choose the correct answer

The following information relates to Questions 7-12 Martha Brady is the chief investment officer (CMO) of the Upper Derby County (UDC) public employees' s system. Brady is considering to a part of the pension system's assets to private equity. She has asked two of her alsts, Jennifer Cham, CFA, and Matthew Hermansky, to provide more information about the workings of the private equity Brady recognizes that the private equity ass classe s a broad spectrum of city investments that are traded is public markets. She has describe the major differences between that constitute this Ch h ath pa y class ranges from our capital cing of early age c o mplete youts of large publicly traded or child com Cadence of the characteristics of votre capital and out investments Chaumes that pro firms take care the comics of the managers of the investments the cool with the othe uity firms Various contractual clauses id in the otheu m ent is onder to rewando punishmanagers who do not meet agreed on r obots One concern is the liquidity of private equi e r time. But some funds are turned to investors over the life of the fund became asher of investment opportunities are exited carly. A number of provisions describe the distribution of returns to investors, some of which farver the limited partners. One such po i s the distributie waterfall mechanism that provides distributes to limi t ( L efore the cal partner (GP) cives the cared interest. This distribution mechanism is called the total rum waterfall Chas prepares the following data to illustrate the distribution w e ll mechanism and the funds provided to limited partners when a private equity fund with a rere hundle rate exits from its first three projects during a three-year period El levereras and was Cha cautions that me e t the describe the performance of private equity fundi t ation of per c ebe should be made with the awareness that much of the fund a r i ng a start of the fund's life. She provides the latest data is for Alpha Gama Fundo diversified high technology venture capital funds formed five years ago and each with five years remaining to Che studies the data and Othered the Alpha Fund has the best chance to outperform over the rema f e. First, because the r e has earned such a relatively high residual value on capital and will be able cama r eturn on the remaining funds called down. Al termination, the RVP will can do the 65" value when the rest of the funds are called down. Second, itsason c uma mah DP seady as high as that of the Beta Fund. PIC. paid in capital provides information about the proportion of capital called by the GP. The PC of Alpha is relatively low t o Beta and Gamma EXIME Financial Performance of AlphaIt, and Game Funds Beta 0.55 0.10 1.25 Chia 3 14 073 Hermansky notes that a private equity fund's ability to properly plan and execute its exit from an investment is vital for the fund's success. Venture funds such as Alpha, Beta, and Gamma take special care to plan for exiting from investments, Venture funds tend to focus on certain types of exits, especially when equity markets are strong Brady then asks the analysts what procedures private equity firms would use to value investments in their portfolios as well as any other investments that might be added to the portfolio. She is concerned about buying into a fund with existing assets that do not have public market prices to ascertain value. In such cases, the GP may overvalue the assets and new investors in the fund will pay a higher NAV for the fund assets than they are worth Hermansky makes three statements regarding the valuation methods used in private equity transactions during the early stages of selling a fund to investors Statement 1 For venture capital investment in the early stages of analysis, emphasis is placed on the discounted cash flow approach to valuation Statement 2 For buyout investments, income-based approaches are used frequently as a primary method of valuation Statement 3 If a comparable group of companies crist, multiples of revenues or carnings are used frequently to derive a value for venture capital investments 7. The characteristic that is most likely common to both the venture capital and buryout private equity investment is A measurable and assessable risk B. the extensive use of financial leverage C. the strength of the individual track record and ability of members of management 8. The contractual term enabling management of the private equity controlled company to be rewarded with increased equity ownership as a result of meeting performance targets is called: A. a raichet. B the tag along right. C. the clawback provision 9. For the projects described in Exhibit 1, under a deal-by.deal method with a clawback provision and true-up every three years, the cumulative dollar amount the GP receives by the end of the three years is equal to A one million 9. For the projects described in Exhibit 1, under a deal-by-deal method with a clawback provision and true-up every three years, the cumulative dollar amount the GP receives by the end of the three years is equal to: A. one million. B. two million. C. three million. 10. Are Chau's two reasons for interpreting Alpha Fund as the best performing fund over the remaining life correct? A. No. B. Yes. C. The first reason is correct, but the second reason is incorrect. 