Breaking into Wall Street 400 Practice Test

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• Are revenue or cost synergies more important in merger modeling?
• Why might a PE firm prefer high-yield debt?
• LBO analysis is typically used in which context?
• Which statement correctly describes the effect of a liability write-down on pre-tax income and after-tax income, assuming tax rate 40%?
• Which statement about factoring dividends into cost of equity is correct?
• Why is Enterprise Value used instead of Equity Value for industry-specific multiples like EV investing?
• What is the formula to relever beta?
• Which statement best describes cash-based vs accrual accounting?
• When valuing a private company, you typically apply what to public company comparables?
• Why do we add Preferred Stock to get to Enterprise Value?
• To derive levered FCF from EBIT, which sequence is correct?
• Which option is NOT listed as a complete effect of an acquisition?
• In a merger model, after projecting the combined income statements, which items are considered in the Combined Pre-Tax Income line?
• Precedent transactions usually yield higher values than comparable companies - when might this not be the case?
• In a stock-financed acquisition, when are additional shares outstanding issued?
• Why is the income statement not affected by changes in inventory?
• What term describes the implied minimum purchase price that achieves the target IRR in an LBO?
• What does creation of Goodwill & Other Intangibles represent in an acquisition?
• What can sensitivity tables show in a merger model?
• Sum of the Parts valuation is most appropriate in which scenario?
• Which statement best describes the purpose of free cash flow calculations?
• Why is precedent transaction data generally harder to obtain than public comps?
• Which formula represents levered ROA?
• Difference between merger and acquisition?
• What is the unlevered ROA formula?
• What multiples are commonly used for banks instead of EV multiples?
• What is considered an 'ideal' candidate for an LBO?
• An asset or liability write-down affects which income statement items?
• Which statement about merger model sensitivities is true?
• What operating sensitivities are often considered in merger modeling?
• What is the typical range for days sales outstanding (accounts receivable days)?
• Why would you not use a DCF for a bank or other financial institution?
• What is the effect of using levered free cash flow instead of unlevered cash flow in a DCF?
• Which formula defines Fixed Asset Turnover?
• If a company could pay 100% cash for another company, why might it choose not to?
• Change in deferred income taxes: Which statements show changes?
• Where does depreciation typically appear on the income statement?
• How would you value Facebook in its early days when profits were absent?
• What is the purpose of WACC in a DCF?
• Which has greater impact on a DCF valuation: a 10% change in revenue or a 1% change in the discount rate?
• What is the difference between accounts receivable and deferred revenue?
• A company has 1 million shares outstanding at $100 per share. It also has $10 million of convertible bonds, with par value of $1,000 and a conversion price of $50. How many diluted shares outstanding?
• What does Future Share Price Analysis involve?
• Which is correct for free cash flow multiples when using unlevered FCF?
• What represents the value over fair market value that the buyer paid in an acquisition?
• Which assets are typically used as a plug to balance the balance sheet in an LBO model?
• What premium range is typically paid over the current share price to win shareholder approval for a public target?
• Which financial statement begins with net income and includes adjustments for non-cash expenses and changes in working capital?
• If a company has 100 basic shares outstanding at $10, plus 10 options at $5, what is the fully diluted equity value?
• Which factor has the biggest impact on an LBO model's returns?
• Which of the following expresses APIC when considering shares sold, selling price, and par value?
• What are the effects on the three statements of a $100 liability write-down (as a reduction of a liability)?
• Which item is typically classified as an asset on the balance sheet?
• In a bailout scenario where the government makes an equity investment of $100, which of the following statements correctly describes the effect on the three statements?
• On the income statement, what is the final line showing profitability called?
• Under which condition would you not use a DCF in valuation?
• Levered free cash flow is cash flow after debt service and is available to which claimants?
• What is the formula for total capital raised from shareholders?
• If IPods are sold for revenue of $20 with a cost of $10, which statements correctly reflect the three financial statements, assuming a 40% tax rate?
• What is a common flaw of basing terminal value multiples on current public comps?
• What is a common consequence of overpaying for a target?
• Why do most mergers and acquisitions fail?
