WALL STREET PREP COMPREHENSIVE UPDATED EXAM
QUESTIONS AND ANSWERS MARKED A+
✔✔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)
• 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? - ✔✔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
QUESTIONS AND ANSWERS MARKED A+
✔✔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)
• 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? - ✔✔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
