A simple distribution waterfall without catch-up
Series XIX-A case study · set 1, case 4 of 5 · 4 questions · 1 mark each
Question 1 of 4Case practice
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The case · stays here for all 4 questions
The River Fund is winding up after a one-year investment. Investors paid ₹100 crore at the start. After all sale costs, fund expenses and taxes, ₹130 crore is available for distribution. Its hypothetical agreement uses this order: first return the ₹100 crore contributed capital. Next pay investors an 8% simple preferred return on that capital for the one year. Then divide all remaining money 80% to investors and 20% to the manager as carried interest. There is no catch-up provision, no earlier distribution, and no remaining asset. The manager has no capital contribution in this simplified example. The distributor must explain the waterfall as written, rather than importing terms from another fund.
The preferred return and split are illustrative contractual assumptions.
No catch-up, previous distribution or other claim applies.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
The River Fund is winding up after a one-year investment. Investors paid ₹100 crore at the start. After all sale costs, fund expenses and taxes, ₹130 crore is available for distribution. Its hypothetical agreement uses this order: first return the ₹100 crore contributed capital. Next pay investors an 8% simple preferred return on that capital for the one year. Then divide all remaining money 80% to investors and 20% to the manager as carried interest. There is no catch-up provision, no earlier distribution, and no remaining asset. The manager has no capital contribution in this simplified example. The distributor must explain the waterfall as written, rather than importing terms from another fund.
The preferred return and split are illustrative contractual assumptions.
No catch-up, previous distribution or other claim applies.
Q1How much goes to investors as the preferred return?
Option A. ₹10.40 crore
Why it is wrong: This applies 8% to exit proceeds instead of contributed capital.
Option B. ₹8 crore — Correct answer
Option C. ₹30 crore
Why it is wrong: This treats all profit as the preferred return.
Option D. ₹6 crore
Why it is wrong: This is 20% of total profit, not the preferred return.
Answer: B. The preferred return is ₹100 crore × 8% × 1 year = ₹8 crore. It is paid after return of capital and before dividing the remaining profit. Remember: Follow the sequence and the specified preferred-return base.
Hint, shown before you answer in practice mode: Apply the preferred rate to the returned capital base for one year.
XIXA-S1-C04-Q1easynumerical
Q2How much remains for the 80:20 split?
Option A. ₹8 crore
Why it is wrong: This is the preferred return itself.
Option B. ₹30 crore
Why it is wrong: This omits the preferred return.
Option C. ₹22 crore — Correct answer
Option D. ₹122 crore
Why it is wrong: This fails to return capital first.
Answer: C. Remaining cash = ₹130 crore − ₹100 crore capital − ₹8 crore preferred return = ₹22 crore. Only this balance is subject to the stated split. Remember: Carry calculations depend on the waterfall tiers.
Hint, shown before you answer in practice mode: Remove the first two tiers from available cash.
XIXA-S1-C04-Q2mediumnumerical
Q3What carried interest does the manager receive?
Option A. ₹4.40 crore — Correct answer
Option B. ₹26.00 crore
Why it is wrong: This charges carry on total exit proceeds, including capital.
Option C. ₹6.00 crore
Why it is wrong: This charges 20% on all profit before the preferred return.
Option D. ₹17.60 crore
Why it is wrong: This is the investors’ 80% share of the residual tier.
Answer: A. Carried interest = 20% × ₹22 crore = ₹4.40 crore. There is no catch-up, so the manager does not receive 20% of the entire ₹30 crore profit. Remember: No-catch-up waterfalls can differ from an overall profit split.
Hint, shown before you answer in practice mode: Apply the manager’s share only to the final tier.
XIXA-S1-C04-Q3mediumnumerical
Q4What is the investors’ total distribution?
Option A. ₹125.60 crore — Correct answer
Option B. ₹108.00 crore
Why it is wrong: This omits the investors’ residual share.
Option C. ₹130.00 crore
Why it is wrong: This omits the manager’s carried interest.
Option D. ₹124.00 crore
Why it is wrong: This incorrectly gives the manager 20% of all profit.
Answer: A. Investors receive ₹100 crore + ₹8 crore + 80% × ₹22 crore = ₹125.60 crore. Together with ₹4.40 crore carry, the allocations exhaust ₹130 crore. Remember: Reconcile a waterfall back to total available cash.
Hint, shown before you answer in practice mode: Add the capital, preferred return and investors’ final-tier share.
XIXA-S1-C04-Q4hardnumerical
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