LBO Wall Street Exam Prep Questions and Answers Updated 2024/2025 (GRADED)

LBO Wall Street Exam Prep Questions and Answers Updated 2024/2025 (GRADED) After you clean and properly format raw data that you receive from clients, there are two preliminary analyses that you should perform to begin looking at the merits of the business. What preliminary analyses are important to complete relatively quickly? : EBITDA multiple and EBITDA margin calculations COGS % of revenue and Operating Expenses % of revenue Revenue growth rate and balance sheet check Return on Assets (ROA) and return on Equity (ROE) Revenue growth rate and balance sheet check Explanation: After organizing and formatting raw data, it is customary to complete a couple of preliminary analyses - typically, these include year-over-year revenue growth rate, gross profit margin, net income margin, and balance sheet check. 3. 1 / 18 WallStreet Exam Prep LBO Questions and Answers 2024/2025 Given the following fact pattern, calculate the cash impact of the change in current assets and current liabilities for Company F for the fiscal year 2020 (note: numbers enclosed in parenthesis indicate negative numbers - e.g., ($20) is equivalent to -$20) Fact Pattern: FY 2019 FY 2020 Current Assets: 400 600 Current Liabilities: 400 550 Cash impact of change in assets: ($200) Cash impact of change in liabilities: $150 Cash impact of change in assets: $200 Cash impact of change in liabilities: ($150) Cash impact of change in assets: $200 Cash impact of change in liabilities: $150 Cash impact of change in assets: ($200) Cash impact of change in liabilities: ($150 Cash impact of change in assets: ($200) Cash impact of change in liabilities: $150 Explanation: To calculate the cash impact of changes in assets, the formula is "previous period MINUS current period" (i.e., $400 - $600 = ($200)). To calculate the cash impact of changes in liabilities, the formula is "current period MINUS previous period" (i.e., $550 - $400 = $150) 4. Which of the following is NOT a good definition/representation of EBITDA? Financial metric that represents cash flow that includes the impact of capex Financial metric that represents cash flow that excludes the impact of capex Financial metric that PE firms use to Financial metric that represents cash flow that includes the impact of capex Explanation: EBITDA is often used as a proxy of operating cash flow, but the calculation of EBITDA does not include the impact of capex. 2 / 18 benchmark valuation Financial metric that serves as a general proxy for pre-tax operating cash flow 5. All of the items below are examples of non-recurring expenses that should be added back as adjustments to EBITDA EXCEPT? One-time legal expense One-time consultant fees One-time dividend payment One-time integration expenses One-time dividend payment Explanation: Dividend payments are not recorded on the income statement as expenses and should not be added back as adjustments to EBITDA. 6. Which "tier" of EBITDA does the PE firm base its valuation on? EBITDA as defined Diligence-adjusted EBITDA Management-adjusted EBITDA Lender-adjusted EBITDA Diligence-adjusted EBITDA Explanation: Diligence-adjusted EBITDA takes adjustments suggested by management and adds specific costs that the private equity firm will incur as part of the transaction such as diligence and closing fees, annual management fees, and normalized income or expenses. This is the "tier" of EBITDA that private equity firms base their valuation on. 7. Overhead can be broken into two broad categories - what are they? Operating costs and non-operating costs Fixed costs and variable costs Explanation: Overhead refers to the operating costs needed to run the business 3 / 18 Fixed costs and variable costs Asset costs and liability costs Income statement costs and balance sheet costs and can be broadly classified into fixed costs and variable costs. 8. Given the following fact pattern, calculate DOH (days on hand) Revenue: 1000 COGS: 400 Operating Expenses: 200 Accounts Receivable: 20 Inventory: 40 Days: 365 36.5 Days Explanation: Days on Hand (DOH) is calculated by dividing inventory by COGS and multiplying by days in the period (i.e., $40 / $400 * 365 = 36.5 days) 9. Which option below is the BEST description of "net working capital ratio"? It provides a general sense of how many times a company has sold and replaced its inventory during a given period It provides a general sense of whether or not the business has a sufficient amount of net funds available in the short-term to stay in operation It provides a general sense of whether or not the business has a sufficient amount of fixed assets available in the short-term to stay in operation It provides a general sense