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CFA Institute Exam CFA-Level-II Topic 3 Question 86 Discussion

Actual exam question for CFA Institute's CFA-Level-II exam
Question #: 86
Topic #: 3
[All CFA-Level-II Questions]

The New York-based Irwin Goldreich Schmidt (IGS) is a mid-sized private equity firm with $300 million capital raised from its investors. Amid a turbulent year, the firm has recently dropped its unsuccessful $100 million bid for a Norwegian media company and is now aggressively searching for new venture or buyout investments in the Eurozone. After several months of intense search IGS believes it identified two potential investments:

1. Sverig, a rapidly expanding Swedish start-up construction company.

2. L'Offre, a struggling French department store in existence since the late 19th Century.

Following several rounds of successful negotiations, IGS makes a $20 million investment in Sverig and a $100 million leveraged buyout investment in L'Offre, committing to an additional $100 million for possible future capital drawdowns. It retains all of Sverig's managers but replaces L'Offre's management team with experienced IGS managers, many of whom are former company senior executives.

IGS also sets up Sverig-L'Offre Private Equity Fund (SLPEF), a fund to manage both firms. The fund manager's compensation is set at 20% of profits net of fees. IGS also specifies that the manager's profits are calculated on the entire portfolio when portfolio value exceeds invested capital by 30%.

Despite the market's recent turbulence, Sverig's original founders are extremely optimistic and believe the firm could be sold for $400 million in six years. To achieve this, they speculate the firm needs another capital infusion of $40 million in four years in addition to the $20 million capital investment today. Given the high risk of the firm, SLPEFs private equity investors decide that a discount rate of 40% for the first four years and 30% for the last two years is appropriate. The founders of Sverig want to hold 5 million shares.

An appropriate equity valuation technique for Sveng and L'Offre, respectively, would be the:

Sverig L'Offre

Show Suggested Answer Hide Answer
Suggested Answer: B

Funded status equals fair value of plan assets minus PBO (395 - 635 = -240). (Study Session 6, LOS 22.c,f)


Contribute your Thoughts:

Pamella
7 days ago
I wonder if the IGS managers will be wearing powdered wigs and riding horse-drawn carriages to the office, since they're taking over that 19th-century department store. But in all seriousness, the valuation choices make sense.
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Owen
8 days ago
I'm just curious, does the 40% discount rate mean Sverig's founders will be paying themselves in Bitcoin? Jokes aside, the answers seem pretty straightforward.
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Farrah
15 days ago
Hmm, I'd say the relative value approach could work for L'Offre too. After all, if it's been around since the 19th century, there must be some comparable companies out there, right? As for Sverig, the venture capital method is a no-brainer.
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Aleisha
2 days ago
I agree, using the relative value approach for L'Offre makes sense. It's important to consider comparable companies.
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Crissy
18 days ago
I agree with Buck, the Venture capital method seems more fitting for Sverig's valuation.
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Salina
18 days ago
Agreed! The venture capital method is perfect for Sverig, and the DCF method is the way to go for L'Offre. Now, can someone explain to me how to calculate a 40% discount rate? My calculator just laughed at me.
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Chantay
20 days ago
I disagree, I believe the DCF method would be more suitable for valuing L'Offre.
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Marvel
21 days ago
The venture capital method seems like the way to go for Sverig, given the high-risk startup nature of the business. As for L'Offre, the DCF method would be more appropriate to capture the struggling department store's future cash flows.
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Sheridan
10 days ago
I think the venture capital method is suitable for Sverig.
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Buck
1 months ago
I think the appropriate equity valuation technique for Sverig would be the Venture capital method.
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