Private Equity and Venture Capital
Mock Exam
Course Introduction
This course provides an in-depth exploration of private equity and venture capital, focusing on the formation, structure, and operation of investment funds that finance high-growth startups and mature companies. Students will gain a comprehensive understanding of the investment lifecycle, including fundraising, sourcing deals, due diligence, valuation, deal structuring, post-investment management, and exit strategies. The course also examines the legal, financial, and ethical considerations involved in private equity and venture capital transactions, as well as the roles of limited partners, general partners, and entrepreneurs. Real-world case studies and contemporary industry trends are incorporated to equip students with practical skills and insights essential for careers in investment, entrepreneurship, or financial advisory.
Recommended Textbook
Mergers Acquisitions and Other Restructuring Activities 7th Edition by Donald DePamphilis
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Chapter 1: Introduction to Mergers, acquisitions, and Other
Restructuring
Activities
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Q1) Most M&A transactions in the United States are hostile or unfriendly takeover attempts.
A)True
B)False
Answer: False
Q2) The empirical evidence supports the presumption that bigger is always better when it comes to acquisitions.
A)True
B)False
Answer: False
Q3) Institutional investors in private companies often have considerable influence approving or disapproving proposed mergers.Which of the following are generally not considered institutional investors?
A) Pension funds
B) Insurance companies
C) Bank trust departments
D) United States Treasury Department
E) Mutual funds
Answer: D
Page 3
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Chapter 2: The Regulatory Environment
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Q1) Some state anti-takeover laws contain so-called "fair price provisions" requiring that all target shareholders of a successful tender offer receive the same price as those who actually tendered their shares.
A)True
B)False
Answer: True
Q2) The market share of the combined firms is rarely an important factor in determining whether a proposed transaction is likely to be considered anti-competitive.
A)True
B)False
Answer: False
Q3) What alternative actions could the government take to limit market power resulting from a business combination?
Answer: Regulators could require the combined firms to submit to price controls or to subject price increases to regulatory approval.However,this is likely to slow the ability of management to make good business decisions and introduces an element of uncertainty into any business decision in that the price change may not be approved.
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Chapter 3: The Corporate Takeover Market: Common
Takeover Tactics, anti-Takeover Defenses, and Corporate Governance
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Q1) The size of the target firm is the best predictor of the likelihood of being taken over by another firm.
A)True
B)False
Answer: True
Q2) What factors may have contributed to Warner Lambert's rejection of the Pfizer proposal?
Answer: It is unclear what the true motives were behind Warner's rejection of the Pfizer bid.The shareholders interests' hypothesis would argue that Warner's board was simply holding out for a more attractive bid from Pfizer.The management entrenchment theory would suggest that Warner's management and board found the AHP proposal more attractive because of an understanding that they may be retained following the merger.The unusual size of the breakup fee and poison pill and the apparent superior strategic fit between Warner and Pfizer suggest that indeed Warner management and board members may have been trying to entrench themselves in their efforts to ward off the Pfizer bid.
Q3) Purchasing target stock in the open market is a rarely used takeover tactic.
A)True
B)False
Answer: False Page 5
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Chapter 4: Planning,developing Business,and Acquisition
Plans: Phases 1 and 2 of the Acquisition Process
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Q1) A collection of markets is said to comprise an industry.
A)True
B)False
Q2) Good planning expedites sound decision making.
A)True
B)False
Q3) What are the alternatives to merger available to the major pharmaceutical companies? What are the advantages and disadvantages of each alternative?
Q4) How would you describe Dell's current implementation strategy (i.e.,solo venture,shared growth/shared control, merger/acquisition,or some combination)? On what core competencies is Michael Dell relying to make this strategy work?
Q5) Which of the following represent key components of the acquisition process
A) Business plan
B) Integration plan
C) Search plan
D) Negotiation process
E) All of the above
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Chapter 5: Implementation: Search Through Closing:
Phases 3 to 10 of the Acquisition Process
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Q1) Which of the following is generally not true of a financing contingency?
A) It is a condition of closing in the agreement of purchase and sale
B) Trigger the payment of break-up fees if not satisfied.
C) Protects both the lender and seller
D) Primarily protects the buyer
E) Primarily protects the seller
Q2) Confidentiality agreements are rarely required when target and acquiring firms exchange information.
A)True
B)False
Q3) Refining the target valuation based on new information uncovered during due diligence is most likely to affect which of the following
A) Total consideration
B) The search process
C) The business plan
D) The acquisition plan
E) The target's business plan
Q4) Why was Gore Technology Group able to do what Mattel could not do in a year.?
Page 8
Q5) What was the role of "strategic controls" in implementing the K2 business plan?
Q6) Why was Mattel interested in diversification?
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Chapter 6: Postclosing Integration: Mergers, acquisitions, and Business Alliances
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Q1) Which of the following is generally not true about communication during the integration period?
A) Communication should be as frequent as possible
B) Employees should be sheltered from bad news
C) The CEO of the combined firms should lead the effort to communicate to employees at all levels
D) Regularly scheduled employee meetings are often the best way to communicate progress to plan
E) The reasons for changing work practices and compensation must be thoroughly explained to employees
Q2) Highly decentralized organizational structures generally expedite the integration effort more so than highly centralized structures.
