Certification Exam: Review: Wall Street Prep

Review: Wall Street Prep
Certification Exam
Score: 56%, 28 correct out of 50 | Taken On: 12-07-16
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 Question 1
Which one of these are generally NOT considered to be a pre-tax non-
recurring (unusual or infrequent) item?
o Restructuring expenses
o One-time write offs
o Extraordinary gains/losses
o Gains/losses on sale of assets
Your answer is incorrect.
Extraordinary gains and losses are unusual and infrequent one-time charges
that are reported after taxes.
 Question 2
Which of the following statements is FALSE about Depreciation and
Amortization (D&A)?
o D&A may be classified within cost of goods sold
o D&A may be classified as a separate line item on the income statement
o D&A may be classified within interest expense
o D&A may be classified within operating costs
Your answer is correct.
 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:
o A decrease of $15 million
o An increase of $15 million
Increase in assets leads to $40m negative cash impact, while increase in
liabilities leads to positive cash impact of $25m. The net change is a $15m
cash decrease.
 Question 4
The final component of an earnings projection model is calculating interest
expense. The calculation may create a circular reference because:
o 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
o 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
o Interest expense affects projected debt levels, which affects projected net income,
which, in turn, affects projected interest expense, hence the circular reference
o None of the above
The circular reference occurs because Interest expense reduces net income,
which reduces free cash flow, which reduces the amount of debt a company
pays down, which, in turn, increases the interest expense, etc.
 Question 5
A 10-Q financial filing has all of the following characteristics EXCEPT:
o Issued 4 times per year
o Unaudited
o Provides less detail regarding stock options and debt schedules than a 10-K
o Provides the most up-to-date financial information for the firm
10-Q is a quarterly report that is issued 3 times a year – after the end of each
of a company’s first 3 quarters. A 10-K is issued after the end of a company’s
4Q/fiscal year-end.
 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?
o Computers used by the accounting department
o Manufacturing equipment
o Manufacturing plant
o 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?
o 20%
o 45%
o 55%
o 80%
 Question 8
A company has the following information:
o 2014 Revenues of $5 billion
o 2013 Accounts receivable of $400 million

What are the days sales outstanding (DSO) for this company?
o 29.2 days
o 36.5 days
o 44 days
o 60 days
 Question 9
o 2014 Revenues of $8 billion
o 2014 COGS of $5 billion

o 2013 Inventories of $1 billion
o 2014 Inventories of $800 million
o 2013 Accounts payable of $250 million
o 2014 Accounts payable of $300 million

What are the inventory days for the company?
o 58.4 days
o 65.7 days
o 70 days
o 73 days
Inventory days = Average inventories / Cost of sales x 365
= $900m / $5bn x 365 days
= 65.7 days
 Question 10
Which of the following is TRUE?
o Intangible assets include brands and patents but not trademarks
o Goodwill is not considered an intangible asset
o Coca Cola’s brand name is not reflected as an intangible asset on its balance
sheet
o Intangible assets have indefinite useful lives
Internally-generated brand names, whose value cannot be objectively
determined are not recorded on the balance sheet.
Certain – but not all – intangible assets have indefinite useful lives.
Intangibles assets include brands, patents, and trademarks. Goodwill is
considered an intangible asset and is often included in that line item for
presentation purposes.
 Question 11
o 2014 share repurchase plan of $4 billion
o Average share price of $60 for the year 2013
o Expected EPS growth for 2014 of 10%

What should the number of shares repurchased by the company be in your
financial model?
o 56.6 million
o 60.6 million
o 66.7 million
o 73.3 million
Assuming that this company’s P/E ratio will stay the same, EPS growth of
10% will be matched by share price growth of 10%, to $66.
Number of shares repurchased = share repurchase plan / share price = $4

billion / $66 per share = 60.6 million shares.
 Question 12
Non-controlling interest:
o Is an expense on the income statement and an asset on the balance sheet
o Is an expense on the income statement and equity on the balance sheet
o Is the amount an outside party owns in a parent company
o Always requires that a company pay out dividends to the minority shareholders
When a company owns more than 50% but less than 100% of another
company, it records a portion of net income that it doesn't own as a non-
controlling interest expense on the income statement and non-controlling
interest account balance in its shareholders’ equity on the balance sheet.
 Question 13
o 2013 retained earnings balance of $12 billion
o Net income of $3.5 billion in 2014
o Capex of $200 million in 2014
o Preferred dividends of $100 million in 2014

