Breaking into Wall Street 400 Practice Test

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