A)True
B)False
Q3) What evidence do you have that the high price-to-earnings ratio associated with Cisco's stock during the late 1990s may have caused the firm to overpay for many of its acquisitions? How might overpayment have complicated the integration process at Cisco?
Q4) What were the principal risks to the merger?
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Chapter 7: Merger and Acquisition Cash Flow Valuation
Basics
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Q1) Which one of the following factors is not considered in calculating the firm's cost of equity?
A) risk free rate of return
B) beta
C) interest rate on corporate debt
D) expected return on equities
E) difference between expected return on stocks and the risk free rate of return
Q2) The zero growth model is a special case of what valuation model?
A) Variable growth model
B) Constant growth model
C) Delta growth model
D) Perpetuity valuation model
E) None of the above
Q3) The relationship between the overall market and a specific firm's beta may change significantly if a large sector of stocks that make up the overall index increase or decrease substantially.
A)True
B)False
Q4) Did @Home overpay for Excite?
Q5) What other assumptions might you consider?
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Chapter 8: Relative,asset-Oriented,and Real Option
Valuation Basics
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Q1) Like the recent transactions method,comparable company valuation estimates do not require the addition of a purchase price premium.
A)True B)False
Q2) Which of the following is not true about the liquidation/break-up valuation methods?
A) Highly diversified companies are often valued in terms of the sum of the standalone values of their operating units
B) The calculation of such values is heavily dependent on the skill of appraisers who are intimately familiar with the operations to be liquidated.
C) Assets can sometimes be liquidated in an orderly fashion.
D) Legal, appraisal, and consulting fees may comprise a substantial share of the total proceeds of the sale of the assets
E) The liquidation value of most of the firm's assets is about the same.
Q3) The use of market-based valuation methods usually reflect actual demand and supply considerations at a moment in time.
A)True B)False
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Chapter 9: Applying Financial Models to Value, structure, and Negotiate Mergers and Acquisitions
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Q1) In calculating the value of net synergy,the costs required to realize the anticipated synergy should be ignored because they are difficult to forecast.
A)True
B)False
Q2) Which one of the following is not one of the steps in the M&A model building process?
A) Valuing the acquirer and the target firms as standalone businesses
B) Valuing the target and acquiring firms including synergy
C) Determining the initial offer price for the target firm
D) Establishing search criteria for the potential target firm
E) Determining the combined firm's ability to finance the transaction.
Q3) Revenue-related synergy may result from the acquirer being able to sell their products to the target firm's customers.
A)True
B)False
Q4) The maximum purchase price is the minimum price plus the present value of sources of value.True or False
A)True
B)False
Page 13
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Chapter 10: Analysis and Valuation of Privately Held Companies
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Q1) It is rare that the owner or a family member is either an investor in or an owner of a vendor supplying products or services to the family owned firm.
A)True
B)False
Q2) A pure control premium is the value the acquirer believes can be created by replacing the target firm's incompetent management,by changing the strategic direction of the target,by gaining a foothold in a market not currently served,or by achieving unrelated diversification.
A)True
B)False
Q3) Despite the lack of public exchanges for privately held firms,Wall Street analysts have ample incentive to analyze such firms in search of emerging companies.
A)True
B)False
Q4) Who were Panda Ethanol,Grove Street Investors,Grove Panda,and Cirracor? What were their roles in the case study? Be specific.
Q5) What were the primary reasons Cantel wants to acquire Crosstex? Be specific.
Page 14
Q6) What are the advantages of employing a reverse merger strategy in this instance?
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Chapter 11: Structuring the Deal: Payment and Legal
Considerations
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Q1) A fixed exchange collar agreement may involve a fixed exchange ratio as long as the acquirer's share price remains within a narrow range,calculated as of the effective date of the signing of the agreement of purchase and sale.
A)True
B)False
Q2) Which of the following is not true of mergers?
A) Liabilities and assets transfer automatically
B) May be subject to transfer taxes.
C) No minority shareholders remain.
D) May be time consuming due to need for shareholder approvals.
E) May have to pay dissenting shareholders appraised value of stock
Q3) The reverse triangular merger involves the acquisition subsidiary being merged with the target and subsidiary surviving.
A)True
B)False
Q4) If the form of acquisition is a statutory merger,the seller retains all known,unknown or contingent liabilities.
A)True
B)False
Page 15
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Chapter 12: Structuring the Deal: Tax and Accounting
Considerations
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Q1) As a result of a 338 election,the IRS treats the purchase of target shares as a taxable purchase of assets which can be stepped up to fair market value.Only the buyer has to agree to the 338 election.
A)True
B)False
Q2) Discuss various methodologies you might use to value assets acquired from SDL such as existing technologies,"core" technologies,trademarks and trade names,assembled workforce,and deferred compensation?
Q3) Which of the following is not true about goodwill ?
A) Goodwill must be written off over 20 years.
