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WALL STREET PREP PREMIUM EXAM
|CERTIFIED QUESTIONS WITH ANSWERS
2026 UPDATE
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.
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According to the discounted cash flow valuation method, Company X shares are: -
correct-answer -.13 per share overvalued
the formula for discounting any specific period cash flow in period "t"is: - correct-
answer -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 -
correct-answer -cash flow from period "t+1" divided by (discount rate-growth
rate)
the two-stage DCF model is: - correct-answer -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
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disadvantages of a DCF do not include - correct-answer -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 - correct-answer -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 - correct-answer -A deferred tax liability
equal to $52.5 million
WALL STREET PREP PREMIUM EXAM
|CERTIFIED QUESTIONS WITH ANSWERS
2026 UPDATE
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.
,2|Page
According to the discounted cash flow valuation method, Company X shares are: -
correct-answer -.13 per share overvalued
the formula for discounting any specific period cash flow in period "t"is: - correct-
answer -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 -
correct-answer -cash flow from period "t+1" divided by (discount rate-growth
rate)
the two-stage DCF model is: - correct-answer -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
, 3|Page
disadvantages of a DCF do not include - correct-answer -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 - correct-answer -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 - correct-answer -A deferred tax liability
equal to $52.5 million
