I need help on this question. one sentence would be enough for each Thanks Are t

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I need help on this question.

one sentence would be enough for each

Thanks

Are the following statements true or false? Please give a (very) brief explanation. (a) A private equity firm is a firm that is not traded in the stock market. [2p] (b) 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] (c) A general partner in a private equity fund is the person who makes decisions to invest in portfolio companies. In the terminology of agency theory, he is the principal. [2p] (d) Consider a firm A which has a lot of cash. A poison bill 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] (e) Empirically, leverage decreasing capital structure decisions decrease the value of the firm. This observation supports the theory of agency cost of five cash flows. [2p]

Explanation / Answer

True. This is so because most buyouts are not IPOs. True. The compensation structure, still in use today, with limited partners paying an annual management fee of 1.0 – 2.5% and a carries interest up to 20% of the profits of the partnership. False. True. For example In a tender offer, the acquiring firm makes the offer to buy stock directly to the shareholders, thereby bypassing management. True. If the company does not have sufficient taxable income to shield, or if its operating profits are below a critical value, financial leverage will reduce equity value and thus reduce the value of the company. In a 1986 paper in the American Economic Review, Michael Jensen noted that free cash flows allowed firms' managers to finance projects earning low returns which therefore might not be funded by the equity or bond markets.

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