ADVANCED PHARMACOLOGY QUESTIONS BANK NEWEST ACTUAL
EXAM COMPLETE 200 QUESTIONS AND CORRECT DETAILED
ANSWERS (VERIFIED ANSWERS) |ALREADY GRADED A+(2025)
What does the cost of equity mean intuitively? - (answer)It tells you the average percentage a company's
stock "should" return each year. To a company, the Cost of Equity represents the cost of funding its
operations by issuing additional shares to investors.
What does WACC Intuitively mean? - (answer)To a company, WACC represents the cost of funding its
operations by using all its sources of capital and keeping its capital structure unchanged. A company
might decide to fund a new project, acquisition, or expansion if its expected IRR exceeds WACC.
What does Beta mean intuitively? - (answer)1. Levered Beta tells you how volatile a company's stock
price is relative to the stock market as a whole, factoring in both intrinsic business risk and risk from
leverage (i.e., Debt).
2. Unlevered Beta excludes the risk from leverage and reflects only the intrinsic business risk, so it's
always less than or equal to Levered Beta.
Why would a company want to buy another? - (answer)If it believes it will be better off following the
acquisition.
1. Qualitatively: Taking out a competitor, acquiring proprietary software, expanding into new markets
etc, economies of scale, acquire new customers or distribution channels, and to expand their products.
Deals are also motivated by competition, office politics, and ego.
2. Quantitatively: The Seller's asking price is less than its Implied Value, the Buyer's expected IRR from
the acquisition exceeds its WACC,
Walk me through how the Balance Sheet and IRR in an LBO change with a $100 leveraged dividend recap
and $2 in financing fees. - (answer).On the Assets side of the Balance Sheet, you deduct the $2 in
financing fees from Cash, so the Assets side is down by $2. On the L&E side, you record $100 - $2 = $98
for the new Debt because you deduct financing fees directly from the book value of the Debt. You also
deduct $100 from Retained Earnings to reflect the Dividends issued to the PE firm, so the L&E side is
,ADVANCED PHARMACOLOGY QUESTIONS BANK NEWEST ACTUAL
EXAM COMPLETE 200 QUESTIONS AND CORRECT DETAILED
ANSWERS (VERIFIED ANSWERS) |ALREADY GRADED A+(2025)
down by $2 and both sides balance. In the IRR calculation, you reflect this $100 in Dividends to the PE
firm, which boosts the IRR.
Advantages of stock in a transaction - (answer)1. Readily available
2. No additional interest in debt
3. Share synergies of an acquisition
4. No taxes for the seller until they sell
One disadvantage is it is dilutive to existing shareholders.
Advantages of cash - (answer)1. No dilution to shareholders
2. More accretive because its less expensive than debt
3. Acquiring all the synergy risk because the seller has no equity stake
Big disadvantage is you no longer have the cash. Seller has to pay taxes.
How would you model a "waterfall returns" structure where different Equity investors in an LBO receive
different percentages of the returns based on the overall IRR? For example, let's say that Investor Group
A receives 10% of the returns up to a 15% IRR (Investor Group B receives 90%), but then receives 15% of
the returns (with Investor Group B receiving 85%) beyond a 15% IRR. How does that work? - (answer)1.
Check to see what the IRR for the Equity proceeds is. If $500M is generated, do calculations and see this
is an 18% IRR.
2. Next determine Equity proceeds represent a 15.0% IRR. Then run the numbers to find that $450M
equates to a 15% IRR.
3. Allocate 10% of this $450M, or $45M, to Investor Group A and $405M to Investor Group B
,ADVANCED PHARMACOLOGY QUESTIONS BANK NEWEST ACTUAL
EXAM COMPLETE 200 QUESTIONS AND CORRECT DETAILED
ANSWERS (VERIFIED ANSWERS) |ALREADY GRADED A+(2025)
4. Allocate 15% of the remaining $50M ($500M minus $450M) to Investor Group A and 85% to Investor
Group B
Walk me through the impact of a 10% option pool in an LBO if the initial Investor Equity is $500 and the
Exit Equity Value is $1,000. The options are in-the-money because the Exit - (answer)The options are in-
the-money because the Exit Equity Value exceeds the initial Investor Equity. The Cash Payment to the PE
firm for the exercise of these options is 10% * $500 = $50. Proceeds to management are: (10% / (100% +
10%)) * ($1,000 + $50) = ~9% * $1,050 = ~$95. The PE firm receives: Exit Equity Value of $1,000 + $50 in
Cash - $95 in Proceeds to Management, which equals $955. As a result, its IRR and MoM multiple will
decline slightly, but the difference is very small.
