Mergers & Inquisitions (M&I) 400 Practice Exam

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• What is the formula for Un-Levered Beta?
• Why might companies report pro forma earnings in addition to GAAP earnings?
• What factor primarily influences whether WACC is higher for a 5 billion or a 500 million dollar market cap company?
• In which situation would you potentially use Equity Value/Revenue?
• What flaw exists within public company comparables when trying to assess value?
• What is the primary reason for projecting free cash flows (FCF) in a DCF model?
• What is a potential issue with the standard Enterprise Value formula?
• Which discount rate should be used when calculating with Levered Free Cash Flow?
• What often leads to Goodwill impairment in a company?
• What method is primarily used to value a company in a DCF analysis?
• What distinguishes Accounts Receivable from Deferred Revenue?
• When using the Multiples Method for terminal value calculation, what adjustment is made to the discount period?
• Under what circumstances can a company have a negative book Equity Value?
• When selecting precedent transactions, what is a crucial factor to consider?
• Why can't you use a future share price analysis for private companies?
• What is the typical range for accounts receivable collection periods?
• Which multiple would you avoid using for valuation under normal circumstances?
• How would you value an apple tree?
• What does a higher-than-expected percentage dilution in Equity Value typically signify?
• Which statement would be most important for understanding a company's cash generation?
• What does EBITDA stand for?
• What is one of the primary tasks that investment bankers perform for their clients?
• What is a significant flaw in using terminal multiples based on public company comparables?
• How can you determine if your Discounted Cash Flow (DCF) is overly reliant on future assumptions?
• Which valuation methodology is generally ranked highest due to the Control Premium?
• What is typically the first step in valuing a company for a merger or acquisition?
• Which type of stock typically has no rights in a bankruptcy proceeding?
• What does a high Deferred Revenue balance usually indicate in companies with negative Working Capital?
• What happens to Free Cash Flow if you increase accounts payable?
• Industries with a Beta greater than 1 are characterized as:
• Why might an analyst choose the Gordon Growth method over the Multiples Method?
• How does the Balance Sheet impact the Cash Flow Statement, specifically regarding starting cash?
• What is the formula for calculating Enterprise Value?
• What does the term "in-the-money" refer to regarding options?
• Why do we add Preferred Stock when calculating Enterprise Value?
• What adjustments may be included in the Cost of Equity calculation to enhance accuracy?
• What is the present value calculation used for in financial analysis?
• What is the correct approach for using Free Cash Flow multiples?
• What are the two methods for calculating Terminal Value?
• What financial metric might indicate that a company is cash-flow negative despite having positive EBITDA?
• Which item is NOT considered a part of Shareholders' Equity?
• What could justify a company being valued at a premium despite similar growth and profitability?
• Which of the following is NOT one of the three major financial statements?
• When a company is acquired, what typically happens to its Goodwill?
• What is the purpose of using the mid-year convention in a DCF analysis?
• What can influence the variability of DCF outcomes?
• What issue arises when calculating WACC for a private company?
• What would indicate that a company has been successful in its financial operations?
• What type of financial data is essential for conducting a DCF analysis?
• Which component is included in the Balance Sheet?
• How can the Cost of Debt be typically estimated?
• What is the formula used in CAPM to calculate the required return on equity?
• What is generally considered the most reliable method for creating a revenue model?
• How would you value a company with no profit or revenue, such as early Facebook?
• What happens to the balance sheet when a $100 equity investment is made from the government?
• What financial metric distinguishes EBIT from EBITDA?
• What information can enhance the accuracy of a multiples analysis?
• If Net Income falls by $6 due to an increase in Depreciation, how does that affect Shareholders' Equity?
• What does the Equity Risk Premium represent in the Cost of Equity calculation?
• What is the key difference between LIFO and FIFO inventory accounting methods?
• What is a crucial check that must be performed when calculating dividends in a DDM?
• What should be considered when valuing a company with unique advantages?
• What happens to Free Cash Flow when Net Working Capital increases?
• What is the effect on valuation when using the Gordon Growth method compared to the Multiples Method?
• How does accrual accounting record a transaction when a customer pays with a credit card?
• What key equation does the Balance Sheet represent?
• If Enterprise Value is $150 million and Equity Value is $100 million, what is the net debt?
• What is the effect of interest being tax-deductible on WACC?
• What is the first step in calculating Beta in the Cost of Equity calculation?
• Can a company have a negative Equity Value? What does that imply?
• How does the Cash Flow Statement change when Apple invests in new factories?
• Why might a company experience one-time charges that affect its financial performance?
• What is typically included in non-GAAP earnings reports?