o Common dividends of $400 million in 2014
What is the retained earnings balance at the end of 2014?
o $14.8 billion
o $15 billion
o $15.2 billion
o $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:
o Cash inflows from operations + Cash outflows for investments + Financing cash
flows + beginning cash balance
o Beginning cash balance + pre-debt cash flows – Min. cash balance – Required
principal payments of LT and other debt
o Beginning cash balance + cash inflows from operations - Min. cash balance
o 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?
o Apply a weighted average interest rate times the beginning debt balance
o Apply a weighted average interest rate times the ending debt balance
o Apply a weighted average interest rate times the average debt balance over the
course of the year
o None of the above
 Question 16
Enterprise (Transaction) Value represents the:
o Value of all capital invested in a business
o Value attributable to the owners of the business
o Market Value of Equity plus the dollar value of all "in-the-money" securities
(option, convertible stock, warrants, etc.)
o Equity value plus gross debt
Enterprise (also known as firm or transaction) value represents the value of
all capital invested in a business, not just the firm's equity owners. It can be
calculated as equity value plus net debt (gross debt less cash).
 Question 17
A debt holder would be primarily concerned with which of the following
multiples?
I. Enterprise (Transaction) Value / EBITDA
II. Price/Earnings
III. Enterprise (Transaction) Value / Sales

o I and II only
o II only
o I and III only
o I, II, and III
 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 2020 as follows:
Year 2014 2015 2016 2017 201 2019 2020
8
Free Cash 110 120 150 170 200 250 280

Flow
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):
o $624.1 million
o $693.3 million
o $837.0 million
o $1,117.8 million
 Question 19
Year 2014 2015 2016 2017 201 2019 2020
8
Free Cash 110 120 150 170 200 250 280

Flow
Calculate Company X's implied Enterprise Value by using the discounted

cash flow method:
o $2,759.0 million
o $2,807.5 million
o $2,951.2 million
o $3,232.0 million
 Question 20
Year 2014 2015 2016 2017 201 2019 2020
8
Free Cash 110 120 150 170 200 250 280

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

are:
o $0.13 per share undervalued
o $0.23 per share overvalued
 Question 21
The formula for discounting any specific period cash flow in period “t” is:
o Cash flow from period “t” divided by (1+discount rate) raised exponentially to
“t-1”
o Cash flow from period “t” divided by the (discount rate) raised exponentially to
“t”
o Cash flow from period “t” divided by (1+discount rate) raised exponentially to
“t”
o Cash flow from period “t” divided by the (discount rate) raised exponentially to
“t-1”
 Question 22
The terminal value of a business that grows indefinitely is calculated as
follows:
o Cash flow from period “t+1” divided by (discount rate – growth rate)
o Cash flow from period “t+1” divided by (1 + discount rate)
o Cash flow from period “t” divided by (discount rate – growth rate)
o None of the above
 Question 23
The two-stage DCF model is:
o Where a first stage of cash flows are explicitly projected and then a second stage
is predicted using a different growth rate
o the least common of the DCF approaches
o 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
o None of the above
In a 2-stage DCF model, stage 1 involves projecting annual free cash flows
over the first 5-10 future years, while Stage 2 is a lump-sum (terminal value)
estimate of the cash flows from the end of that explicit forecast period in
perpetuity.
 Question 24
Disadvantages of a DCF do NOT include:
o Need realistic projected financial statements over at least one business cycle (7 to
10 years) or until cash flows are “normalized”
o Sales growth rate, margin, investment in working capital, capital expenditures,
and terminal value assumptions along with discount rate assumptions are key to the valuation
o Free cash flows over the first 5-10 year period represent a significant portion of
value and are highly sensitive to valuation assumptions
o None of the above
Terminal value, not free cash flows over the first 5-10 year period, represent
a significant portion/majority of a company’s DCF-derived value, and placing
so much value weight on the terminal value is typically regarded as a
disadvantage.
 Question 25
The typical sell-side process:
o Is usually longer than the buy-side process
o Requires that the seller secure financing in order to complete the deal
o Involves identifying potential issues to address such as inside ownership and
unusual equity structures, liabilities, etc.
o None of the above
 Question 26
The following happened in a recent M&A transaction:
o 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
o No “step-up” for tax purposes
o Original tax basis of $650 million

Assuming a corporate tax rate of 35%, for book purposes, the company
should record the following:
o A deferred tax liability equal to $280 million
o A deferred tax asset equal to $280 million
o A deferred tax liability equal to $52.5 million
o A deferred tax asset equal to $52.5 million
 Question 27
An acquisition creates shareholder value:
o By acquiring a business whose fundamental value is lower than the purchase
price
o When a company acquires a business whose fundamental value is higher than the
purchase price
o As long as the fundamental value of the target plus the present value of the
synergies is less than the purchase price
o None
An acquisition creates shareholder value when the purchase price is lower
than the target’s fundamental value.
 Question 28
o Acquirer purchases 100% of target by issuing additional stock to purchase target
shares
o No premium is offered to the current target share price
o Acquirer share price at announcement is $30
o Target share price at announcement is $50
o Acquirer EPS next year is $3.00
o Target EPS next year is $2.00
o Acquirer has 4 thousand shares outstanding
o Target has 2 thousand shares outstanding