of the amount of time it takes a company It provides a general sense of whether or not the business has a sufficient amount of net funds available in the short-term to stay in operation Explanation: The net working capital ratio is calculated by dividing current assets by current liabilities and analyzes a company's short-term liquidity (and therefore ability to stay in business) 4 / 18 to convert its investment in inventory into cash 10. All of the periods below are typical to review for net working capital targets EXCEPT: 3-month NWC target 6-month NWC target 12-month NWC target 24-month NWC target 24-month NWC target Explanation: It is typical to review a company's average net working capital (to calculate a target) over the previous 3 months, 6 months and 12 months. 11. What is another name that is often used for NWC target? Working capital peg Working capital cycle Working capital turnover Working capital days Working capital peg Explanation: Working capital peg is another name that is often used for net working capital target. 12. Which formula below accurately depicts how fixed assets are forecasted in the financial model? Previous period fixed assets + previous period capex - previous period depreciation Previous period fixed assets - current period capex + current period depreciation Previous period fixed assets + current Previous period fixed assets + current period capex - current period depreciation Explanation: The answer is C. Forecasted fixed assets (or PP&E) are calculated by increasing previous period fixed assets (or PP&E) by new (current period) capex and decreasing by new (current period) depreciation. 5 / 18 period capex - current period depreciation Previous period fixed assets + previous period capex + previous period depreciation 13. What is one overall reason to build a "bonus plan" into your model? To help identify any potential revenue growth shortfalls the business might face in the future To help identify any potential cash "pain points" the business might face in the future To help identify any potential operating expense "pain points" the business might face in the future To help identify any potential EBITDA growth shortfalls the business might face in the future To help identify any potential cash "pain points" the business might face in the future Explanation: A bonus plan accrues funds that are paid out once a year. This may be a cash "pain point" if the business does not generate enough cash during the year to pay out this bonus. Note that a comprehensive bonus plan is often put together after the deal closes; at the point in which you are building the model, you are making thoughtful conservative assumptions and checking if this creates any cash shortfalls during the projection period. 14. Which of the following statements is the most ACCURATE regarding the tax structure of LLCs? LLCs are not pass-through entities for tax purposes; but the members of the LLC are responsible for the LLC taxes even if they don't receive any cash LLCs are not pass-through entities for tax purposes; the members of the LLC are not responsible for the LLC taxes if they don't receive any cash LLCs can be pass-through entities for tax purposes; the members of the LLC are responsible for the LLC taxes even if they don't receive any cash Explanation: LLCs are typically pass-through entities for tax purposes which means that members are responsible for taxes even if they don't receive any cash. As a result, some LLC operating agreements include stipulations 6 / 18 LLCs can be pass-through entities for tax purposes; but the members of the LLC are not responsible for the LLC taxes if they don't receive any cash LLCs can be pass-through entities for tax purposes; the members of the LLC are responsible for the LLC taxes even if they don't receive any cash that the LLC will distribute money to members (whenever it makes profits) to help pay the members' tax bill. 15. What is the "sources and uses" schedule? A schedule that outlines important EBITDA calculations related to the transaction A schedule that outlines how the transaction is paid for and where the cash goes A schedule that outlines the allocation of the purchase price to various assets and liabilities of the target A schedule that outlines the sources and uses of cash related to changes in key assets and liabilities of the tar A schedule that outlines how the transaction is paid for and where the cash goes Explanation: The "Sources & Uses" schedule is completed for all acquisitions and minority investments and it outlines the "sources" of funds (how is the transaction paid for; where the money comes from) and "uses" of funds (where the cash goes; what the cash is used for) related to a transaction.