• When options are exercised in the example of fully diluted shares, what happens to the total share count?
• Which of the following best describes the function of Additional Paid-In Capital?
• What happens to the Cost of Equity if a company takes on additional debt?
• Which scenario might lead to precedent transactions producing lower valuations than public company comparables?
• Which valuation method uses historical financial data of other companies in the same industry?
• In a financial projection, how do you arrive at Free Cash Flow from Revenue?
• In the absence of specific performance data, what approach can be used to value a company?
• What does an increase in inventory indicate in relation to cash flow?
• How should convertible debt be treated when calculating the Levered Beta if it is in-the-money?
• What is the relationship between debt levels and Cost of Equity?
• Why is cash subtracted from Enterprise Value in its calculation?
• How does negative Working Capital present an opportunity in retail companies?
• How is Working Capital defined?
• How can a company's competitive advantage be factored into its valuation?
• What is one reason that a company might have consistently negative Net Income?
• How are long-term investments treated in relation to Enterprise Value?
• Why is it inappropriate to use Equity Value/EBITDA as a valuation multiple?
• Why might a company have a higher EV/EBITDA multiple?
• How does a $100 bailout from the government affect the cash flow statement?
• What happens to Cash after a $100 asset write-down with a 40% tax rate?
• Which of the following industries typically has a Beta less than 1?
• Which scenario describes a deferred tax asset?
• Which method of calculating Terminal Value is typically more variable?
• What components are included in the calculation of Enterprise Value?
• What does the Capital Assets Pricing Model (CAPM) help determine?
• In the Cash Flow Statement, which of the following is NOT considered a source of cash?
• What is the primary adjustment made for a stub period in a Discounted Cash Flow (DCF) analysis using the mid-year convention?
• What is the primary type of investment commonly associated with a government bailout?
• When calculating WACC, what impact does out-of-the-money convertible debt have?
• Which of the following is NOT typically included in a valuation analysis?
• If a company's Net Working Capital is negative, what does it indicate?
• What factor is critical when conducting a multiples analysis on a company?
• What factor is NOT typically considered when projecting Terminal Value growth rates?
• What does it mean when convertible bonds are said to be "in-the-money"?
• What is the main purpose of valuation in the context of investment banking?
• What is typically considered the appropriate growth rate for calculating Terminal Value?
• What does Accumulated Other Comprehensive Income include?
• How does the Discounted Cash Flow (DCF) method typically rank in expected value compared to other methodologies?
• What happens to Apple's Income Statement at the start of Year 1 after a factory purchase?
• What does WACC primarily depend on?
• What is the outcome when calculating diluted shares outstanding from convertible bonds?
• What effect does the write-down of an asset have on the Balance Sheet?
• In an Unlevered DCF, how do you handle a company’s debt repayments?
• How do you apply the valuation methodologies to determine a company's value?
• A DCF primarily relies on which of the following elements?
• When should you use P/E multiples instead of EV/EBIT or EV/EBITDA multiples?
• What does WACC stand for?
• What does Net Working Capital represent?
• What must be true for debt to be added to the Equity Value in calculating Enterprise Value?
• Why does Warren Buffet prefer EBIT multiples to EBITDA multiples?
• In Enterprise Value calculations, why is cash important for evaluating a company's financial health?
• Which term describes the process of assessing the financial worth of a company?
• What is a primary link between the Balance Sheet and the Income Statement?
• What discount might you apply when valuing a private company compared to public company multiples?
• If a company has $50 million in revenue and $5 million in profit, which valuation aspect would you consider crucial for further analysis?
• If management's growth projections seem too aggressive, a potential course of action could be?
• Which financial statement gives the most accurate picture of cash generation over time?
• Given 100 shares at $10 each and 10 options at an exercise price of $5, what is the fully diluted equity value?
• In what situation might a company have a negative Enterprise Value?
• What can lead to negative shareholders' equity?
• Which of the following factors does a DCF NOT generally consider?
• What two components primarily make up a company's capital structure?
• What distinguishes Equity Value from Shareholders' Equity?
• What does the market risk premium represent?
• What does net debt refer to in a company's financials?
• For what reason would a company not record cash collected as revenue immediately?
• When does Goodwill typically increase?
• What should you do if you lack sufficient information to create a financial model for a company?
• What should be done to account for the purchase of a factory in a DCF?
• Which of the following items is typically not included when calculating Enterprise Value?
• When calculating Terminal Value, what should you primarily ensure about your assumptions?
• If you don't trust management’s projections for a DCF model, what is NOT a recommended approach?
