M&A MODELING EXAM – WALL STREET PREP
PRACTICE QUESTIONS AND ANSWERS - LATEST
AND COMPLETE UPDATE WITH VERIFIED
SOLUTIONS – ASSURED PASS WITH INSTANT
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1. In a stock-for-stock acquisition, the purchase price is typically determined
based on:
A. Target’s debt-to-equity ratio
B. Exchange ratio multiplied by the acquirer’s share price
C. Target’s book value of equity only
D. Acquirer’s EBITDA multiple
Rationale: In stock-for-stock deals, the purchase price is calculated by multiplying
the agreed-upon exchange ratio by the acquirer’s share price at closing.
2. Which of the following is a primary reason for performing a synergies
analysis in M&A?
A. To determine the target’s historical EPS
B. To calculate goodwill for accounting purposes
C. To estimate incremental value creation post-acquisition
D. To comply with SEC disclosure requirements
Rationale: Synergies analysis estimates how much additional value the combined
entity will generate compared to the standalone companies.
3. When modeling a leveraged buyout (LBO), which assumption has the
largest impact on the internal rate of return (IRR)?
A. Historical revenue growth
, B. Target’s dividend payout ratio
C. Entry and exit multiples
D. Number of employees
Rationale: Entry and exit multiples directly affect acquisition cost and exit
proceeds, which are the main drivers of LBO IRR.
4. Which valuation method is most sensitive to market conditions and recent
transactions?
A. Discounted Cash Flow (DCF)
B. Comparable company analysis (Comps)
C. Precedent transactions analysis
D. Adjusted book value method
Rationale: Comparable company analysis relies on current market valuations,
making it sensitive to market conditions.
5. A company with negative free cash flows may still be an attractive M&A
target if:
A. Its equity book value is high
B. Strategic synergies or growth potential exist
C. Its debt-to-equity ratio is below 0.5
D. It has a long dividend history
Rationale: Negative FCF does not preclude acquisition if the buyer expects future
growth or strategic benefits.
6. Accretion/dilution analysis primarily measures the impact of an acquisition
on:
, A. Target’s enterprise value
B. Debt covenants
C. Acquirer’s earnings per share (EPS)
D. Combined company’s P/E ratio
Rationale: Accretion/dilution analysis compares pro forma EPS to standalone EPS
to assess whether the deal increases or decreases shareholder earnings.
7. In a merger model, purchase price allocation affects:
A. Only the cash balance
B. Only the target’s net income
C. Goodwill and intangible assets on the balance sheet
D. Dividend payout ratios
Rationale: The difference between purchase price and fair value of net assets is
allocated to goodwill and other intangibles.
8. When using a DCF to value a target company, increasing the discount rate
will:
A. Increase the enterprise value
B. Increase terminal value
C. Have no impact on net present value
D. Decrease the enterprise value
Rationale: A higher discount rate increases the cost of capital, reducing the
present value of future cash flows.
9. Which of the following is an example of a revenue synergy?
A. Reducing SG&A expenses by combining offices
, B. Cross-selling products to each other’s customers
C. Refinancing debt at a lower interest rate
D. Reducing headcount post-acquisition
Rationale: Revenue synergies arise from actions that increase combined sales or
pricing power.
10.Which factor is critical when assessing whether a transaction will be
accretive or dilutive to EPS?
A. Target’s historical dividend policy
B. Acquirer’s stock volatility
C. Relative P/E ratios of acquirer and target
D. Debt issuance costs
Rationale: Higher target P/E relative to the acquirer may result in dilution, and
lower P/E may result in accretion.
11.In merger models, contingent consideration (earn-outs) is recorded as:
A. A reduction in goodwill only
B. A liability at fair value on the balance sheet
C. A cash expense on the income statement immediately
D. Deferred revenue
Rationale: Contingent consideration is recognized as a liability if the payment
depends on future performance.