• LBO analysis is used to determine how much a private equity firm could pay to hit a target IRR, typically around what range?
• If accounts receivable increases, what happens to revenue?
• Which are the three major valuation methodologies used in standard practice?
• EBITDA excludes investment in long-term assets. Which term describes this exclusion?
• What is the Accounts Receivable Days formula?
• Which statement about depreciation and cash flow is correct?
• How do you calculate WACC for a private company?
• What does MCFE stand for in energy industry metrics?
• Which action would directly increase levered FCF under the levered FCF from CFS framework?
• Which valuation method involves valuing a company's assets as if they were sold off and subtracting liabilities to determine equity value?
• Which financing method is typically preferred when funding an acquisition if resources are abundant, and why?
• What does bullet maturity mean in debt terms?
• After considering purchase and exit multiples, which variable has a significant impact on LBO returns?
• Which formula correctly defines the Inventory Turnover?
• What is the difference between equity value and shareholders' equity?
• Which terminal value method tends to produce a wider valuation range due to variability in assumptions?
• Which of the following is the correct Gordon Growth value TV formula?
• If a company is distressed or underperforming, which percentile might you use instead of the median?
• What is working capital? How is it used?
• How does increasing the debt-to-equity ratio affect levered beta, assuming tax rate remains constant?
• A company experiences an increase in accounts payable or deferred revenue. Which statements are affected and how?
• Which accounting method is most commonly used by large companies due to widespread use of credit?
• How would a sale paid with a credit card for a TV be recorded under cash-based vs accrual accounting?
• Which industry uses EV/EBITDAR as a listed industry-specific multiple?
• Which equation correctly computes levered FCF from the cash flow statement?
• What happens to equity and debt in a dividend recap?
• How would you determine how much debt can be raised in an LBO and how many tranches there would be?
• Goodwill impairment often results from which situation?
• Which formula computes ROE?
• Which formula correctly represents levered free cash flow?
• Changes from issuing dividends
• What is a primary use of valuation outputs?
• What is the typical amortization pattern for bank debt vs high-yield debt in LBOs?
• Which methods are typically used to value an early-stage company?
• What is the relationship between debt level and levered beta, and how does it affect cost of equity?
• If inventory increases by $10 and is paid for with cash, which of the following statements is true?
• Which expression defines the new required investment rate as NOPAT times the investment rate?
• In REIT valuation, which is a common industry-specific multiple?
• What is the fundamental accounting equation used on the balance sheet?
• Which expression represents Accounts Receivable Turnover?
• What is a dividend recapitalization?
• GAAP accounting vs tax accounting: which statement is true?
• Which statement best describes P/E versus EV multiples?
• Which expression computes the book value of common equity?
• Why do companies report non-GAAP earnings?
• Under what circumstances would you use Gordon Growth rather than the multiples method to estimate Terminal Value?
• In an asset write-down scenario, what is the effect on total assets?
• Which has greater impact on DCF, a 1% change in revenue vs a 1% change in the discount rate?
• Apple orders an additional $10 of IPod inventory using cash on hand and has not produced or sold anything yet. Which statements are true?
• Cost synergies typically impact which part of the income statement?
• How does the relationship between debt and WACC typically behave?
• Which component is typically added back when converting net income to a cash-based measure in FCF calculations?
• Why would you use leverage when buying a company?
• To obtain levered FCF from unlevered FCF, which items are subtracted?
• Which sequence correctly computes unlevered free cash flow from EBIT?
• When would you use liquidation valuation?
• Under what circumstances would Goodwill increase?
• What is the purpose of un-levering beta before re-levering it for a specific company?
• Which item is a non-cash adjustment that is commonly added back to net income on the cash flow statement?
• Which scenario could lead to negative Enterprise Value?
• What is the typical relationship between enterprise value and debt in an acquisition?
• In an all-stock acquisition, under what condition is the deal accretive according to the rule of thumb?
• Why is the ranking of valuation methodologies not universal?
• What is the Inventory Days formula?
• Which ratio is defined as EBITDA divided by Interest Expense?
• Which expression represents the total capital raised from shareholders?
