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Review: Wall Street Prep Certification Exam

Question 1

Which one of these are generally NOT considered to be a pre-tax non-recurring (unusual or infrequent) item?

Restructuring expenses
One-time write offs
Extraordinary gains/losses
 Gains/losses on sale of assets

Question 2

Which of the following statements is FALSE about Depreciation and Amortization (D&A)?

D&A may be classified within cost of goods sold

D&A may be classified as a separate line item on the income statement
D&A may be classified within interest expense
D&A may be classified within operating costs

Question 3

Company X’s current assets increased by $40 million from 2007 to 2008, while the company’s current liabilities increased by $25
million over the same period. The cash impact of the change in working capital was:

A decrease of $15 million

An increase of $15 million
An increase of $40 million
An increase of $25 million

Question 4

The final component of an earnings projection model is calculating interest expense. The calculation may create a circular reference
because:

Interest expense affects net income, which affects free cash flow, which affects the amount of debt a company pays down, which,
in turn, affects the interest expense, hence the circular reference
Interest expense affects net income, which affects working capital levels, which affects short-term debt levels, which, in turn, affects interest
expense, hence the circular reference
Interest expense affects projected debt levels, which affects projected net income, which, in turn, affects projected interest expense, hence
the circular reference
None of the above

Question 5

A 10-Q financial filing has all of the following characteristics EXCEPT:

Issued 4 times per year

Unaudited
Provides less detail regarding stock options and debt schedules than a 10-K
Provides the most up-to-date financial information for the firm

Question 6

Depreciation expense found in the SG&A line of the income statement for a manufacturing firm would most likely be attributable to
which of the following?

Computers used by the accounting department

Manufacturing equipment

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Manufacturing plant
None of the above

Question 7

If a company has projected revenues of $10 billion, a gross profit margin of 65%, and projected SG&A expenses of $2 billion, what is
the company’s operating (EBIT) margin?

20%
45%
55%
80%

Question 8

A company has the following information:

2014 Revenues of $5 billion

2013 Accounts receivable of $400 million

2014 Accounts receivable of $600 million

What are the days sales outstanding (DSO) for this company?

29.2 days
36.5 days
44 days
60 days

Question 9

A company has the following information:

2014 Revenues of $8 billion

2014 COGS of $5 billion

2013 Accounts receivable of $400 million

2014 Accounts receivable of $600 million

2013 Inventories of $1 billion

2014 Inventories of $800 million

2013 Accounts payable of $250 million

2014 Accounts payable of $300 million

What are the inventory days for the company?

58.4 days
65.7 days
70 days
 73 days

Question 10

Which of the following is TRUE?

Intangible assets include brands and patents but not trademarks

Goodwill is not considered an intangible asset
Coca Cola’s brand name is not reflected as an intangible asset on its balance sheet
 Intangible assets have indefinite useful lives

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Question 11

A company has the following information:

2014 share repurchase plan of $4 billion

Average share price of $60 for the year 2013

Expected EPS growth for 2014 of 10%

What should the number of shares repurchased by the company be in your financial model?

56.6 million
60.6 million
66.7 million
73.3 million

Question 12

Non-controlling interest:

Is an expense on the income statement and an asset on the balance sheet

Is an expense on the income statement and equity on the balance sheet
Is the amount an outside party owns in a parent company
Always requires that a company pay out dividends to the minority shareholders

Question 13

A company has the following information:

2013 retained earnings balance of $12 billion

Net income of $3.5 billion in 2014

Capex of $200 million in 2014

Preferred dividends of $100 million in 2014

Common dividends of $400 million in 2014

What is the retained earnings balance at the end of 2014?

 $14.8 billion
$15 billion
$15.2 billion
$15.5 billion

Question 14

In order to find out how much cash is available to pay down short term debt, such as a revolving credit line, you must take:

Cash inflows from operations + Cash outflows for investments + Financing cash flows + beginning cash balance
Beginning cash balance + pre-debt cash flows – Min. cash balance – Required principal payments of LT and other debt
 Beginning cash balance + cash inflows from operations - Min. cash balance
Beginning cash balance + cash inflows from operations + Cash outflows for investments - Min. cash balance

Question 15

To calculate interest expense in the future, you should do which of the following?

Apply a weighted average interest rate times the beginning debt balance
Apply a weighted average interest rate times the ending debt balance
Apply a weighted average interest rate times the average debt balance over the course of the year
None of the above

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Question 16

Enterprise (Transaction) Value represents the:

Value of all capital invested in a business

Value attributable to the owners of the business
Market Value of Equity plus the dollar value of all "in-the-money" securities (option, convertible stock, warrants, etc.)
Equity value plus gross debt

Question 17

On January 1, 2014, shares of Company X trade at $6.50 per share, with 400 million shares outstanding. The company has net debt
of $300 million. After building an earnings model for Company X, you have projected free cash flow for each year through 2020 as
follows:

Year 2014 2015 2016 2017 2018 2019 2020

Free Cash Flow 110 120 150 170 200 250 280

You estimate that the weighted average cost of capital (WACC) for Company X is 10% and assume that free cash flows grow in
perpetuity at 3.0% annually beyond 2020, the final projected year.

