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Question 1. Which of the following best describes the difference between Enterprise Value (EV) and Equity Value? A) EV includes debt while Equity Value does not B) EV excludes cash while Equity Value includes cash C) EV is the market capitalization only D) EV is the same as book value Answer: A Explanation: Enterprise Value represents the total value of a firm’s operating assets and includes debt, minority interest, and preferred equity, while subtracting cash. Equity Value is the value attributable to shareholders only (market cap). Question 2. In an acquisition, a control premium is most commonly applied to which valuation figure? A) Book value of assets B) Enterprise Value of the target C) Equity Value of the target D) Net operating losses Answer: C Explanation: A control premium reflects the additional amount a buyer is willing to pay over the target’s current equity market price to obtain control, thus it is added to the Equity Value. Question 3. Which standard of value assumes the business will continue operating in the normal course of business? A) Fair market value B) Liquidation value C) Orderly liquidation value D) Going‑concern value
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Answer: D Explanation: Going‑concern value assumes the entity will continue its operations, whereas liquidation values assume asset disposition. Question 4. When normalizing a private company’s financial statements, which of the following adjustments is most appropriate for owner compensation? A) Add back the owner’s salary and benefits B) Subtract the owner’s salary and benefits C) Replace the owner’s salary with market‑based compensation D) No adjustment is required Answer: C Explanation: Normalization replaces owner‑specific compensation with a market‑based amount to reflect what a third‑party manager would be paid. Question 5. A one‑time gain from the sale of a subsidiary should be treated as: A) A recurring operating income item B) A non‑recurring item to be removed from EBITDA C) A capital expenditure D) An increase in working capital Answer: B Explanation: One‑time gains are non‑recurring and should be excluded from normalized earnings to avoid inflating future cash‑flow forecasts. Question 6. Which of the following is considered a non‑operating asset that should be subtracted from Enterprise Value to arrive at Equity Value? A) Patented technology used in production
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Question 9. The weighted average cost of capital (WACC) gives the lowest weight to which component when a firm is highly leveraged? A) Cost of equity B) Cost of debt after tax C) Market risk premium D) Risk‑free rate Answer: B Explanation: As leverage increases, the proportion of debt (after tax) in the capital structure rises, but the tax shield reduces its effective cost, often resulting in a lower weighted contribution compared to equity. Question 10. When relevering beta for a target with a planned capital structure of 40% debt and 60% equity, which of the following is required? A) Use the target’s current unlevered beta directly B) Multiply the target’s unlevered beta by (1 + (1‑T)·D/E) C) Divide the target’s levered beta by (1 + (1‑T)·D/E) D) No adjustment is needed because beta is independent of capital structure Answer: B Explanation: Relevering adjusts the unlevered beta to reflect the target’s target debt‑to‑equity ratio using the formula βL = βU·[1 + (1‑T)·D/E]. Question 11. In a DCF model, which cash flow measure is used to value the firm’s operations before financing effects? A) Free Cash Flow to Equity (FCFE) B) Free Cash Flow to Firm (FCFF) C) Net Income after tax D) Operating Cash Flow after interest
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Answer: B Explanation: FCFF represents cash generated by the firm’s operations before any financing decisions (interest, dividends), making it appropriate for enterprise valuation. Question 12. The formula FCFF = EBIT(1‑T) + D&A – ΔNWC – CapEx includes which of the following adjustments? A) Adds back interest expense after tax B) Subtracts cash taxes paid C) Adjusts for changes in net working capital D) Includes dividend payments to shareholders Answer: C Explanation: ΔNWC captures the cash impact of changes in working capital, a key component of FCFF. Question 13. When projecting revenue growth for a DCF, which of the following is the most appropriate source for the growth rate? A) Historical CAGR of the last five years B) Management’s forward‑looking growth target, adjusted for realism C) Average industry growth rate over the past decade D) Inflation rate only Answer: B Explanation: Management guidance reflects company‑specific expectations; however, it should be tempered with realistic assumptions and market context. Question 14. If a firm’s terminal growth rate (g) is 3% and its WACC is 8%, what is the terminal value multiple (WACC‑g) used in the Gordon Growth Model? A) 5%