Economy Notes - (answer)1. Economy is really hard to predict. Really robust expansion over the past 10
years and that we are late cycle. Jerome Powell even said he can't predict what will happen in 2021.
2. While M&A activity is down. What makes me feel good about entering IB is that PE firms have record
cash on hand
3. Interest rates are so low that is easy to raise debt financing. A lot of money came into the loan market
from 2015 - 2018 because people thought rates are raising. Now that Feds are starting to cut rates there
is an outflow in the loan market since investors aren't as hungry to buy loans because they are floating
read.
4.. M&A activity is down but private evaluations could come down and large companies could level set
and start to become acquisitive
How did tax cuts affect valuations? - (answer)1. Cost of debt is going to go up, because your tax shield
lowers so WACC will go up so it will lower your valuation
2. Your FCF will be higher as well, and it is unclear whether that will be off set by a higher WACC
, ADVANCED PHARMACOLOGY QUESTIONS BANK NEWEST ACTUAL
EXAM COMPLETE 200 QUESTIONS AND CORRECT DETAILED
ANSWERS (VERIFIED ANSWERS) |ALREADY GRADED A+(2025)
3. Can spend more on Capex which you could argue that the value of the company will increase over
time
Why would one company want to buy another company? - (answer)One company will want to buy
another company if it believes it will be better off after the acquisition takes place.
1. The sellers asking price is less than its implied value (discounted future cash flows)
2. The IRR is greater than the WACC
Buyers often acquire Sellers to save money via consolidation and economies of scale, to grow
geographically or gain market share, to acquire new customers or distribution channels, and to expand
their products.
How can you analyze an M&A deal and determine whether or not it makes sense? - (answer)1.
Qualitatively looking at could the deal help the company expand geographies, products, or customer
bases, give it more intellectual property, or improve its team
2. The quantitative side might include a valuation of the Seller to see if it's undervalued, as well as a
comparison of the expected IRR to the Buyer's WACC. Finally, EPS accretion/dilution is very important in
most deals because few Buyers want to execute dilutive deals; investors focus tremendously on near-
term EPS, so dilutive deals tend to make companies' stock prices decline.
Why is it good for IRR to exceed WACC? - (answer)Because then the projects rate of return will exceed its
cost
Walk me through a merger model - (answer)A merger model is intended as a sanity check to evaluate if a
transaction is accretive or dilutive.
EXAM COMPLETE 200 QUESTIONS AND CORRECT DETAILED
ANSWERS (VERIFIED ANSWERS) |ALREADY GRADED A+(2025)
What does the cost of equity mean intuitively? - (answer)It tells you the average percentage a company's
stock "should" return each year. To a company, the Cost of Equity represents the cost of funding its
operations by issuing additional shares to investors.
What does WACC Intuitively mean? - (answer)To a company, WACC represents the cost of funding its
operations by using all its sources of capital and keeping its capital structure unchanged. A company
might decide to fund a new project, acquisition, or expansion if its expected IRR exceeds WACC.
What does Beta mean intuitively? - (answer)1. Levered Beta tells you how volatile a company's stock
price is relative to the stock market as a whole, factoring in both intrinsic business risk and risk from
leverage (i.e., Debt).
2. Unlevered Beta excludes the risk from leverage and reflects only the intrinsic business risk, so it's
always less than or equal to Levered Beta.
Why would a company want to buy another? - (answer)If it believes it will be better off following the
acquisition.
1. Qualitatively: Taking out a competitor, acquiring proprietary software, expanding into new markets
etc, economies of scale, acquire new customers or distribution channels, and to expand their products.
Deals are also motivated by competition, office politics, and ego.
2. Quantitatively: The Seller's asking price is less than its Implied Value, the Buyer's expected IRR from
the acquisition exceeds its WACC,
Walk me through how the Balance Sheet and IRR in an LBO change with a $100 leveraged dividend recap
and $2 in financing fees. - (answer).On the Assets side of the Balance Sheet, you deduct the $2 in
financing fees from Cash, so the Assets side is down by $2. On the L&E side, you record $100 - $2 = $98
for the new Debt because you deduct financing fees directly from the book value of the Debt. You also
deduct $100 from Retained Earnings to reflect the Dividends issued to the PE firm, so the L&E side is
,ADVANCED PHARMACOLOGY QUESTIONS BANK NEWEST ACTUAL
EXAM COMPLETE 200 QUESTIONS AND CORRECT DETAILED
ANSWERS (VERIFIED ANSWERS) |ALREADY GRADED A+(2025)
down by $2 and both sides balance. In the IRR calculation, you reflect this $100 in Dividends to the PE
firm, which boosts the IRR.
