WALL STREET PREP FINAL EXAM ACTUAL QUESTIONS
AND ANSWERS MARKED A+
✔✔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
AND ANSWERS MARKED A+
✔✔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
