Corporate Finance Fall 2023 Exercise Set 5
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Corporate Finance
Exercise Set 5
Fall 2023
Due Tuesday, 11/21
This problem set consists of four questions. You can obtain a maximum of 40 points.
Question 1 [10 points]
(a) Managers have different motivations to acquire another company. When is a merger likely to be beneficial for the shareholders of both firms? [2p]
(b) When is a merger likely to be not beneficial for shareholders of the acquiring company? [2p]
(c) What roles do investment banks play when there is an acquisition? What other types of advisors are also involved and what are they doing? [4p]
(d) How do the stock prices of target firms respond to a takeover offer on average? [2p]
Question 2 [6 points]
Please comment on the following statements.
(a) Venture capital funds want to invest in innovative startups. Why should VC manager care about agency theory? What is agency theory about? [3p]
(b) Venture capital funds invest in startups. Why are convertible preferred securities so prevalent in such investments? [3p]
Question 3 [16 points]
(a) What is a limited partnership agreement (LPA)? [2p]
(b) There is a compensation rule in the LPA called carried interests. Please explain this rule. What is the purpose of the rule? [2p]
There are two LBO funds setup for ten years with $1 billion committed capital each.
Fund A has the following characteristics: A constant management fee of 2% and carried interest of 80-20.
Fund B is as follows: A decreasing management fee (2% in the first 5 years, 1% for the rest), preferred return of 12% per year, full catch-up, and carried interest of 70-30.
(c) What is the investment capital of fund A and B, respectively? [2p]
(d) Suppose all investment capitals are invested at t=0 and both funds have the same
internal rate of return (per year) of 14% on investment capital. The LP maximizes
payoff in year 10. Which fund is better forthe LP and how much more can the LP get by choosing the better fund? [6p]
(e) What is the total payoff (including all fees) for the GP of fund A and B, respectively? [4p]
Question 4 [8 points]
Are the following statements true or false? Please give a brief explanation.
(a) Consider a firm A which has a lot of cash. A poison pill in the corporate charter of firm A is designed to protect shareholders of firm A because it makes inefficient
acquisitions by the management of firm A more difficult. [2p]
(b) A limited partner provides committed capital to a private equity fund and typically has voting rights regarding investments in portfolio companies. [2p]
(c) A mezzanine debt fund borrows money from the syndicated loan markets to buy equity shares of firms that have high ratings. [2p]
(d) When a venture capital fund invests in a portfolio company, the venture capitalist typically requires a carry of 20% of the profit made by the portfolio company. [2p]
2023-11-09