11. The exit route for a venture capital investment is least likely to be in the form of an): A. initial public offering (IPO). B. sale to other venture funds targeting the same sector. C. buyout by the management of the venture investment 12. Which statement by Hermansky is the least valid? A. Statement 1. B. Statement 2. C. Statement 3. The following information relates to Questions 7-12 Martha Brady is the chief investment officer (CMO) of the Upper Derby County (UDC) public employees' s system. Brady is considering to a part of the pension system's assets to private equity. She has asked two of her alsts, Jennifer Cham, CFA, and Matthew Hermansky, to provide more information about the workings of the private equity Brady recognizes that the private equity ass classe s a broad spectrum of city investments that are traded is public markets. She has describe the major differences between that constitute this Ch h ath pa y class ranges from our capital cing of early age c o mplete youts of large publicly traded or child com Cadence of the characteristics of votre capital and out investments Chaumes that pro firms take care the comics of the managers of the investments the cool with the othe uity firms Various contractual clauses id in the otheu m ent is onder to rewando punishmanagers who do not meet agreed on r obots One concern is the liquidity of private equi e r time. But some funds are turned to investors over the life of the fund became asher of investment opportunities are exited carly. A number of provisions describe the distribution of returns to investors, some of which farver the limited partners. One such po i s the distributie waterfall mechanism that provides distributes to limi t ( L efore the cal partner (GP) cives the cared interest. This distribution mechanism is called the total rum waterfall Chas prepares the following data to illustrate the distribution w e ll mechanism and the funds provided to limited partners when a private equity fund with a rere hundle rate exits from its first three projects during a three-year period El levereras and was Cha cautions that me e t the describe the performance of private equity fundi t ation of per c ebe should be made with the awareness that much of the fund a r i ng a start of the fund's life. She provides the latest data is for Alpha Gama Fundo diversified high technology venture capital funds formed five years ago and each with five years remaining to Che studies the data and Othered the Alpha Fund has the best chance to outperform over the rema f e. First, because the r e has earned such a relatively high residual value on capital and will be able cama r eturn on the remaining funds called down. Al termination, the RVP will can do the 65" value when the rest of the funds are called down. Second, itsason c uma mah DP seady as high as that of the Beta Fund. PIC. paid in capital provides information about the proportion of capital called by the GP. The PC of Alpha is relatively low t o Beta and Gamma EXIME Financial Performance of AlphaIt, and Game Funds Beta 0.55 0.10 1.25 Chia 3 14 073 Hermansky notes that a private equity fund's ability to properly plan and execute its exit from an investment is vital for the fund's success. Venture funds such as Alpha, Beta, and Gamma take special care to plan for exiting from investments, Venture funds tend to focus on certain types of exits, especially when equity markets are strong Brady then asks the analysts what procedures private equity firms would use to value investments in their portfolios as well as any other investments that might be added to the portfolio. She is concerned about buying into a fund with existing assets that do not have public market prices to ascertain value. In such cases, the GP may overvalue the assets and new investors in the fund will pay a higher NAV for the fund assets than they are worth Hermansky makes three statements regarding the valuation methods used in private equity transactions during the early stages of selling a fund to investors Statement 1 For venture capital investment in the early stages of analysis, emphasis is placed on the discounted cash flow approach to valuation Statement 2 For buyout investments, income-based approaches are used frequently as a primary method of valuation Statement 3 If a comparable group of companies crist, multiples of revenues or carnings are used frequently to derive a value for venture capital investments 7. The characteristic that is most likely common to both the venture capital and buryout private equity investment is A measurable and assessable risk B. the extensive use of financial leverage C. the strength of the individual track record and ability of members of management 8. The contractual term enabling management of the private equity controlled company to be rewarded with increased equity ownership as a result of meeting performance targets is called: A. a raichet. B the tag along right. C. the clawback provision 9. For the projects described in Exhibit 1, under a deal-by.deal method with a clawback provision and true-up every three years, the cumulative dollar amount the GP receives by the end of the three years is equal to A one million 9. For the projects described in Exhibit 1, under a deal-by-deal method with a clawback provision and true-up every three years, the cumulative dollar amount the GP receives by the end of the three years is equal to: A. one million. B. two million. C. three million. 10. Are Chau's two reasons for interpreting Alpha Fund as the best performing fund over the remaining life correct? A. No. B. Yes. C. The first reason is correct, but the second reason is incorrect. 11. The exit route for a venture capital investment is least likely to be in the form of an): A. initial public offering (IPO). B. sale to other venture funds targeting the same sector. C. buyout by the management of the venture investment 12. Which statement by Hermansky is the least valid? A. Statement 1. B. Statement 2. C. Statement 3