12.The beta of a company used in WACC calculation reflects:
A. Interest rate risk
B. Systematic risk relative to the market
PRACTICE QUESTIONS AND ANSWERS - LATEST
AND COMPLETE UPDATE WITH VERIFIED
SOLUTIONS – ASSURED PASS WITH INSTANT
DOWNLOAD PDF.
1. In a stock-for-stock acquisition, the purchase price is typically determined
based on:
A. Target’s debt-to-equity ratio
B. Exchange ratio multiplied by the acquirer’s share price
C. Target’s book value of equity only
D. Acquirer’s EBITDA multiple
Rationale: In stock-for-stock deals, the purchase price is calculated by multiplying
the agreed-upon exchange ratio by the acquirer’s share price at closing.
2. Which of the following is a primary reason for performing a synergies
analysis in M&A?
A. To determine the target’s historical EPS
B. To calculate goodwill for accounting purposes
C. To estimate incremental value creation post-acquisition
D. To comply with SEC disclosure requirements
Rationale: Synergies analysis estimates how much additional value the combined
entity will generate compared to the standalone companies.
3. When modeling a leveraged buyout (LBO), which assumption has the
largest impact on the internal rate of return (IRR)?
A. Historical revenue growth
, B. Target’s dividend payout ratio
C. Entry and exit multiples
D. Number of employees
Rationale: Entry and exit multiples directly affect acquisition cost and exit
proceeds, which are the main drivers of LBO IRR.
4. Which valuation method is most sensitive to market conditions and recent
transactions?
A. Discounted Cash Flow (DCF)
B. Comparable company analysis (Comps)
C. Precedent transactions analysis
D. Adjusted book value method
Rationale: Comparable company analysis relies on current market valuations,
making it sensitive to market conditions.
5. A company with negative free cash flows may still be an attractive M&A
target if:
A. Its equity book value is high
B. Strategic synergies or growth potential exist
C. Its debt-to-equity ratio is below 0.5
D. It has a long dividend history
Rationale: Negative FCF does not preclude acquisition if the buyer expects future
growth or strategic benefits.
6. Accretion/dilution analysis primarily measures the impact of an acquisition
on:
, A. Target’s enterprise value
B. Debt covenants
C. Acquirer’s earnings per share (EPS)
D. Combined company’s P/E ratio
Rationale: Accretion/dilution analysis compares pro forma EPS to standalone EPS
to assess whether the deal increases or decreases shareholder earnings.
7. In a merger model, purchase price allocation affects:
A. Only the cash balance
B. Only the target’s net income
C. Goodwill and intangible assets on the balance sheet
D. Dividend payout ratios
Rationale: The difference between purchase price and fair value of net assets is
allocated to goodwill and other intangibles.
8. When using a DCF to value a target company, increasing the discount rate
will:
A. Increase the enterprise value
B. Increase terminal value
C. Have no impact on net present value
D. Decrease the enterprise value
Rationale: A higher discount rate increases the cost of capital, reducing the
present value of future cash flows.
9. Which of the following is an example of a revenue synergy?
A. Reducing SG&A expenses by combining offices
, B. Cross-selling products to each other’s customers
C. Refinancing debt at a lower interest rate
D. Reducing headcount post-acquisition
Rationale: Revenue synergies arise from actions that increase combined sales or
pricing power.
10.Which factor is critical when assessing whether a transaction will be
accretive or dilutive to EPS?
A. Target’s historical dividend policy
B. Acquirer’s stock volatility
C. Relative P/E ratios of acquirer and target
D. Debt issuance costs
Rationale: Higher target P/E relative to the acquirer may result in dilution, and
lower P/E may result in accretion.
11.In merger models, contingent consideration (earn-outs) is recorded as:
A. A reduction in goodwill only
B. A liability at fair value on the balance sheet
C. A cash expense on the income statement immediately
D. Deferred revenue
Rationale: Contingent consideration is recognized as a liability if the payment
depends on future performance.
12.The beta of a company used in WACC calculation reflects:
A. Interest rate risk
B. Systematic risk relative to the market