B) Goodwill must be checked for impairment at least annually.
C) The loss of key customers could impair the value of goodwill.
D) Goodwill does not have to be amortized.
E) Goodwill is shown as an asset on the balance sheet.
Q4) What are the potential risk factors related to the merger?
Q5) So-called Morris Trust transactions tax code rules restrict how certain types of corporate deals can be structured to avoid taxes.
A)True
B)False
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Chapter 13: Financing the Deal: Private Equity, hedge Funds, and
Other
Sources of Funds
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Q1) Bridge financing is usually expected to be replaced within two years after the closing date of the LBO transaction.
A)True
B)False
Q2) The loan agreement stipulates the terms and conditions under which the lender will loan the borrower funds.
A)True
B)False
Q3) Cash flow lenders view the borrower's future cash flow generation capability as the primary means of recovering a loan,while largely ignoring the assets of the LBO target.
A)True
B)False
Q4) Premiums paid to LBO target firm shareholders often exceed 40%.
A)True
B)False
Q5) Management buyouts without a financial equity contributor are relatively rare.
A)True
B)False
Q6) What are the risks to this deal's eventual success? Be specific.
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Chapter 14: Highly Leveraged Transactions: Lbo Valuation and Modeling Basics
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Q1) The total value of the firm according to the adjusted present value method is the present value of the firm's free cash flows to equity investors plus the present value of future tax savings discounted at the firm's unlevered cost of equity.
A)True
B)False
Q2) Why would it take five very large financial institutions to finance the transactions?
Q3) If the debt-to-equity ratio is expected to fluctuate substantially during the forecast period,applying conventional capital budgeting techniques that discount future cash flows with a constant weighted average cost of capital (CC)is appropriate.
A)True
B)False
Q4) Without adjusting for the cost of financial distress,the adjusted present value method implies that the value of the firm could be increased by continuously taking on more debt.
A)True
B)False
Q5) Cite examples of economies of scale and scope?
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Chapter 15: Business Alliances: Joint Ventures, partnerships, strategic Alliances, and Licensing
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Q1) Empirical studies show that the business alliance announcements seldom have any impact on the market value of their parent firms.
A)True
B)False
Q2) What does the reaction of the stock market and credit rating agencies tell you about how investors value the contribution of the two partners to the partnership? Do you think investors may have over-reacted?
Q3) Which of the following is not a motivation for establishing an alliance?
A) Risk sharing
B) Gaining access to new markets
C) Gaining access to a new technology
D) Achieving maximum control
E) Entering into a foreign market
Q4) In your judgment,do these alliances deliver real value to the consumer? Explain your answer.
Q5) Strategic alliances often make use of written contracts rather than more formal legal structures such as a corporation.
A)True
B)False
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Chapter 16: Alternative Exit and Restructuring Strategies:
Divestitures, spin-Offs, carve-Outs, split-Ups, and Split-Offs
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Q1) An equity carve-out differs from a spin-off for all but which one of the following reasons?
A) Generates a cash infusion into the parent
B) Is undertaken when the unit has very little synergy with the parent
C) The proceeds often are taxable to the parent
D) Continues to be influenced by the parent's management and board
E) The carve-out's shareholders may differ from those of the parent's shareholders
Q2) What risks did Hughes face in moving completely away from its core defense business and into a high-technology commercial business? In your judgment,did Hughes move too quickly or too slowly? Explain your answer.
Q3) Which of the major restructuring motives discussed in this chapter seem to be a work in this business case? Explain your answer.
Q4) In a public solicitation,a firm can announce publicly that it is putting itself,a subsidiary,or a product line up for sale.Either potential buyers contact the seller or the seller actively solicits bids from potential buyers or both.
A)True B)False
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Chapter 17: Alternative Exit and Restructuring Strategies: Bankruptcy
Reorganization and Liquidation
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Q1) The debtor firm often initiates the voluntary settlement process,because it generally offers the best chance for the current owners to recover a portion of their investments either by continuing to operate the firm or through a planned liquidation of the firm.
A)True
B)False
Q2) Legal insolvency occurs when a firm's liabilities exceed the book value of its assets.
A)True
B)False
Q3) The court can ignore the objections of creditors and stockholders if it feels the reorganization is both fair and feasible.
A)True
B)False
Q4) Federal law prohibits trading in a bankrupt firm's securities. A)True
B)False
Q5) Prepackaged bankruptcies are less common today than in years past. A)True
B)False
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Chapter 18: Cross-Border Mergers and Acquisitions:
Analysis and Valuation
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Q1) Which of the following represent common components of the global capital asset pricing model when applied to valuing firms in emerging countries?
A) Risk free rate of return
B) Specific country's risk premium
C) Firm size risk premium
D) Emerging country firm's global beta
E) All of the above
Q2) Licensing allows a firm to purchase the right to manufacture and sell another firm's products within a specific country or set of countries.
A)True
B)False
Q3) Globally integrated capital markets provide foreigners with unfettered access to local capital markets and local residents to foreign capital markets.
A)True
B)False
Q4) Mergers are legal in all countries.
A)True
B)False
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