Investment Banking Basics Practice Test

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• What is the tax shield in an LBO?
• Depreciation increasing by $10, with a 40% tax rate, what happens to Net Income?
• Accounts receivable days are typically within which range?
• What is the basic interpretation of Enterprise Value?
• Why does depreciation affect cash balance?
• In Sum of the Parts analysis, what is the recommended approach for divisions?
• If a company shows positive EBITDA for many years but goes bankrupt due to cash issues, which factor not reflected in EBITDA is most likely to cause cash-flow problems leading to bankruptcy?
• If a convertible bond is out-of-the-money, how is it treated in calculating diluted shares?
• Which statement describes the cash flow effect of a dividend recap on the cash flow statement?
• Could a company have a negative Equity Value? What would that mean?
• Who bears the debt after an LBO deal closes?
• Under GAAP, is goodwill amortized, or is impairment the primary method of accounting for it?
• Why do we add Preferred Stock to get to Enterprise Value?
• Which item is typically capitalized?
• Which of the following is NOT among the most common valuation multiples listed?
• Rank the 3 valuation methodologies from highest to lowest expected value.
• What is the typical horizon for projecting FCF in a DCF?
• In building a merger model, which items are typically assumed at Step 1?
• When planning debt in an LBO, what is the purpose of using debt comps from similar deals?
• When will precedent transactions usually produce a higher value than comparable companies?
• What is the primary reason a private equity firm would execute a dividend recapitalization of a portfolio company?
• Why is depreciation added back to cash flow from operations?
• When would you not use a DCF?
• Which is one of the main criteria used to select comparable companies/precedent transactions?
• When would you use Sum of the Parts?
• Why would a PE firm buy a company in a risky industry, such as technology?
• When analyzing how much debt a company can take on, and what the terms should be, what are reasonable leverage and coverage ratios?
• If a company has 100 shares outstanding, price $10, and 10 options at an exercise price of $15, what is the fully diluted equity value?
• What is the relationship between the terminal value and the final year's FCF in the final cash flow calculation?
• Which statements are the three main financial statements?
• Depreciation vs amortization applies to which types of assets?
• In simplifying the enterprise value calculation, replacing debt with net debt and removing the subtraction of cash implies what?
• In a merger, which combination of write-offs could impact the combined company's accounting beyond Goodwill?
• In an LBO model, is it necessary to project a full Balance Sheet?
• When using unlevered free cash flow multiples, which value metric should you pair it with?
• In the standard Enterprise Value formula EV = Equity Value + Debt + Preferred Stock + Noncontrolling Interest - Cash, which item is subtracted?
• After a $10 increase in accrued compensation, what are the balance sheet effects?
• What is an alternate way to calculate levered FCF?
• Why is Enterprise Value used for industry-specific multiples like EV/Unique Visitors?
• What does Noncontrolling Interest represent on a consolidated balance sheet?
• What is net debt?
• At the start of Year 1, Apple finances the purchase of $100 of factory assets entirely with debt. Which statement best describes the initial effect on the three statements?
• Why is the Income Statement not affected by changes in Inventory?
• Why is Operating Working Capital excluding cash and debt useful in models?
• Which of the following is NOT listed as an alternative valuation method?
• When calculating the combined pre-tax income in a merger model, what is done with foregone interest on cash?
• In the real-life LBO analogy of buying a house, which component represents investor equity?
• What does Funds From Operations (FFO) for REITs do with depreciation and gains on sale?
• Which metric is commonly used at exit to estimate equity returns in an LBO?
• How would you present valuation methodologies to a company or its investors?
• Which statement best describes accrual accounting?
• Under the Treasury Stock Method, when options are exercised, what happens to the cash from exercises?
• Why would a PE firm use high yield debt?
• Which statement best describes why the EV/EBITDA multiple is commonly used over Equity Value/EBITDA?
• Which value is typically higher for healthy companies: Equity Value or Shareholders' Equity?
• Which of the following statements about the income statement after a dividend recap is true?
• After projecting FCF for the horizon, what is used to estimate cash flows beyond the projection period?
• Which metric does a merger model primarily evaluate to determine if the combination is favorable for the buyer?
• Noncontrolling Interest was formerly known as what?
• Which of the following is NOT listed as a way to boost returns in an LBO?
