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Exam (elaborations)
M&A Deals and Merger Models - Accretion/Dilution Calculation Questions and Correct Answers
1. Company A, with a P / E of 25x, acquires Company B for a purchase P / E multiple of 15x. Will the deal be accretive? You can't tell unless you know that it's a 100% Stock deal. If it is a 100% Stock deal, then it will be accretive because the Buyer's P / E is higher than the Seller's, indicating that the Buyer's Cost of Acquisition (1 / 25, or 4%) is less than the Seller's Yield (1 / 15, or 6.7%). 2. Walk me through the full math for the deal now. Assume that Company A has 10 shares ...
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Merger Model Questions & Correct Answers - Advanced
What's the difference between Purchase Accounting and Pooling Accounting in an M&A deal? In purchase accounting the seller's shareholder's equity number is wiped out and the premium paid over that value is recorded as Goodwill on the conbined balance sheet post-acquisition. In pooling account, you simply combine the 2 shareholder's equity numbers rather than worrying about Goodwill and t he related items that get created. There are specific requirements for using pooling accounting, so in 99...
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Mergers and Acquisitions Final Exam Questions and Solutions
On average leveraged buyouts perform Well Debt can reduce agency conflicts by providing managers an incentive to work hard. -no ability to pursue things that can benefit themselves. Have to work hard to meet interest payments LBO participants -financial sponsors -investment banks -bank and institutional lenders -bond investors -target management Financial sponsors include -private equity funds -hedge funds -venture capitalist firms Financial sponsors funding -raise money f...
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M&A Advanced Part II Study Questions and Correct Answers
What if there are CapEx synergies? For example, what if the buyer can reduce its CapEx spending because of certain assets the seller owns? In this case, you would start recording a lower CapEx charge on the combined Cash Flow Statement, and then reflect a reduced Depreciation charge on the Income Statement from that new CapEx spending each year. You would not start seeing the results until Year 2 because reduced Depreciation only comes after reduced CapEx spending. This scenario would be much ea...
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M&A Exam 2: Chapters 3-10 Review Questions and Correct Answers
Intrinsic Value you value an asset based on it's intrinsic characteristics The Forever Loser Proposition for an asset to have value the expected cash flows have to be positive some time over the life of the asset The "It's Okay" Proposition assets that generate cash flows early in their life are more valuable What is the difference between equity valuation and firm valuation? Firm valuation looks at the entire business while equity valuation looks at the value of the equity's claims on t...
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M&A Practice Exam Questions and Correct Answers
Consolidation when a company joins another and becomes 1 merger of equals two companies have an arrangement to share the post merger entity in an equal way. Usually governance plays a large role. equal number of board members CEO of acquiring company can before chairman of the target company Horizontal Mergers two firms that operate within the same market space merge economies of scale reduces costs market share/power increased usual sources of synergy gaining market power and economies o...
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M&A Merger Models Review Questions and Correct Answers
How can you think about calculating combined equity value? if no Stock is used, Combined Equity Value = Company A's Equity Value. If it's a 100% Stock deal, Combined Equity Value = Company A's Equity Value + Company B's Purchase Equity Value. How can you think about calculating combined enterprise value? Combined Enterprise Value = Acquirer's Current Enterprise Value + Seller's Purchase Enterprise Value Equal to the Combined Equity Value, plus the Debt (and other Debt-like Liabilities), m...
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M&A Practice Test Questions and Correct Answers
What's the difference between a "Merger" and an "Acquisition"? In a merger, the buyer and seller are about the same size, whereas in an acquisition the *buyer* is significantly bigger (usually at least 2-3x bigger by revenue or market cap) Walk me through a basic merger model 1. Determine the purchase price, purchase method and other assumptions (deal fees, synergies, etc.) 2. Forecast the 3 statements for both buyer + seller 3. Calculate Goodwill and Allocate the Purchase Price 4. Combine...
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Mergers and Acquisitions Exam 1 Questions and Correct Answers
Intro to M&A - M&A is highly cyclical - Median deal sizes are increasing - Valuations: at or near record highs and stable - Covid initially slowed down market activity, but now fourth quarter activity is improving quickly Paths to drive growth Build it => Research & development Buy it => Mergers & Acquisitions M&A failure rate 65% to 85% - poor strategy - poor integration M&A objective Add value to business, maximize shareholding wealth - improve company's sustainable competitive advan...