• Are other intangible assets amortized and do they affect pretax income?
• Deferred revenue write-off occurs when which scenario is true?
• Which of the following items is typically reported as an asset on the balance sheet?
• Non-GAAP earnings are typically higher because they exclude which type of expenses?
• In the unlevered free cash flow calculation, which non-cash charges are added back?
• What is the formula to unlever beta?
• Why are Goodwill & Other Intangibles created in an LBO?
• Why would a strategic acquirer typically be willing to pay more for a company than a private equity firm would?
• When presenting valuation methodologies, which type of chart is typically used to show ranges?
• Why do you need to add Minority Interest to Enterprise Value?
• Why does depreciation affect the cash balance if it is a non-cash expense?
• In a DCF, what is Free Cash Flow used for?
• In sensitivity analyses for a DCF, which statement best explains why they are used?
• Which percentiles define the football field in a valuation?
• Between LBO and DCF valuations, which generally yields a lower valuation?
• If a PE firm plans major expansions and wants fewer covenants, which debt type is more suitable?
• In a valuation, what does the football field illustrate?
• What is the levered ROA formula?
• The Terminal Value is discounted back to Net Present Value using which metric?
• If two companies have the same capital structure in terms of percentages and interest rates, which will have a higher WACC, a smaller company or a larger one?
• What cash-flow characteristic is most important when evaluating an LBO candidate?
• If accrued compensation increases by $10 and is recognized as an expense, which of the following statements is true about the three financial statements and cash flow?
• What is a Fairness Opinion in valuation practice?
• Which of the following describes scenarios where a company collects cash upfront for services that will be performed in the future?
• What is the formula for the value of treasury stock repurchased?
• Why might you discount public company comparables but not precedent transactions when valuing a private company?
• Which formula represents Common Stock (based on shares sold and par value)?
• Change to Capital Expenditures: Which statements are affected?
• Do you need to project all three financial statements in an LBO model? Are shortcuts available?
• How could two transactions with the same financial profile have different EBITDA multiples?
• How is Enterprise Value calculated in a DCF?
• Is there a universal rule to ALWAYS use the median multiple for comparables?
• Which statement about preferred stock in enterprise value is true?
• When would liquidation value produce the highest value?
• If you could review only one financial statement to gauge a company's cash-generating ability on a desert island, which would you choose?
• Why might a company with similar growth and profitability to its peers trade at a premium?
• What is the formula for the current ratio?
• What is a non-cash item that is added back in calculating free cash flow?
• What happens to the cost of debt as leverage increases beyond a point?
• Which debt-related adjustment is commonly included when deriving levered FCF from unlevered FCF?
• Which sensitivity analysis is typical in a DCF?
• If accounts receivable decreases, how does revenue change?
• What role does a merger model play in deal negotiations?
• What is a standard approach to estimating how much debt a company could issue in a merger or acquisition?
• When is minority interest added to enterprise value?
• Where do you typically source the equity risk premium for a DCF?
• Which scenario is commonly associated with negative working capital as a sign of efficiency?
• If Apple buys $100 of new factories with debt, which statement is true about the initial year-end 1 statements?
• Which of the following expressions correctly expresses the investment rate when defined as Growth divided by ROIC?
• Can a company have a negative Enterprise Value?
• Unlevered free cash flow represents money available to which group?
• What is the general effect of increasing debt on cost of equity, holding other factors constant?
• What practice helps avoid overreliance on peak cyclical multiples when using exit multiples?
• What is the correct statement about goodwill in relation to amortization?
• What is the difference between goodwill and other intangible assets?
• If you use levered free cash flow, what discount rate should you apply?
• Is it possible for a company to have negative shareholders' equity, and what would that typically indicate?
• Change in Accrued Expenses: Which Income Statement items are affected?
• A change in AR or inventory affects which balance sheet item among the following?
• What is the formula for the cost of equity?
• If cash is collected upfront but revenue hasn't yet been earned, what happens to the cash and the related liability account?
• Fully diluted shares include the dilutive effect of which securities?
• For deals funded with cash and debt, which quick rule helps determine accretion or dilution?
• How do you calculate fully diluted shares?