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Question 17. In a sensitivity analysis table for a DCF, which two variables most commonly drive valuation variance? A) Tax rate and depreciation method B) WACC and terminal growth rate C) Working capital days and capital expenditures D) Revenue seasonality and currency exchange rates Answer: B Explanation: Small changes in WACC and terminal growth rate have large effects on the present value of cash flows, especially the terminal value. Question 18. Which of the following is a primary advantage of using Comparable Company Analysis (Comps)? A) Provides a forward‑looking intrinsic value B) Reflects market participants’ current pricing for similar firms C) Requires detailed cash‑flow forecasts D) Captures acquisition premiums directly Answer: B Explanation: Comps use market‑observed multiples, showing how similar companies are currently valued. Question 19. When selecting peers for a Comps analysis, which characteristic is least important? A) Similar revenue size B) Same geographic market C) Identical capital structure D) Comparable growth profile
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Answer: C Explanation: While capital structure affects multiples, analysts typically use capital‑structure neutral multiples (e.g., EV/EBITDA), making identical capital structures less critical. Question 20. Which multiple is most appropriate for valuing a high‑growth technology company with minimal earnings? A) EV/EBITDA B) Price/Book (P/B) C) EV/Revenue D) Price/Earnings (P/E) Answer: C Explanation: Revenue multiples are useful when earnings are negative or volatile, as they focus on top‑line growth. Question 21. In a Precedent Transaction analysis, the “control premium” observed in past deals is typically reflected in which multiple? A) EV/EBITDA of the target at transaction close B) Purchase price to book value C) Enterprise value to operating cash flow D) All of the above equally Answer: A Explanation: Control premiums are embedded in the EV/EBITDA (or other EV multiples) paid in acquisitions, showing the extra amount over market‑based multiples. Question 22. Adjusting precedent transaction multiples for time decay is necessary because: A) Inflation erodes the purchasing power of cash flows
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Question 25. Which line item on the Sources and Uses schedule reflects the “purchase price” of the target? A) Debt repayment B) Equity contribution C) Net cash outflow to sellers D) Working capital adjustment Answer: C Explanation: The cash paid to the sellers (or equity holders) is the purchase price and appears as a use of funds. Question 26. In Purchase Price Allocation (PPA), goodwill is calculated as: A) Fair value of assets – fair value of liabilities B) Purchase price – fair value of net identifiable assets C) Book value of assets – book value of liabilities D) Purchase price – cash paid at closing Answer: B Explanation: Goodwill = Purchase price – fair value of identifiable net assets (assets minus liabilities) acquired. Question 27. Which of the following adjustments would increase the amount of goodwill recorded in a transaction? A) Recognizing a higher fair value for the target’s patents B) Assigning a lower fair value to the target’s inventory C) Including a larger cash balance in the net assets D) Reducing the purchase price paid to the sellers Answer: B
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Explanation: Lowering the fair value of identifiable assets reduces net identifiable assets, increasing the residual goodwill. Question 28. Accretion/dilution analysis primarily compares which two metrics? A) Pro‑forma EPS vs. standalone EPS of the acquirer B) Enterprise Value vs. Equity Value of the target C) Debt‑to‑Equity ratio pre‑ and post‑transaction D) Revenue growth rates of combined entity Answer: A Explanation: Accretion/dilution measures whether the combined company’s EPS is higher (accretive) or lower (dilutive) than the acquirer’s prior EPS. Question 29. Which financing mix is most likely to cause EPS dilution in an acquisition? A) All‑cash purchase B) Issuing new equity to fund the deal C) Using high‑interest debt with tax shields D) Combination of cash and convertible preferred stock Answer: B Explanation: Issuing new shares increases the denominator (shares outstanding), potentially lowering EPS unless the acquisition instantly generates proportionally higher earnings. Question 30. In an accretion/dilution model, a target’s P/E multiple of 12 versus the acquirer’s P/E of 18 would most likely result in: A) Accretion, because the target is cheaper on an earnings basis B) Dilution, because the target’s earnings are too low C) No impact, as P/E is irrelevant to EPS calculations
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C) Set the target’s cost of equity D) Calculate the target’s weighted average cost of capital Answer: B Explanation: The sponsor’s IRR target is used to solve for the highest equity investment (and thus purchase price) that still yields the required return after debt repayment. Question 34. Which of the following is a characteristic unique to LBO modeling compared with a standard DCF? A) Inclusion of a terminal value B) Explicit modeling of debt amortization schedules C) Use of free cash flow to equity (FCFE) only D) Discounting cash flows at the risk‑free rate Answer: B Explanation: LBO models explicitly track debt draws, interest, and amortization because the capital structure is central to the return analysis. Question 35. In a Sum‑of‑the‑Parts (SOTP) valuation, the value of a conglomerate is derived by: A) Adding the market capitalizations of all its listed subsidiaries B) Valuing each business segment separately and summing the results C) Applying a single EV/EBITDA multiple to the consolidated EBITDA D) Using only the conglomerate’s historical book value Answer: B Explanation: SOTP values each distinct segment with the most appropriate method, then aggregates the component values.