Advantages of stock in a transaction - (answer)1. Readily available
2. No additional interest in debt
3. Share synergies of an acquisition
4. No taxes for the seller until they sell
One disadvantage is it is dilutive to existing shareholders.
Advantages of cash - (answer)1. No dilution to shareholders
2. More accretive because its less expensive than debt
3. Acquiring all the synergy risk because the seller has no equity stake
Big disadvantage is you no longer have the cash. Seller has to pay taxes.
How would you model a "waterfall returns" structure where different Equity investors in an LBO receive
different percentages of the returns based on the overall IRR? For example, let's say that Investor Group
A receives 10% of the returns up to a 15% IRR (Investor Group B receives 90%), but then receives 15% of
the returns (with Investor Group B receiving 85%) beyond a 15% IRR. How does that work? - (answer)1.
Check to see what the IRR for the Equity proceeds is. If $500M is generated, do calculations and see this
is an 18% IRR.
2. Next determine Equity proceeds represent a 15.0% IRR. Then run the numbers to find that $450M
equates to a 15% IRR.
3. Allocate 10% of this $450M, or $45M, to Investor Group A and $405M to Investor Group B
,ADVANCED PHARMACOLOGY QUESTIONS BANK NEWEST ACTUAL
EXAM COMPLETE 200 QUESTIONS AND CORRECT DETAILED
ANSWERS (VERIFIED ANSWERS) |ALREADY GRADED A+(2025)
4. Allocate 15% of the remaining $50M ($500M minus $450M) to Investor Group A and 85% to Investor
Group B
Walk me through the impact of a 10% option pool in an LBO if the initial Investor Equity is $500 and the
Exit Equity Value is $1,000. The options are in-the-money because the Exit - (answer)The options are in-
the-money because the Exit Equity Value exceeds the initial Investor Equity. The Cash Payment to the PE
firm for the exercise of these options is 10% * $500 = $50. Proceeds to management are: (10% / (100% +
10%)) * ($1,000 + $50) = ~9% * $1,050 = ~$95. The PE firm receives: Exit Equity Value of $1,000 + $50 in
Cash - $95 in Proceeds to Management, which equals $955. As a result, its IRR and MoM multiple will
decline slightly, but the difference is very small.
Economy Notes - (answer)1. Economy is really hard to predict. Really robust expansion over the past 10
years and that we are late cycle. Jerome Powell even said he can't predict what will happen in 2021.
2. While M&A activity is down. What makes me feel good about entering IB is that PE firms have record
cash on hand
3. Interest rates are so low that is easy to raise debt financing. A lot of money came into the loan market
from 2015 - 2018 because people thought rates are raising. Now that Feds are starting to cut rates there
is an outflow in the loan market since investors aren't as hungry to buy loans because they are floating
read.
4.. M&A activity is down but private evaluations could come down and large companies could level set
and start to become acquisitive
How did tax cuts affect valuations? - (answer)1. Cost of debt is going to go up, because your tax shield
lowers so WACC will go up so it will lower your valuation
2. Your FCF will be higher as well, and it is unclear whether that will be off set by a higher WACC
, ADVANCED PHARMACOLOGY QUESTIONS BANK NEWEST ACTUAL
EXAM COMPLETE 200 QUESTIONS AND CORRECT DETAILED
ANSWERS (VERIFIED ANSWERS) |ALREADY GRADED A+(2025)
3. Can spend more on Capex which you could argue that the value of the company will increase over
time
Why would one company want to buy another company? - (answer)One company will want to buy
another company if it believes it will be better off after the acquisition takes place.
1. The sellers asking price is less than its implied value (discounted future cash flows)
2. The IRR is greater than the WACC
Buyers often acquire Sellers to save money via consolidation and economies of scale, to grow
geographically or gain market share, to acquire new customers or distribution channels, and to expand
their products.
How can you analyze an M&A deal and determine whether or not it makes sense? - (answer)1.
Qualitatively looking at could the deal help the company expand geographies, products, or customer
bases, give it more intellectual property, or improve its team
2. The quantitative side might include a valuation of the Seller to see if it's undervalued, as well as a
comparison of the expected IRR to the Buyer's WACC. Finally, EPS accretion/dilution is very important in
most deals because few Buyers want to execute dilutive deals; investors focus tremendously on near-
term EPS, so dilutive deals tend to make companies' stock prices decline.
Why is it good for IRR to exceed WACC? - (answer)Because then the projects rate of return will exceed its
cost
Walk me through a merger model - (answer)A merger model is intended as a sanity check to evaluate if a
transaction is accretive or dilutive.
