Breaking into Wall Street 400 Practice Test

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