• Is it always accurate to add Debt to Equity Value when calculating Enterprise Value?
• Under accrual accounting, a TV sold on credit would appear as which immediately?
• How would you value an apple tree?
• Which of the following is commonly shown on the Cash Flow Statement as an adjustment?
• Which is the strongest indicator of an attractive LBO candidate?
• When would you use a Liquidation Valuation?
• When applying valuation methodologies, what is typically used as the base multiple?
• What is Operating Working Capital? (definition)
• Would an LBO or DCF typically provide a higher valuation?
• What are the most common multiples used in Valuation?
• In a slide comparing financial and non-financial institutions, you might use Equity Value / Revenue instead of EV / Revenue because of what condition?
• What are the 3 major valuation methodologies?
• An acquisition is dilutive when which of the following is true?
• What is the primary purpose of a basic merger model?
• Goodwill on the balance sheet represents
• Deferred revenue vs accounts receivable is correctly described as:
• If accrued compensation increases by $10, what is the effect on Cash Flow from Operations, assuming a 40% tax rate?
• What is the general rule for fully diluted shares when evaluating dilutive securities?
• A company has 1 million shares outstanding at $100 per share and $10 million of convertible bonds with par value $1000 and conversion price $50. How many diluted shares are outstanding?
• Under accrual accounting, when is revenue recognized?
• Negative book equity value can arise when which of the following occurs?
• After a dividend recap, which statement about the financial statements is true?
• What is the purpose of Debt Comps in merger modeling?
• Which variables are most commonly examined in merger model sensitivities?
• What determines whether a cost is capitalized or expensed?
• In precedent transactions, what is often used to limit the set?
• Net Income from the Income Statement is used on the Cash Flow Statement as what?
• Which basic metric reflects the minimum return required given alternative investments?
• A Fairness Opinion is a document that proves what?
• Which order of valuation methods is described as highest to lowest in the material?
• A government bailout of $100 in equity typically has which effect on the three financial statements?
• If you could review only one statement to assess overall health, which would you choose?
• Which statement best describes the essential components to project in an LBO model?
• In M&A terminology, how does a merger typically differ from an acquisition?
• What are the two main components of a DCF valuation?
• Which statement describes amortization differences between bank debt and high-yield debt?
• Which two statements would you use to construct a cash flow statement?
• What are the flaws with public company comparables?
• What does positive working capital indicate?
• How is the balance sheet adjusted in an LBO? What happens to existing shareholders' equity?
• Which multiple is commonly used for Real Estate Investment Trusts (REITs)?
• Which item is excluded from EBITDA?
• What is the final cash flow in a typical DCF analysis?
• An increase in accrued compensation by $10 would result in which of the following on the Income Statement?
• What is the standard Enterprise Value formula?
• When would liquidation valuation produce the highest value?
• A company writes down a $100 liability. Which statement correctly describes the impact on the three financial statements?
• Which statement about upfront cash for future services is true?
• How do you account for convertible bonds in the Enterprise Value formula?
• Do you always use the median multiples of a set of public company comparable or precedent transactions?
• Which expression represents levered Free Cash Flow?
• Under rising product prices, which inventory method results in higher COGS?
• How would you determine how much debt can be raised and how many tranches there would be in an LBO?
• Cash collected in advance is typically recorded as which on the balance sheet?
• In energy valuations, EBITDAX excludes which expense to normalize comparisons?
• Why do companies report both GAAP and non-GAAP earnings?
• What happens to the private equity firm's equity investment after a dividend recap?
• To get Unlevered FCF, which items are added back/subtracted?
• What is the standard method to account for the dilutive impact of stock options when computing fully diluted shares?
• How are convertible bonds treated in computing diluted shares when determining Equity Value?
• What discount rate is used to compute the present value of projected cash flows in a DCF?
• What are some flaws with precedent transactions?
• What is Working Capital?
• When do you use an LBO Analysis as part of valuation?
• A company purchases $10 of inventory with cash. Which of the following describes the impact on the three financial statements?
• Which step in an LBO model involves determining the exit and calculating equity returns?
• At the start of Year 3, Apple orders $10 of additional iPad inventory using cash on hand. They have not manufactured or sold anything yet. Which of the following best describes the effect on the three statements?
