential income of $205,000 per year and operating costs of $119,000 per year. What is the NOI if the vacancy rate is expected to be 7%?

A)$65,400
B)$66,438
C)$70,393
D)$71,650
E)$119,000