What is the exchange ratio for the deal?
o 0.6x
o 1.5x
o 1.7x
o 2.5x
Review the correct answer on this fact pattern.
 Question 29
o Acquirer purchases 100% of target by issuing additional stock to purchase target
shares
o No premium is offered to the current target share price
o Acquirer share price at announcement is $30
o Target share price at announcement is $50
o Acquirer EPS next year is $3.00
o Target EPS next year is $2.00
o Acquirer has 4 thousand shares outstanding
o Target has 2 thousand shares outstanding

Assuming a 40% tax rate, what are the necessary pre-tax synergies needed
to break-even?
o $6,000
o $8,000
o $10,000
o $12,000
 Question 30
Pushdown accounting:
o Refers to the establishment of a new accounting and reporting basis in an
acquired company's parent’s financial statements
o 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
o Refers to the establishment of a new accounting and reporting basis in an
acquired company's separate financial statements
o None of the above
 Question 31
Use the following information to answer the question below:
o Acquirer purchases 100% of target by issuing $100 million in new debt to
purchase target shares, carrying an interest rate of 10%
o Excess cash is used to help pay for the acquisition
o 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
o Target PP&E is written up by $25 million to fair market value
o 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?
o Advisory fee expense of $30 million
o Depreciation expense increase due to PP&E write-up
o Pre-tax synergies of $2 million
o All of the above
 Question 32
Use the following information to answer the question below:
o Acquisition takes place on July 1, 2013
o Acquirer FYE – June 30
o Target FYE – December 31
o Acquirer expected EPS for FYE June 2014 is $2.40
o Target consensus EPS for FYE Dec 2013 is $1.12
o 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):
o $1.45
o $1.62
o $2.00
o $2.90
 Question 33
A 338(h)(10) election:
o Requires that the acquirer must purchase over 80% of target stock within a 2-year
period
o Requires that both buyer and seller must jointly elect to have the IRS deem the
acquisition a stock sale for tax purposes
o Requires that both buyer and seller must jointly elect to have the IRS deem the
acquisition an asset sale for tax purposes
o None of the above
 Question 34
A good LBO candidate has which of the following characteristics?
o Significant existing leverage
o Cyclical cash flows
o Significant levels of investment in the business through capex and working
capital
o None of the above
 Question 35
Which of the following is NOT a disadvantage of performing an LBO analysis?
o Value obtained is sensitive to projections and aggressiveness of operating
assumptions
o Stand-alone LBO may overestimate strategic sale value by ignoring synergies
with acquirer
o Only meaningful for companies which could operate under high financial
leverage
o Sales growth rate, margins, and discount rates are key to valuation
One of the disadvantages of an LBO is that it may underestimate strategic
sale value by ignoring synergies with acquirer.
 Question 36
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:
o Equity - 10%; Debt 90%
The current LBO split is approximately 65% debt / 35% equity.
 Question 37
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:
o Use an Enterprise Value/Sales multiple to find Enterprise Value and then subtract
net debt
o Use an Enterprise Value/EBITDA multiple to find Enterprise Value and then
subtract net debt
o Use a Price/Earnings multiple to find Equity Value
o All of the above
All of these multiples – EV/EBITDA, EV/Sales, and P/E – can be used to
calculate equity value of a company at the LBO sponsor’s exit year.
 Question 38
Under recapitalization accounting:
o Goodwill is created
o Returns to sponsors will be affected
o The purchase price is reflected as a reduction to equity
o None of the above
 Question 39
Which of the following is true about senior debt?
o Has the least restrictive covenants because it is secured by the company’s assets
o Since it is secured by the company’s assets, lenders prefer to have the debt
outstanding over time in order to generate more interest
o Usually uses PIK securities or come with warrants like mezzanine debt
o None of the above
Senior debt has the most restrictive covenants and can be pre-paid before
maturity date.
 Question 40
On December 30, 2013:
o Company Y trades at $10 per share
o Enterprise Value / EBITDA multiple of 5.0x
o Leverage ratio of 0.6x (Net debt/EBITDA)
o 2013 EBITDA = $2.0 billion

o Assume no cash on company Y's balance sheet
o Company Y undergoes an LBO and is recapitalized
o The company's new leverage ratio becomes 5.0x
o Financial sponsor exit is planned for Year 5. Assume that the EV/ EBITDA
multiple at exit year is the same as the current multiple.
o Required rate of return is 25%
o Exit year EBITDA projected to be $3.0 billion
o The company's year-end leverage ratio is 1.6x

What is the initial Equity Value?
o $9.0 billion
o $8.8 billion
o $7.6 billion
o $8.0 billion
 Question 41



