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What is generally not

Extraordinary
considered to be a pre-
tax non-recurring
gains/losses(unusual
or infrequent) item?
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Terms in this set (50)

What is generally not considered to be

a pre-tax non-recurring (unusual or
infrequent) item?

Extraordinary gains/losses

what is false about depreciation and

amortization

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

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

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

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

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?

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

36.5

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?

65.7 days

Which of the following is true

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?

60.6 million

non-controlling interest

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
• Common dividends of $400 million in
2014
What is the retained earnings balance at
the end of 2014?

15 billion

in order to find out how much cash is

available to pay down short term debt,
such as revolving credit line, you must
take

beginning cash balance + pre-debt cash

flows - min. cash balance - required
principal payments of LT and other debt

to calculate interest expense in the

future, you should do which of the
following

apply a weighted average interest rate

times the average debt balance over
the course of the year

enterprise (transaction) value represents

the:

value of all capital invested in a business

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

1 and 3 only

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 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.
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):

837 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.
Calculate Company X's implied
Enterprise Value by using the
discounted cash flow method:

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:

.13 per share overvalued

the formula for discounting any specific

period cash flow in period "t"is:

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

cash flow from period "t+1" divided by

(discount rate-growth rate)

the two-stage DCF model is:

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

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

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

A deferred tax liability equal to $52.5

million

An acquisition creates shareholder

value:

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 $30
• Target share price at announcement is
$50
• Acquirer EPS next year is $3.00
• Target EPS next year is $2.00
• Acquirer has 4 thousand shares
outstanding
• Target has 2 thousand shares
outstanding
What is the exchange ratio for the deal?

1.7x

• 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 $30
• Target share price at announcement is
$50
• Acquirer EPS next year is $3.00
• Target EPS next year is $2.00
• Acquirer has 4 thousand shares
outstanding
• Target has 2 thousand shares
outstanding
Assuming a 40% tax rate, what are the
necessary pre-tax synergies needed to
break-even?

...

Pushdown accounting:

Refers to the establishment of a new

accounting and reporting basis in an
acquired company's separate
financial statements

Use the following information to answer

the question below:• Acquirer purchases
100% of target by issuing $100 million in
new debt to purchase target shares,
carrying an interest rate of 10%
• Excess cash is used to help pay for the
acquisition
• 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
• Target PP&E is written up by $25
million to fair market value
• 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?

Advisory fee expense of $30 million

Depreciation expense increase due to
PP&E write-up
Pre-tax synergies of $2 million

Use the following information to answer

the question below:
• Acquisition takes place on July 1, 2013
• Acquirer FYE - June 30
• Target FYE - December 31
• Acquirer expected EPS for FYE June
2014 is $2.40
• Target consensus EPS for FYE Dec
2013 is $1.12
• 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)

$1.45

A 338(h)(10) election:

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?

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?

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:

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:

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

The purchase price is reflected as a

reduction to equity

which of the following is true about

senior debt

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)