• In terms of Cost of Equity, which company should have a higher rate?
• How are convertible bonds accounted for in the Enterprise Value calculation?
• Why is cash subtracted in the formula for calculating Enterprise Value?
• What is an alternative method to calculate Free Cash Flow beside the standard net income approach?
• Why is a projection period of 5 to 10 years preferred in DCF analysis?
• What triggers the recording of expenses related to inventory on the Income Statement?
• What cash amount is received by the company when options are exercised?
• In what scenario would cash-based accounting recognize revenue?
• How does an increase in Depreciation affect the Income Statement?
• In valuating a vending machine business, which scenario would likely result in a higher multiple?
• Which type of debt is paid off first in the event of bankruptcy?
• Which investment is typically characterized by a negative beta?
• Which of the following statements is TRUE regarding the linkage of financial statements?
• If Levered Free Cash Flow is used in a DCF, what does it indicate regarding the valuation?
• When calculating with a multiple based on EBITDA or free cash flow, you are determining which of the following?
• What does a company’s Levered Beta indicate?
• How do you calculate fully diluted shares?
• For what purpose do investors look at both Enterprise Value and Equity Value?
• What is the treatment of cash collected that is not recognized as revenue?
• In an acquisition, why is Enterprise Value more significant than Equity Value?
• In a Dividend Discount Model (DDM), what is the basis for calculating dividends?
• Why might some operating leases need to be converted to capital leases when calculating Enterprise Value?
• How can Cost of Equity be calculated without using CAPM?
• What is the effect on Cash Flow from Operations after recording Net Income with depreciation added back?
• What are the main criteria for selecting Comparable Companies?
• What happens to Apple's Balance Sheet after the loan is paid back?
• When Apple sells inventory for revenue, how does this affect Net Income?
• How does an inventory purchase of $10 using cash affect the Cash Flow Statement?
• If Inventory increases by $10 and is paid for in cash, what is the immediate effect on the Income Statement?
• What discount rate is typically used in DCF analysis?
• Which analysis cannot be performed without historical or projected performance data?
• Which type of company is likely to have a higher Beta according to industry perceptions?
• In finance, what does Beta measure?
• What is the first step in calculating the per-share value of a public company in a DCF?
• When creating an expense model, which assumption is often made regarding employee numbers?
• Deferred tax liabilities arise when what occurs?
• In what situation might you avoid using the median multiple for valuation?
• What discount rate is used in a Dividend Discount Model (DDM) instead of WACC?
• What is a significant challenge when analyzing precedent transactions?
• What is a common outcome when an investment bank successfully values a company?
• In conducting a DCF for a private company, how would you estimate WACC?
• What are the three major valuation methodologies used in financial analysis?
• For what purpose is a valuation typically used?
• Why is it necessary to include Noncontrolling Interest in the calculation of Enterprise Value?
• How might differing multiples occur between two identical companies acquired by the same buyer?
• What does the Income Statement provide an overview of?
• When might a DCF analysis not be appropriate to use?
• Why is a DCF generally not used for banks or financial institutions?
• When valuing a company, why is it important to know the industry?
• What is a key difference between Adjusted Present Value (APV) and Weighted Average Cost of Capital (WACC)?
• How does Depreciation affect tax liability?
• What determines whether a purchase is capitalized or expensed?
• What effect does rising Accrued Compensation have on the Cash Flow Statement?
• Why is it critical to pair the appropriate valuation metrics with the type of cash flow?
• What do Net Operating Losses represent in relation to Enterprise Value?
• In a scenario where one company has debt and another does not, which is likely to have a higher WACC?
• When might a Liquidation Valuation produce the highest value?
• Which of the following statements is true about GAAP accounting?
• Which of the following is an appropriate example of sensitivity analysis in a DCF?
• When selecting an exit multiple for Terminal Value, what should you base your choice on?
• What is a potential impact of increasing Accounts Receivable?
• How are dividends incorporated into the calculation of Cost of Equity?
• What is the significance of a Fairness Opinion in finance?
• Which formula is used to calculate the Cost of Equity?
• When valuing a company, which typically has a greater impact on DCF evaluation?
• What is the fully diluted equity value for a company with 100 shares outstanding at $10 each and 10 options at an exercise price of $15 each?
• Why might a company without debt generally have a higher WACC?
• What is a common approach to valuing a private company?
• What value should be used for calculating Enterprise Value when available?
• What is typically considered a "too high" percentage dilution in Equity Value?
• Why might unfunded pension obligations be counted as debt in Enterprise Value calculations?
• After one year, what impact does depreciation have on Operating Income for Apple's factory investment?