• What is a dividend recapitalization?
• Which rate is typically used to discount cash flows in a DCF?
• What does the football field valuation graph illustrate?
• In a scenario with 100 shares outstanding, price $10, and 10 options at an exercise price of $5, what is the fully diluted equity value?
• Which statement is true about the differences between bank debt and high-yield debt?
• How is goodwill defined in an acquisition?
• Why do bankers look at Operating Working Capital more commonly in financial models?
• Cash-based versus accrual accounting: which statement is true?
• In Year 2, the company records 10% depreciation on the factory assets and 10% interest expense. With a 40% tax rate, which statement best describes the impact on net income and cash flow from operations?
• To derive unlevered free cash flow from revenue projections, which sequence is correct?
• Two companies have the exact same financial profiles and are bought by the same acquirer, but the EBITDA multiple for one transaction is twice the multiple of the other transaction - how could this happen?
• What is the primary purpose of an LBO Model in private equity analysis?
• How would a company estimate debt capacity in a merger?
• Which of the following best expresses Free Cash Flow (FCF) used in a discounted cash flow model?
• Under the indirect method, which line item is most directly affected by adding back non-cash expenses?
• Net Income increases which component on the Balance Sheet?
• How is cash treated on the asset side of the balance sheet in an LBO?
• In an LBO, how is the target purchase price determined, and why is it called a floor valuation?
• What does goodwill and other intangible assets represent in an acquisition?
• Could you ever end up with negative shareholders' equity? What does it mean?
• In an LBO, why would a PE firm use debt rather than financing entirely with equity?
• Why might you use bank debt rather than high-yield debt in an LBO?
• Why would you use leverage when buying a company?
• Terminal value in a DCF is used to capture cash flows beyond the projection period. True or false?
• What does the PV of cash flows equal when discounted by the WACC in a DCF?
• Why is cash subtracted in the Enterprise Value calculation, and is it always accurate?
• Where does depreciation usually show up on the Income Statement?
• Under IFRS, is LIFO permitted?
• For healthy companies, how does Equity Value typically compare to Shareholders' Equity?
• What is the primary use of the term 'Discount rate' in investment appraisal?
• Which EV multiple is typically used to value Technology (internet) firms?
• Which statement about the list of common valuation multiples is accurate?
• In an acquisition, which value does the buyer typically consider to determine price?
• Why is EBITDAX used in energy valuations?
• Which statement best describes the difference between accounts receivable and deferred revenue?
• Formula for WACC includes which components?
• If Apple sells the iPads for revenue of $20, with a cost of $10, what is the effect on the three statements?
• Why is Noncontrolling Interest added in the Enterprise Value calculation?
• Under what circumstances would Goodwill increase?
• In Year 3, the factories are written down by 80 and the loan must be paid back now. Which of the following describes the impact on the three statements?
• In an all-stock deal, what is a quick rule of thumb to assess accretion?
• Why can't you use Equity Value/ EBITDA as a general valuation multiple?
• Why would a company with similar growth and profitability be valued at a premium?
• When calculating enterprise value, which equity value is typically used in practice?
• Which metric would be most appropriate to value a pre-profit, user-based startup around 2004?
• Valuation can be used in all of the following except?
• Which methods can be used to estimate terminal value in a DCF?
• Which of the following is a reason negative working capital can occur?
• What is the correct interpretation of the relationship between FCF and EV in a DCF?
• What covenants are associated with high-yield debt and bank debt?
• Which item would typically be capitalized?
• Which statement correctly describes Equity Value versus Shareholders' Equity?
• How do you pick purchase multiples and exit multiples in an LBO model?
• Which valuation method is used to determine how much a private equity firm could pay and set a floor on valuation?
• What triggers goodwill impairment in financial reporting?
• Why are Goodwill and other intangibles created in an LBO?
• In LBO modeling, is a full Balance Sheet required?
• Which factor can make an acquisition dilutive beyond foregone cash interest?
• What characteristics make an ideal candidate for an LBO?
• An asset write-down of $100 is recorded. With a 40% tax rate, which of the following best describes the impact on the three financial statements?
• Which variables have the biggest impact on the returns of an LBO model?
• Why do analysts look at both Enterprise Value and Equity Value?
• What is the most important factor when selecting comparables?