Estimate the present value of the projected free cash flows through 2020, discounted at the stated WACC. Assume all cash flows are
generated at the end of the year (i.e., no mid-year adjustment):

$624.1 million
$693.3 million
$837.0 million
$1,117.8 million

Question 18

On January 1, 2014, shares of Company X trade at $6.50 per share, with 400 million shares outstanding. The company has net debt
of $300 million. After building an earnings model for Company X, you have projected free cash flow for each year through 2014 as
follows:

Year 2014 2015 2016 2017 2018 2019 2020

Free Cash Flow 110 120 150 170 200 250 280

You estimate that the weighted average cost of capital (WACC) for Company X is 10% and assume that free cash flows grow in
perpetuity at 3.0% annually beyond 2020, the final projected year.

Calculate Company X’s implied Enterprise Value by using the discounted cash flow method:

$2,759.0 million
$2,807.5 million
$2,951.2 million
 $3,232.0 million

Question 19

On January 1, 2014, shares of Company X trade at $6.50 per share, with 400 million shares outstanding. The company has net debt
of $300 million. After building an earnings model for Company X, you have projected free cash flow for each year through 2014 as
follows:

Year 2014 2015 2016 2017 2018 2019 2020

Free Cash Flow 110 120 150 170 200 250 280

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You estimate that the weighted average cost of capital (WACC) for Company X is 10% and assume that free cash flows grow in
perpetuity at 3.0% annually beyond 2020, the final projected year.

According to the discounted cash flow valuation method, Company X shares are:

$0.13 per share undervalued

$0.23 per share overvalued
$0.83 per share overvalued
 $0.83 per share undervalued

Question 20

The formula for discounting any specific period cash flow in period “t” is:

Cash flow from period “t” divided by (1+discount rate) raised exponentially to “t-1”
Cash flow from period “t” divided by the (discount rate) raised exponentially to “t”
Cash flow from period “t” divided by (1+discount rate) raised exponentially to “t”
Cash flow from period “t” divided by the (discount rate) raised exponentially to “t-1”

Question 21

The terminal value of a business that grows indefinitely is calculated as follows:

Cash flow from period “t+1” divided by (discount rate – growth rate)
Cash flow from period “t+1” divided by (1 + discount rate)
 Cash flow from period “t” divided by (discount rate – growth rate)
None of the above

Question 22

The two-stage DCF model is:

Where a first stage of cash flows are explicitly projected and then a second stage is predicted using a different growth rate
the least common of the DCF approaches
where Stage 1 is an explicit projection of free cash flows (generally for 5-10 years), and Stage 2 is a lump-sum estimate of the
cash flows beyond the explicit forecast period
None of the above

Question 23

Disadvantages of a DCF do NOT include:

Need realistic projected financial statements over at least one business cycle (7 to 10 years) or until cash flows are “normalized”
Sales growth rate, margin, investment in working capital, capital expenditures, and terminal value assumptions along with discount rate
assumptions are key to the valuation
Free cash flows over the first 5-10 year period represent a significant portion of value and are highly sensitive to valuation
assumptions
 None of the above

Question 24

The typical sell-side process:

Is usually longer than the buy-side process

 Requires that the seller secure financing in order to complete the deal
Involves identifying potential issues to address such as inside ownership and unusual equity structures, liabilities, etc.
None of the above

Question 25

The following happened in a recent M&A transaction:

PP&E of the target company was increased from its original book basis of $650 million to $800 million to reflect fair market
value for book purposes in accordance with the purchase method of accounting

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No “step-up” for tax purposes

Original tax basis of $650 million

Assuming a corporate tax rate of 35%, for book purposes, the company should record the following:

A deferred tax liability equal to $280 million

A deferred tax asset equal to $280 million
A deferred tax liability equal to $52.5 million
A deferred tax asset equal to $52.5 million

Question 26

An acquisition creates shareholder value:

By acquiring a business whose fundamental value is lower than the purchase price
When a company acquires a business whose fundamental value is higher than the purchase price
As long as the fundamental value of the target plus the present value of the synergies is less than the purchase price
None

Question 27

Acquirer purchases 100% of target by issuing additional stock to purchase target shares

No premium is offered to the current target share price

Acquirer share price at announcement is $30

Target share price at announcement is $50

Acquirer EPS next year is $3.00

Target EPS next year is $2.00

Acquirer has 4 thousand shares outstanding

Target has 2 thousand shares outstanding

What is the exchange ratio for the deal?

