Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin
operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital
contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after
the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment
period ends. Both funds expect to have $505,000,000 in capital commitments when the fund commences operations and both project
a five-year cycle for startup and acquisitions. Capital flows are expected as follows:
Fund A
Year 1
Year 2
Year 3
Year 4
Year 5
Fund B
Year 1
Year 2
Year 3
Year 4
Year 5
Contributed
Capital
$ 202,000,000
303,000,000
Contributed
Capital
$ 303,000,000
202,000,000
Capital Returned
$0
0
0
101,000,000
50,500,000
Capital Returned
0
0
50,500,000
101,000,000
Invested Capital
$ 202,000,000
505,000,000
505,000,000
404,000,000
353,500,000
Invested Capital
$ 303,000,000
505,000,000
505,000,000
454,500,000
353,500,000
Required:
a. What will total fees be for Fund (A)? For Fund (B)?
b. Would one of the fee structures cause the manager to want to hold the properties longer before selling than the other fee structure?
if so, which one?
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Transcribed Image Text:An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment period ends. Both funds expect to have $505,000,000 in capital commitments when the fund commences operations and both project a five-year cycle for startup and acquisitions. Capital flows are expected as follows: Fund A Year 1 Year 2 Year 3 Year 4 Year 5 Fund B Year 1 Year 2 Year 3 Year 4 Year 5 Contributed Capital $ 202,000,000 303,000,000 Contributed Capital $ 303,000,000 202,000,000 Capital Returned $0 0 0 101,000,000 50,500,000 Capital Returned 0 0 50,500,000 101,000,000 Invested Capital $ 202,000,000 505,000,000 505,000,000 404,000,000 353,500,000 Invested Capital $ 303,000,000 505,000,000 505,000,000 454,500,000 353,500,000 Required: a. What will total fees be for Fund (A)? For Fund (B)? b. Would one of the fee structures cause the manager to want to hold the properties longer before selling than the other fee structure? if so, which one?
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