JV Modeling

Hi Folks,

I just received contradictory information from 2 sources and I thought you all would be best to clear it up.

Do you include the equity contribution(cash outflow) in a waterfall model in year 1 or year 0?

16 Comments
 
Best Response

We only use the accrual method. The formulas I use / have seen for calculating accruals are the following:

1) Beginning Equity Balance * [ (1+hurdle rate)^(1 / # of Periods) -1 ]

* The nominal rate (stated hurdle rates) are equivalent to that of the effective rate.

2) (Beginning Equity Balance * hurdle rate) / # of Periods

* The nominal rate (stated hurdle rates) are less than that of the effective rate.

If we were to take a preferred return of 12.0% compounded monthly:

Example #1 returns after:

1 month: accrual return of 0.95% 1 year: accrual return of 12.00%

Example #2 returns after:

1 month: accrual return of 1.00% 1 year: accrual return of 12.68%

 

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