 0.6x
1.5x
1.7x
2.5x

Question 28

Acquirer purchases 100% of target by issuing additional stock to purchase target shares

No premium is offered to the current target share price

Acquirer share price at announcement is $30

Target share price at announcement is $50

Acquirer EPS next year is $3.00

Target EPS next year is $2.00

Acquirer has 4 thousand shares outstanding

Target has 2 thousand shares outstanding

Assuming a 40% tax rate, what are the necessary pre-tax synergies needed to break-even?

 $6,000
$8,000
$10,000

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$12,000

Question 29

Pushdown accounting:

Refers to the establishment of a new accounting and reporting basis in an acquired company's parent’s financial statements
Is where the purchase price is “pushed down” on the acquirer’s financial statements and used to restate the carrying value of its assets

and liabilities
Refers to the establishment of a new accounting and reporting basis in an acquired company's separate financial statements
None of the above

Question 30

Use the following information to answer the question below:

Acquirer purchases 100% of target by issuing $100 million in new debt to purchase target shares, carrying an interest rate of
10%

Excess cash is used to help pay for the acquisition

Acquirer expects to be able to close down several of the target company’s old manufacturing facilities and save an estimated
$2 million in the first year

Target PP&E is written up by $25 million to fair market value

Investment bankers, accountants, and consultants on the deal earned $30 million in fees

Which of the following adjustments would be made to the pro forma income statement?

Advisory fee expense of $30 million

Depreciation expense increase due to PP&E write-up
Pre-tax synergies of $2 million
All of the above

Question 31

Use the following information to answer the question below:

Acquisition takes place on July 1, 2013

Acquirer FYE – June 30

Target FYE – December 31

Acquirer expected EPS for FYE June 2014 is $2.40

Target consensus EPS for FYE Dec 2013 is $1.12

Target consensus EPS for FYE Dec 2014 is $1.78

Assuming 360 days in a year for simplicity, calculate target EPS adjusted to acquirer FYE in the transaction year (FYE June 2014):

$1.45
$1.62
$2.00
$2.90

Question 32

A 338(h)(10) election:

Requires that the acquirer must purchase over 80% of target stock within a 2-year period
Requires that both buyer and seller must jointly elect to have the IRS deem the acquisition a stock sale for tax purposes
Requires that both buyer and seller must jointly elect to have the IRS deem the acquisition an asset sale for tax purposes
None of the above

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Question 33

A good LBO candidate has which of the following characteristics?

Significant existing leverage

Cyclical cash flows
Significant levels of investment in the business through capex and working capital
None of the above

Question 34

Which of the following is NOT a disadvantage of performing an LBO analysis?

Value obtained is sensitive to projections and aggressiveness of operating assumptions

Stand-alone LBO may overestimate strategic sale value by ignoring synergies with acquirer
 Only meaningful for companies which could operate under high financial leverage
Sales growth rate, margins, and discount rates are key to valuation

Question 35

While equity contribution went as low as the single digits in the 1980’s, the current split between equity and debt in an LBO deal is
best characterized as:

 Equity - 10%; Debt 90%

Equity - 90%; Debt 10%
Equity - 65%; Debt 35%
Equity - 35%; Debt 65%

Question 36

When an LBO sponsor wishes to exit its investment in 5 years, one way to find the equity value of a company at the LBO sponsor’s
exit year is to:

Use an Enterprise Value/Sales multiple to find Enterprise Value and then subtract net debt
Use an Enterprise Value/EBITDA multiple to find Enterprise Value and then subtract net debt
Use a Price/Earnings multiple to find Equity Value
All of the above

Question 37

Under recapitalization accounting:

Goodwill is created
Returns to sponsors will be affected
The purchase price is reflected as a reduction to equity
None of the above

Question 38

Which of the following is true about senior debt?

 Has the least restrictive covenants because it is secured by the company’s assets
Since it is secured by the company’s assets, lenders prefer to have the debt outstanding over time in order to generate more interest
Usually uses PIK securities or come with warrants like mezzanine debt
None of the above

Question 39

On December 30, 2013:

Company Y trades at $10 per share

Enterprise Value / EBITDA multiple of 5.0x

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Leverage ratio of 0.6x (Net debt/EBITDA)

2013 EBITDA = $2.0 billion

Assume no cash on company Y’s balance sheet

On December 31, 2013:

Company Y undergoes an LBO and is recapitalized

The company’s new leverage ratio becomes 5.0x

Financial sponsor exit is planned for Year 5. Assume that the EV/ EBITDA multiple at exit year is the same as the current
multiple.