• Which of the following is an industry-specific multiple listed for technology?
• What is meant by the tax shield in an LBO?
• Which statement correctly describes total asset turnover?
• Goodwill impairment is typically triggered by which situation?
• What is the Total Asset Turnover formula?
• What is the standard formula for Enterprise Value?
• How should you account for a company's competitive advantage in a valuation?
• Non-GAAP earnings are typically higher because they exclude which type of expenses?
• A company records a $100 non-cash asset write-down. Which of the following describes the correct effects on the three financial statements?
• How are revenue synergies used in merger models?
• If depreciation increases by 10 with a 40% tax rate, what is the impact on net income and cash flow from operations?
• Why are smaller companies expected to have higher cost of equity than larger companies, aside from market performance?
• Which statement best describes the relative ranking of valuation methodologies?
• Which intangible items can impact a combined company's value beyond goodwill?
• In Year 3, after the factories' value is written down and the loan is repaid, which of the following best describes the overall effect on the cash balance and the balance sheet?
• Changes from issuing new shares
• How would a dividend recap impact the 3 financial statements in an LBO?
• Why do we look at both Enterprise Value and Equity Value?
• Why can't you use Equity Value / EBITDA as a multiple instead of Enterprise Value / EBITDA?
• Which statement best describes the difference between levered and unlevered FCF?
• Which of the following expresses Inventory Turnover?
• When deciding whether to capitalize or expense a purchase, which rule is correct?
• NOPAT is defined as Net Operating Profit After Tax. How is it commonly calculated from EBIT?
• When evaluating debt capacity in an LBO, the most reliable reference is debt comps showing types, tranches, and terms used recently by similarly sized companies.
• Which two financial statements can be used to construct the cash flow statement?
• Terminal Value in a DCF can be calculated using which methods?
• Changes from buying investments
• If the government makes a $100 equity investment as a bailout, which of the following statements is true?
• In a DCF, if the majority of enterprise value is attributed to terminal value, what does that imply about the sensitivity to future assumptions?
• Which covenants are more common in high-yield debt compared to bank debt?
• A change in depreciation affects which income statement items?
• How should you determine and present the exit multiple used in terminal value calculations?
• Why might you use bank debt rather than high-yield debt in an LBO?
• In M&A, accretive deals are those that do what to the buyer's earnings per share?
• Why is a horizon of 5-10 years used in projection models?
• If two identical firms differ only in capital structure—one is all equity and the other has a small amount of debt—which will have the higher WACC at that point, and why?
• Which income statement items are affected by a change in revenue?
• In an LBO projection, which statement best describes how debt payments are determined year by year?
• Net income from the income statement flows into which part of the balance sheet?
• A change in COGS affects which income statement items?
• Can a company have negative Equity Value?
• Why does Warren Buffett prefer EBIT multiples to EBITDA multiples?
• In an acquisition, foregone interest on cash refers to what?
• What is the generic free cash flow formula starting from cash flow from operations?
• What is the correct formula for WACC?
• Walk me through a DCF: Which two present-value components are used to determine Enterprise Value?
• Which statement about equity value and enterprise value is true?
• How are convertible bonds treated in the enterprise value calculation when they are in the money vs out of the money?
• What are the three main ways to select Comparable Companies / Precedent Transactions?
• In a basic merger model, what is Step 1?
• Which item is not typically listed as a major line item on the income statement?
• Depreciation is a non-cash expense. Which statement best describes its effect on the cash flow statement?
• Changes from Raising Debt
• In Year 3, after the loan is paid back and PP&E is written down, what happens to debt on the balance sheet?
• What is a rule of thumb indicating the discount cash flow is too sensitive to future assumptions when the terminal value dominates the enterprise value?
• Which form correctly computes the book value of common equity when you start with assets, subtract minority interest, and subtract liabilities?
• What are the two types of synergies typically discussed in mergers and acquisitions?
• Which of the following formulas represents the coverage ratio (times-interest earned)?
• Which statement best describes revenue synergies?
• Why is the multiples method commonly used to calculate terminal value in practice?
• Which growth rate is typically used to calculate terminal value in a discounted cash flow valuation?