How much debt is paid down by the exit year (since the LBO
announcement)?
o $6.4 billion
o $5.2 billion
o $6.2 billion
o $5.6 billion
 Question 42


What is the initial equity necessary to achieve the rate of return required by
the financial sponsors?
o $4.95 billion
o $3.34 billion
o $3.15 billion
o $3.80 billion
 Question 43
Non-equity claims that should be deducted from Enterprise Value to find
Equity Value include all of the following EXCEPT:
o Minority Interest
o Preferred stock
o Capitalized leases
o All of the above
All non-equity claims (debt and equivalents) must be subtracted from
enterprise value to identify a company’s equity value. These non-equity
claims can include debt, preferred stock, minority interests, and leases.
 Question 44
"LTM" (Last Twelve Months) is calculated as follows:
o Latest completed fiscal year results + Latest reported stub period results – Same
stub period results from one year ago
o Latest fiscal year results – Latest reported stub period results + Same period
results one year ago
o Latest completed fiscal year results
o None of the above
 Question 45
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:
o Appropriately priced
o Need more information
 Question 46
A debt holder would be primarily concerned with which of the following
multiples?
I. Enterprise (Transaction) Value / EBITDA

II. Price/Earnings
III. Enterprise (Transaction) Value / Sales
o I and II only
o II only
o I and III only
o I, II, and III
 Question 47
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:
o Appropriately priced
o Need more information
 Question 48
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:
o 8-K
o Form S-1
o Proxy statement
o Form S-4
S-1 registration is filed by a company when it decides to go public and sell
securities in an Initial Public Offering (IPO). While the form contains useful
historical financial data about the company, it does not provide any M&A-
related information.
 Question 49
When determining value for a company based on transaction rather than
trading comps, one of the key differences that will affect the value is:
o Lack of a comparable universe
o Premium paid for control of the business
o Unavailable historical information
o Target was never public
Transaction comps typically reflect a premium that acquirers have paid
above a company’s share price in order to gain control of a target.
 Question 50
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.
o Wayne’s shares currently trade at $34 per share
o Wayne’s has 50 million diluted shares outstanding
o Wayne’s LTM EBITDA was $250 million
o Wayne’s Net Debt was $200 million

What is the offer value per share and the offer premium?
o $32.33 per share; -4.9%
o $36.00 per share; 5.9%
o $44.00 per share; 29.4%
o $52.94 per share; 55.7%

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o 2014 Revenues of $5 billion

o 2013 Accounts receivable of $400 million

o 2014 Accounts receivable of $600 million

o 2014 Revenues of $8 billion

o 2014 COGS of $5 billion

o 2013 Accounts receivable of $400 million

o 2013 Inventories of $1 billion

o 2014 Inventories of $800 million

o 2013 Accounts payable of $250 million

o 2014 Accounts payable of $300 million

= $900m / $5bn x 365 days

o Average share price of $60 for the year 2013

o Expected EPS growth for 2014 of 10%

Number of shares repurchased = share repurchase plan / share price = $4

o 2013 retained earnings balance of $12 billion

o Net income of $3.5 billion in 2014

o Capex of $200 million in 2014

o Preferred dividends of $100 million in 2014

I. Enterprise (Transaction) Value / EBITDA

III. Enterprise (Transaction) Value / Sales

Free Cash 110 120 150 170 200 250 280

Free Cash 110 120 150 170 200 250 280

Calculate Company X's implied Enterprise Value by using the discounted

Free Cash 110 120 150 170 200 250 280

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

o No “step-up” for tax purposes

o Original tax basis of $650 million

o No premium is offered to the current target share price

o Acquirer share price at announcement is $30

o Target share price at announcement is $50

o Acquirer EPS next year is $3.00

o Target EPS next year is $2.00

o Acquirer has 4 thousand shares outstanding

o Target has 2 thousand shares outstanding

o No premium is offered to the current target share price

o Acquirer share price at announcement is $30

o Target share price at announcement is $50

o Acquirer EPS next year is $3.00

o Target EPS next year is $2.00

o Acquirer has 4 thousand shares outstanding

o Target has 2 thousand shares outstanding

o Excess cash is used to help pay for the acquisition

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

o Acquisition takes place on July 1, 2013

o Acquirer FYE – June 30

o Target FYE – December 31

o Acquirer expected EPS for FYE June 2014 is $2.40

o Target consensus EPS for FYE Dec 2013 is $1.12

o Target consensus EPS for FYE Dec 2014 is $1.78

o Company Y trades at $10 per share

o Enterprise Value / EBITDA multiple of 5.0x

o Leverage ratio of 0.6x (Net debt/EBITDA)

o 2013 EBITDA = $2.0 billion

o Company Y undergoes an LBO and is recapitalized

o The company's new leverage ratio becomes 5.0x

o Required rate of return is 25%