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M&A Advisory Questions and Correct Answers
What is buy side and sell side in M&A? - Sell-Side M&A: When an investment bank is an advisor to a potential seller - Buy-Side M&A: Conversely, when an investment bank acts as an advisor to the buyer (acquirer), What is the M&A Due Diligence Process? - Purpose - minimis risk and exposure to an acquiring company, focusing on the targets true financial picture - Involves analysing financial information, historic and projected financial results, evaluating synergies and assessing operations to ide...
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M&A Final Exam Questions and Correct Answers
Can you define M&A and explain the difference between a merger and an acquisition? Mergers and acquisitions (M&A) is an umbrella term that refers to the combination of two businesses. To buyers, M&A serves as an alternative to organic growth, whereas for sellers, M&A provides an opportunity to cash out or share in the newly formed entity's risk/reward. The two terms are often used interchangeably but have some minor differences: Merger:A merger suggests the combination of two similarly sized co...
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M&A Exam 2 Formulas & Ratios Questions and Answers
WACC formula = Ke (E/E+D) + Kd (D/D+E) (1 - t) CAPM (Capital Asset Pricing Model) = Rf + B (Rm - Rf) Equity Value Formula = Basic Shares Outstanding + ITM Options & Warrants + ITM Convertible Securities Enterprise Value formula = Equity Value + Total Debt + Pref Stock + Non-Controlling Interests - Cash & Cash Equivalents Perpetuity Growth Model = FCFn ( 1+ g)/ (r-g) Exit Multiple Method = EBITDA(n) * Exit Multiple Exchange Ratio (ER) - number of acquisition shares per target share Premium...
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Mergers and Acquisitions Final Exam Questions and Correct Answers
Leveraged Buyouts A leveraged buyout (LBO) is the acquisition of a company, division, business, or collection of assets ("target") using debt to finance a large portion of the purchase price. The remaining portion of the purchase price is funded with an equity contribution by a financial sponsor ("sponsor"). Financial Sponsor A financial sponsor is a private equity investment firm, particularly a private equity firm that engages in leveraged buyout transactions. They usually look for a 20...
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Merger Model Guide with Questions and Correct Answers
Why would a company want to acquire another company?A company would acquire another company if it believes it will earn a good return on its investment - either in the form of a literal ROI, or in terms of a higher Earnings Per Share (EPS) number, which appeals to shareholders. There are several reasons why a buyer might believe this to be the case: • The buyer wants to gain market share by buying a competitor. • The buyer needs to grow more quickly and sees an acquisition as a way to do t...
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M&A Case Studies- Questions and Complete Solutions
M&A Case Process Steps Key areas to analyze: assets, target, industry, and feasibility - Analyze the client's company - Analyze the target industry - Analyze the target company - Analyze the feasibility of the M&A - Synergies / Risk Analyze the Target Your overall objective here will be to understand how attractive it is both financially and strategically. - What is the current and future financial position of the target (e.g.: revenues, profits, etc.)? Is it under / overvalued? - Does the t...
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Mergers & Acquisitions- Conceptual Questions and Correct Answers
Who normally pays a higher price to merge - strategic or financial buyer? strategic buyer (because of the synergies) What is a disadvantage of a cash offer instead of a stock swap? you need to pay taxes on the cash received What is a pro and con of a stock swap over a cash offer? Pros: you would still own some of the company you just sold Cons: depends on market performance Possible steps to block a hostile takeover (3) - Include in your shareholder rights plan a clause that gives existing sh...
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M&A Exam Questions and Correct Answers
If a company trades at a forward PE of 20.0x, and acquires a company trading at a forward PE of 13.0x. Assuming the deal is 100% stock-for-stock, and a 20% premium is being offered, will the deal be accretive in year 1? Yes: stock for stock deals where the acquirer's PE is higher than target's are always accretive. Don't get tricked - a 20% premium just brings the target's PE to 13 + (13 x 20%) = 15.6 PE, still below the acquirer's. Walk me through a simple M&A model. An M&A model takes tw...
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M&A Modeling Top Exam Questions and 100% CORRECT Answers
Simple squamous epithelium Tiled floor (fried eggs). Location: endothlium (lining of cardio. system) Forms epithelial layer of serous membranes (mesothelium). Functions in sites of filtration and diffusion. Simple cuboidal epithelium single layer of cube shaped cells w/ round, centerally located nucleus. Covers surface of ovary, lines anterior surface of eye lens. Its function is secretion and absorption. nonciliated simple columnar epithelium has goblet cells, Lines GI tract and gallb...
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