• What does M&A Premiums Analysis examine?
• How do you select purchase and exit multiples in an LBO model?
• Are dividend yields already captured in the cost of equity through the CAPM framework?
• What does EV stand for?
• When incorporating revenue synergies into a forecast, what is typically assumed about the incremental revenue?
• A company with a high debt load is paying off principal each year. How do you account for this in a standard DCF?
• Which expression defines the investment rate as Growth divided by ROIC?
• In a private company valuation, what metric is typically shown?
• If a liability write-down reduces liabilities by $100 and increases net income by $60, which choice describes the effect on equity?
• What does negative working capital mean in certain industries, and is it always a bad sign?
• What discount rate is typically used for a DCF valuation?
• How do you apply the three valuation methodologies to derive a value for a company?
• Which formula represents the Gordon Growth Model value TV?
• In a vending machine business, would you pay a higher multiple for a business where you leased the machines or owned them?
• Which expression is used to calculate ROIC when using EBIT and tax rate, according to the standard formula?
• A change in Operating Expenses affects which income statement items?
• Why would a strategic acquirer typically be willing to pay more for a company than a private equity firm would?
• Walk me through a basic LBO model.
• What is floor valuation in LBO valuation?
• What are the flaws of public company comparables?
• When computing unlevered free cash flow, the tax is applied to operating income using (1 − tax rate). What does this imply about tax shields?
• What describes purchased in-process R&D in an acquisition?
• Difference between bank debt and high-yield debt.
• What is a dividend discount approach to calculating cost of equity when CAPM data is unavailable?
• In the convertible bonds example, how many shares does each bond convert into given par value 1000 and conversion price 50?
• What should you do if you don't believe management's projections for a DCF model?
• How do you derive beta for cost of equity calculations in a comps-based approach?
• How would you value a hypothetical apple tree?
• Which expression correctly defines ROIC given EBIT after tax and the average of debt plus equity?
• Why are past precedent transactions not perfectly comparable?
• What is an alternate method to compute free cash flow aside from using net income with non-cash adjustments?
• When choosing between EV/EBIT and EV/EBITDA, which statement is true?
• In Year 2, with debt at a high yield and no principal paydown, an interest rate of 10% and depreciation of 10% on factory assets, what is the effect on net income and cash flow from operations?
• How is the Balance Sheet adjusted in an LBO model?
• What is a key limitation when estimating WACC for a private company?
• Which of the following is NOT listed as a common valuation multiple?
• Depreciation, as shown in the example, is a non-cash expense that reduces pre-tax income but increases cash flow from operations due to the tax shield. This statement is true or false?
• Which are the three major financial statements used to analyze a company's financial health?
• Which formula gives APIC?
• Why would a PE firm choose dividend recap?
• Can private companies be used in valuation?
• After an acquisition, the buyer and seller's financial statements are combined by what process?
• In an all-stock deal where the target is later deemed worth only 50 million after the deal: what typically happens to the buyer's stock?
• Under what condition should you not use the treasury stock method for dilutive effects of convertibles?
• In an LBO analogy, what does 'selling the house' represent?
• Starting from EBITDA, which sequence yields unlevered free cash flow?
• Why might a DCF be inappropriate for banks and other financial institutions?
• How can a PE firm boost its return in an LBO?
• What characterizes an ideal LBO candidate?
• Which expression computes the quick ratio?
• Why would a PE firm use debt in an LBO?
• What does levered free cash flow represent in a valuation?
• Which ratio equals current assets divided by current liabilities?
• What is the purpose of size premium and industry premium in valuations?
• Which variables are most commonly analyzed as sensitivities in a merger model?
• When evaluating an acquisition, do you pay more attention to Enterprise Value or Equity Value?
• Under what circumstances might you use Equity Value / Revenue ratio instead of EV / Revenue?
• Should the cost of equity be higher for a smaller market cap company or larger, and why?
• When valuing a company with no profits, which valuation method is not recommended?
• Why would a PE firm buy a company in a risky industry like tech?
• If net income declines by $6 due to higher expenses, what is the effect on retained earnings assuming no other changes?