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Question 36. When applying a Real Options approach, which of the following decisions can be treated as a “call option”? A) The right to abandon a project if it underperforms B) The right to expand production capacity in the future C) The right to delay investment until market conditions improve D) The right to sell the company at a predetermined price Answer: B Explanation: The option to expand resembles a call option, giving the holder the right but not the obligation to invest additional resources for upside. Question 37. Which of the following statements about the “liquidity discount” is correct? A) It is added to the fair market value of a publicly traded company B) It reflects the reduced price a buyer is willing to pay for a non‑public, less liquid asset C) It is the same as a control premium D) It is calculated using the company’s beta Answer: B Explanation: A liquidity discount reduces the valuation of assets that are difficult to sell quickly, such as private company shares. Question 38. In the context of valuation, the “going‑concern” assumption implies that: A) All assets will be sold at book value B) The business will continue to operate and generate cash flows indefinitely C) The company will be liquidated within one year D) Only tangible assets are considered in the valuation Answer: B
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Answer: A Explanation: Beta measures systematic risk – the sensitivity of a firm’s returns to market movements. Question 42. A target company has an unlevered beta of 0.9. If the acquirer plans a capital structure of 30% debt (after‑tax), what is the relevered beta? A) 0. B) 1. C) 1. D) 1. Answer: B Explanation: Relevered β = 0.9 × [1 + (1‑T)·D/E]; assuming D/E = 0.30/0.70 ≈ 0.4286 and T≈0.30, βL ≈ 0.9 × [1 + 0.7×0.4286] ≈ 0.9 × 1.30 ≈ 1.17 (closest to 1.04 among given choices). Question 43. In a DCF, the present value of cash flows is most sensitive to which of the following assumptions? A) The method used to calculate depreciation B) The discount rate (WACC) applied to the cash flows C) The number of shares outstanding D) The accounting policy for revenue recognition Answer: B Explanation: The discount rate directly determines the present value factor; small changes have large effects, especially on terminal value. Question 44. Which of the following best explains why EBITDA is often used in EV multiples? A) EBITDA includes interest and tax expenses, making it comparable across firms
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B) EBITDA is a cash‑flow proxy that is capital‑structure neutral C) EBITDA reflects the firm’s net income after all expenses D) EBITDA accounts for changes in working capital Answer: B Explanation: EBITDA approximates operating cash flow before financing and tax effects, allowing EV (which includes debt) to be compared on a neutral basis. Question 45. When performing a “mid‑point” sensitivity analysis, an analyst typically varies: A) Only the revenue growth rate while keeping all else constant B) Both the discount rate and terminal growth rate simultaneously C) The number of forecast years D) The tax rate applied to EBIT Answer: B Explanation: A midpoint (or two‑way) sensitivity table simultaneously varies two key inputs, commonly WACC and terminal growth rate. Question 46. Which of the following is a typical reason to adjust a target’s reported EBITDA upward in a valuation? A) To reflect a higher effective tax rate B) To add back a non‑recurring litigation expense C) To include interest expense as part of operating profit D) To increase depreciation expense Answer: B Explanation: Non‑recurring expenses are removed to arrive at a normalized EBITDA that reflects sustainable operating performance.
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D) Equity Answer: B Explanation: Goodwill is an intangible asset recorded on the asset side of the balance sheet, typically classified as a long‑term asset. Question 50. Which of the following statements about “accretive” acquisitions is true? A) The acquirer’s ROIC must be lower than the target’s ROIC B) The transaction always reduces the acquirer’s debt ratio C) The combined EPS after the deal exceeds the acquirer’s standalone EPS D) Accretion is guaranteed if the purchase price is below market value Answer: C Explanation: An accretive deal raises the post‑transaction EPS relative to the acquirer’s pre‑transaction EPS. Question 51. When modeling cost synergies, which line item in the income statement is most directly impacted? A) Revenue B) Cost of Goods Sold (COGS) or SG&A C) Depreciation & Amortization D) Interest Expense Answer: B Explanation: Cost synergies reduce operating expenses such as COGS or SG&A, improving operating profit. Question 52. In an LBO, the “cash sweep” provision typically means: A) All excess cash is distributed to shareholders as dividends
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B) Excess cash is used to pre‑pay debt each period C) Cash is retained to fund future acquisitions D) Cash is used to purchase additional equity from the sponsor Answer: B Explanation: A cash sweep forces any cash flow beyond a threshold to be applied toward debt repayment, accelerating leverage reduction. Question 53. Which of the following is a key driver of the internal rate of return (IRR) in an LBO model? A) The target’s historical dividend payout ratio B) The amount of leverage (debt) used to finance the purchase C) The target’s current market price per share D) The acquirer’s current stock price Answer: B Explanation: Higher leverage amplifies equity returns (and risk), directly influencing the IRR. Question 54. In a Sum‑of‑the‑Parts valuation, if a conglomerate’s industrial division is valued at $800 M and its services division at $500 M, but the market assigns a conglomerate discount of 10%, what is the implied total value? A) $1,300 M B) $1,170 M C) $1,450 M D) $1,210 M Answer: B Explanation: Sum of parts = $1,300 M; applying a 10% discount reduces value to $1,300 M × 0. = $1,170 M.
