q5spr12

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School

University of Pennsylvania *

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Course

238

Subject

Finance

Date

Nov 24, 2024

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pdf

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6

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FIFTH QUIZ FNCE 238/738 March 28, 2012 WRITE ALL ANSWERS ON THE TEST. IF YOUR ANSWER CONTINUES ON THE BACK, MAKE A NOTE OF IT ON THE FRONT. 30 PTS / 25 MINUTES NAME:_____________________________________________ SECTION (10:30, 12, 1:30):__________________________________
1. (6 pts) From the Fulton County Daily Report , August 5, 2010: THE PUBLIC STOCK offering of KKR & Co. put me in mind of three vexing questions. First, if KKR is based on the premise that private equity is a better, more efficient form of organization, why did KKR itself go public? Second, is there evidence that private equity is truly better? Does society benefit? Do investors? Or only the fund managers who pocket those gargantuan fees? Third, what happened to Congress's plan to end the tax break that benefits managers of privateequity funds, as well as other investment funds? In a celebrated 1989 essay, Harvard's Michael Jensen predicted the "Eclipse of the Public Corporation." Jensen's enthusiasm proved to be the peak. As early deals begat high profits, capital rushed in, pushing up buyout prices. Deals such as KKR's acquisition of RJR Nabisco didn't make sense, not that that cooled the dealmakers' ardor. Briefly, on what did Jensen base his enthusiasm? (bullet points are fine)
2. (6 pts) From Corporate Counsel, March 23, 2012: To have a staggered board, or not to have a staggered board? That’s the corporate governance question sparked by this week’s progress report from the Harvard Law School Shareholder Rights Project (SRP), and an ensuing sharp rejoinder penned by AmLaw 100 firm Wachtell, Lipton, Rosen & Katz. [Steven] Davidoff, a law professor at Ohio State University, took a deep dive on staggered board trends and literature in the Times, pre-Wachtell memo blast. He encountered a puzzling pattern: on the one hand, company boards in the S&P 500 are increasingly becoming declassified, dropping from 302 staggered boards in 2002 to 126 staggered boards today. On the other hand, companies that have only recently gone public—such as LinkedIn and Angie’s List—are increasingly doing so with staggered boards in place. Briefly, what could the law firm argue in favor of staggered boards, and what could be the argument against them? (bullet points are fine)
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3. (6 pts) From the rating agency Fitch, March 23, 2012: There appears to be no near-term break in sight for U.S. prime credit card ABS performance, while retail card results came in mixed, according to the latest index results from Fitch. Highlighted by consistent positive collateral performance trends, prime credit card ABS maintained strong momentum into the month of February, with chargeoffs continuing to fall while declining to levels not seen since the end of 2007. Credit card ABS ratings are expected to remain stable and early amortization risk is expected to remain remote. What is early amortization risk, to whom is this risk important, and what would cause this risk to be remote? (bullet points are fine)
4. (12 pts) Two analysts at Fidelity, Bob and Ray, are promoted to managing open-end mutual funds, with Bob managing the Blue Fund and Ray managing the Red Fund. Suppose that investors expect former analysts to add, on average, $20MM/year to the funds they manage. Suppose also that, if a former analyst makes a +25% return in his first year, investors upgrade their expectations to $30MM/year, and if he makes a -25% return, investors downgrade their expectations to $10MM year. Suppose finally that investors require a 5%/year expected return. a. (4 pts) How much would you expect investors to invest in each fund initially? b. (4 pts) If Bob makes a +25% return and Ray makes a -25% return in the first year, how much would you expect to be invested in each fund as they start their second years?
c. (4 pts) In general, would you expect the open-end funds of higher-skilled managers to be better investments for your money? What considerations are important? (bullet points are fine)
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