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WALL STREET PREMIUM EXAM WITH ANSWERS
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What is generally not considered to be a pre-tax non-recurring (unusual or infrequent) item? - ANSWER Extraordinary gains/losses what is false about depreciation and amortization - ANSWER D&A may be classified within interest expense Company X's current assets increased by $40 million from 2007-2008 while the companies current liabilities increased by $25 million over the same period. the cash impact of the change in working capital was - ANSWER a decrease of 15 million the final component of an earnings projection model is calculating interest expense. the calculation may create a circular reference because - ANSWER interest expense affects net income, which affects FCF, which affects the amount of debt a company pays down, which, in turn affects the interest expense, hence the circular reference a 10-q financial filing has all of the following characteristics except - ANSWER issued four times a year. 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 - ANSWER computers used by the accounting department If a company has projected revenues of $10 billion, a gross profit margin of 65%, and projected SG&A expenses of $2billion, what is the company's operating (EBIT) margin? - ANSWER 45% A company has the following information, 1. 2014 revenues of $5 billion,2013 Accounts receivable of $400 million, 2014 accounts receivable of $600 million, what are the days sales outstanding - ANSWER
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? - ANSWER 65.7 days Which of the following is true - ANSWER Coca Cola's brand name is not reflected as an intangible asset on its balance sheet 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? - ANSWER 60.6 million non-controlling interest - ANSWER is an expense on the income statement and equity o the balance sheet 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
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: - ANSWER 2951.2 million 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. According to the discounted cash flow valuation method, Company X shares are: - ANSWER .13 per share overvalued the formula for discounting any specific period cash flow in period "t"is: - ANSWER cash flow from period "t" divided by (1+discount rate raised exponentially to "t"
the terminal value of a business that grows indefinitely is calculated as follows - ANSWER cash flow from period "t+1" divided by (discount rate-growth rate) the two-stage DCF model is: - ANSWER 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 disadvantages of a DCF do not include - ANSWER free cash flows over the first 5-10 year period represent a significant portion of value and are highly sensitive to valuation assumptions the typical sell-side process - ANSWER shorter than the buy side, buyer secures financing, and doesn't involve id'ing potential issues to address such as ownership and unusual equity structures, liabilities, etc. the following happened in a recent M&A transaction: 1. PP&E of the target company was increased from its original book basis of $600 million to $800 million to reflect fair market value for book purposes in accordance with the purchase method of accounting. 2. no "step-up" for tax purposes. 3. original tax basis of $650 million. assuming a corporate tax rate of 35% for book purposes, the company should record the following - ANSWER A deferred tax liability equal to $52.5 million An acquisition creates shareholder value: - ANSWER when a company acquires a business whose fundamental value is higher than the purchase price
- 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 $
- Target share price at announcement is $
- Acquirer EPS next year is $3.
- Target EPS next year is $2.
- Acquirer has 4 thousand shares outstanding
- Target has 2 thousand shares outstanding What is the exchange ratio for the deal? - ANSWER 1.7x
- Acquirer expected EPS for FYE June 2014 is $2.
- Target consensus EPS for FYE Dec 2013 is $1.
- Target consensus EPS for FYE Dec 2014 is $1. Assuming 360 days in a year for simplicity, calculate target EPS adjusted to acquirer FYE in the transaction year (FYE June 2014) - ANSWER $1. A 338(h)(10) election: - ANSWER Requires that both buyer and seller must jointly elect to have the IRS deem the acquisition an asset sale for tax purposes A good LBO candidate has which of the following characteristics? - ANSWER Little to no existing leverage, steady cash flows and little investment in business through capex and working capital Which of the following is NOT a disadvantage of performing an LBO analysis? - ANSWER Stand-alone LBO may overestimate strategic sale value by ignoring synergies with acquirer 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: - ANSWER Equity - 35%; Debt 65% 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: - ANSWER 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 Under recapitalization accounting - ANSWER The purchase price is reflected as a reduction to equity which of the following is true about senior debt - ANSWER None of the Below. 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 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 What is the initial Equity Value? - ANSWER 8.8 billion 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
LTM (Last Twelve Months) is calculated as follows - ANSWER Latest completed fiscal year results + Latest reported stub period results - Same stub period results from one year ago 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: - ANSWER 7.5 per share undervalued 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 - ANSWER one and three only 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: - ANSWER 2.5 per share undervalued 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: - ANSWER Form s- 1 when determining value for a company based on transaction rather than trading comps, one of the key differences that will affect the value is - ANSWER premium paid for control of the business 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? - ANSWER $36.00 per share; 5.9%
