Question 3 [14 points] Are the following statements true or false? Please give a (very) brief explanation. (a) 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] (b) A private equity firm is a firm that is not traded on the stock market. [2p] (c) Equity trading is regulated by the SEC (Security Exchange Commission). An investor who invests money in a private equity fund is also protected by the SEC. [2p] (d) A general partner in a private equity arrangement is the person who makes investment decisions. In the terminology of agency theory, he is the principal. [2p] (e) A successful private equity firm is able to raise a sequence of private equity funds. Each of the funds (e.g. GSCP I, GSPC II, etc.) is governed by its own limited partnership agreement. [2p] (f) A venture capital firm is a financial intermediary that also provides management know how to the portfolio company. [2p] (g) The purpose of financial reporting and issuing financial statements is to give investors some detailed information about the firm's future growth prospects. [2p] Question 4 [16 points] (a) What is a leverage buyout (LBO) and how does it work? Please comment on the statement: Activities on the LBO market depends crucially on how well the junk bond market is working. [4p] (b) Please describe (very briefly) the key elements of an enterprise valuation. [4p] (c) What is a definition of a financial bubble? What are potential problems with the concept of a bubble? [4p] (d) What is a potential transmission mechanism for a financial bubble (or more generally stock market sentiment) to affect corporate finance? [4p]