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Venture capital required rate of return.  Blue Angel Investors has a success ratio of 10 %...

Venture capital required rate of return.  Blue Angel Investors has a success ratio of 10 % with its venture funding. Blue Angel requires a rate of return of 19.1 % for its portfolio of​ lending, and the average length on its loans is 6 years. If you were to apply to Blue Angel for a ​$170,000 ​loan, what is the annual percentage rate you would have to pay for this​ loan?

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Answer #1

Your loan rate means that if one out of ten succeed you need to cover the nine failures after six years, so if Blue Angel makes 10 loans of $170,000 each, i.e. $1,700,000 and requires a return of 19% on its lending portfolio, it will have to accumulate the following amount after 6 years:

$1,700,000 × (1.19.1)6= $4,827,593.45 . So given a success rate of 1 out of 10 loans, it will charge you the following rate :

($4,827,593.45 / $170,000)1/6– 1 = 74.8149%

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