Investor Capital Flashcards
Risk to Risk Premium Ratio
- Indicator of how much of a premium earned on 1% of risk taken.
- RRPR= (Rate of Return - Risk Free Rate)/Range of Risk
Partition Return
1- NPV of Total Project Cash Flows 2-NPV of Cash Flow from OPS 3-NPV of Cash Flow from Reversion 4-% of Each (40%CF-60% Reversion expected) 5-Higher % of Reversion riskier investment
Equity at time of Sale
=Value-Loan Balance-Transaction Costs-Taxes Due
What is a debt asset?
Seniority Contractually specified cash flows Specified Maturity Less Risky
What is an equity asset?
Subordinated/residual claims Uncertain Cash Flows Infinite-Lived More Risky
What are Poorvus advice for partnerships?
Communicate regularly especially with turmoil Ask for enough cash upfront so you’re never short
What are the 3 primary investor concerns?
- Downside liabilities
- Cash calls
- Developer fees
What are operating cash flows?
NOI Annual Debt Service Occur early & often Easier to forecast Happens before reversion
What are reversion cash flows?
Net Sale Price Loan Balance Payoff Occurs at the end of the holding period Difficult to Forecast Last cash flow event More Risky
What is pro-rata?
In proporation to
What is pari passu?
With an equal step, distribution to occur at the same time
What is a preferred rate or hurdle rate?
Either cum, or non-cum normative return to the investor paid before further distributions.
What is a lookback return?
Comprehensive mechanism for guarantying a specific overall IRR for an investor. Combing preferred return and lookback return allow entrepreneur to manufacture or designate a stream of cash flows from the project in order to achieve a specific minimum return for the investor.
How do you calculate a lookback?
1-Layout pre-lookback cash flows 2-Calculate the NPV of the Pre-lookback cash flows using the lookback rate as the discount rate 3-Calculate the payment at the end of the holding period which will have the same present value of the shortfall.
Lookback Payment Equation
=Amount x (1+Hurdle)^t