Required rate of return is 25%

Exit year EBITDA projected to be $3.0 billion

The company’s year-end leverage ratio is 1.6x

What is the initial Equity Value?

$9.0 billion
$8.8 billion
$7.6 billion
$8.0 billion

Question 40

On December 30, 2013:

Company Y trades at $10 per share

Enterprise Value / EBITDA multiple of 5.0x

Leverage ratio of 0.6x (Net debt/EBITDA)

2013 EBITDA = $2.0 billion

Assume no cash on company Y’s balance sheet

On December 31, 2013:

Company Y undergoes an LBO and is recapitalized

The company’s new leverage ratio becomes 5.0x

Financial sponsor exit is planned for Year 5. Assume that the EV/ EBITDA multiple at exit year is the same as the current
multiple.

Required rate of return is 25%

Exit year EBITDA projected to be $3.0 billion

The company’s year-end leverage ratio is 1.6x

How much debt is paid down by the exit year (since the LBO announcement)?

$6.4 billion
$5.2 billion
$6.2 billion
$5.6 billion

Question 41

On December 30, 2013:

Company Y trades at $10 per share

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Enterprise Value / EBITDA multiple of 5.0x

Leverage ratio of 0.6x (Net debt/EBITDA)

2013 EBITDA = $2.0 billion

Assume no cash on company Y’s balance sheet

On December 31, 2013:

Company Y undergoes an LBO and is recapitalized

The company’s new leverage ratio becomes 5.0x

Financial sponsor exit is planned for Year 5. Assume that the EV/ EBITDA multiple at exit year is the same as the current
multiple.

Required rate of return is 25%

Exit year EBITDA projected to be $3.0 billion

The company’s year-end leverage ratio is 1.6x

What is the initial equity necessary to achieve the rate of return required by the financial sponsors?

 $4.95 billion
$3.34 billion
$3.15 billion
$3.80 billion

Question 42

Non-equity claims that should be deducted from Enterprise Value to find Equity Value include all of the following EXCEPT:

Minority Interest
Preferred stock
 Capitalized leases
All of the above

Question 43

“LTM” (Last Twelve Months) is calculated as follows:

Latest completed fiscal year results + Latest reported stub period results – Same stub period results from one year ago
Latest fiscal year results – Latest reported stub period results + Same period results one year ago
Latest completed fiscal year results
None of the above

Question 44

Company A shares are currently trading at $50 per share. A survey of Wall Street analysts reveals that EPS expectations for Company
A for the full year 2014 are $2.50 per share. Company A has 300 million diluted shares outstanding. Company A’s major competitors
are trading at an average share price / 2014 Expected EPS of 23.0x.

Using the comparable company analysis valuation method, Company A shares are:

Appropriately priced
$7.50 per share undervalued
$7.50 per share overvalued
Need more information

Question 45

A debt holder would be primarily concerned with which of the following multiples?

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I. Enterprise (Transaction) Value / EBITDA

II. Price/Earnings

III. Enterprise (Transaction) Value / Sales

I and II only
II only
I and III only
I, II, and III

Question 46

Company A shares are currently trading at $20 per share. A survey of Wall Street analysts reveals that EPS expectations for Company
A for the full year 2014 are $1.50 per share. Company A has 200 million diluted shares outstanding. Company A’s major competitors
are trading at an average share price / 2014 Expected EPS of 15.0x.

Using the comparable company analysis valuation method, Company A shares are:

Appropriately priced
$2.50 per share overvalued
$2.50 per share undervalued
Need more information

Question 47

When looking to do a transaction comp analysis, some of the merger-related filings that should be looked at include each of the
following EXCEPT:

8-K
Form S-1
Proxy statement
Form S-4

Question 48

When determining value for a company based on transaction rather than trading comps, one of the key differences that will affect
the value is:

Lack of a comparable universe

Premium paid for control of the business
Unavailable historical information
Target was never public

Question 49

Garth’s Micro Brewery, whose shares are currently trading at $40 per share, is considering acquiring Wayne’s Beer Bottling Co.  You
have compiled a group of comparable transactions within the beer bottling space and have calculated that since 2014, acquisitions
similar (or comparable!) to the one Garth’s is currently considering have had transaction values (offer value of target plus any target
debt, net of cash) that are, on average, 8.0x target’s EBITDA.

Wayne’s shares currently trade at $34 per share

Wayne’s has 50 million diluted shares outstanding

Wayne’s LTM EBITDA was $250 million

Wayne’s Net Debt was $200 million

What is the offer value per share and the offer premium?

$32.33 per share; -4.9%

$36.00 per share; 5.9%
$44.00 per share; 29.4%
$52.94 per share; 55.7%

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