Accounting
If you were given 2 of the 3 financial statements and had to construct the third, which two would you pick?
IS and BS to build CFS
Is WACC better if its higher or lower?
WACC = minimum rate of return required for its investors. Higher WACC ratios generally indicate that a business is a riskier investment, while a lower WACC tends to correlate with more stable business investments.
Why would a company NOT want to acquire another company?
a.) The buyer wants to gain market share extremely quickly
b.) The buyer wants access to the seller's customers
c.) The buyer thinks the seller has a critical piece of technology or intellectual property
d.) The buyer believes it has too large of a workforce that needs to be split among two companies
D
What is a bear market?
A bear market is a fundamentally driven market decline of 20% or more. A bear market often coincides with a weakening economy, massive liquidation of securities, and widespread investor fear and pessimism. Opposite of a bull market
What’s MoM (multiple of money) and how to calculate?
Total Cash Inflows / Total Cash outflows = Equity you get at the end / Equity you put in the beginning
What is GAAP and what does it stand for?
Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting
What happens to Free Cash Flow if NWC decreases?
Since you subtract changes in net working capital in the FCF calculation, if NWC decreases, FCF increases
If Company A wants to acquire Company B, what is most expensive way Company A could do so?
Financing the transaction with Equity
Which of the following is closest to where the S&P 500 is sitting at?
a.) 35,000
b.) 4,500
c.)14,200
a.) 35,000 - Dow Jones
b.) 4,500 - S&P
c.)14,200- Nasdaq
Which type of buyer is more likely to offer a higher purchase premium: a strategic buyer or a financial buyer?
A Strategic buyer because they can benefit from synergies, which directly allows them to offer higher prices.
Items relating to Debt, Dividends, and Issuing/Repurchasing Shares goes where under the CFS
CF from financing
Which of the following pieces are not a part of the unlevered FCF calculation?
a.) Amortization
b.) NOPAT
c.) PP&E
d.) NWC
Answer is PP&E
Unlevered FCF = EBIT (1-Tax Rate) + Depreciation + Amortization – Changes in Net Working Capital – Capital Expenditures
OR
Unlevered FCF = NOPAT + Depreciation & Amortization − CapEx− Changes in Net Working Capital
What type of material is least likely to be found in an M&A pitchbook?
a.) Backgrounds on the employees of the seller
b.) Football Field
c.) Situational Overview
d.) Market Trends
What is the difference between monetary policy and fiscal policy?
Monetary policy refers to central bank activities that are directed toward influencing the quantity of money and credit in an economy. By contrast, fiscal policy refers to the government's decisions about taxation and spending. The two sets of policies affect the economy via different mechanisms.
If company A is a new tech start up growing at ~80% YoY and company B is an industrial company growing at 1% a year with stable cash flows, which company would make a better LBO candidate?
Company B because LBO needs stable cash flows
What's the difference between accrued expenses and prepaid expenses ?
Accrued expenses represent liabilities as they have accrued but not yet been paid for, prepaid expenses are assets paid for in advance and then used.
Where are 3 places where taxes affect a DCF?
Calculating Beta (conversion from unlevered to levered)
Calculating FCF (NOPAT)
Calculating Cost of Debt (interest is tax deductible)
What are purchasing power over suppliers and tax savings (NOLs) examples of?
Cost Saving Synergies
Which of the following is closest to the RFR?
a.) 1.7%
b.) 4.4%
c.) 6.8%
d.) 5.7%
B.) 4.4%
What does going to IC mean and why is it important?
a.) It means you are going to your LP's to raise more capital for a future investment
b.) It means you are asking permission to invest in a company
B
What are deferred tax assets / liabilities and how do they arise?
DTLs arise when you have a tax expense on the Income Statement but haven't actually paid that tax in cold, hard cash yet.
DTAs arise when you pay taxes in cash but haven't expensed them on the Income Statement yet.
The most common way they occur is with asset write-ups (DTL)and write-downs(DTA) in M&A deals
What is Alpha vs Beta?
Alpha: the excess return generated by a portfolio compared to a benchmark. Pos=good. Neg=underperformed, relevant to HF not DCF
Beta: measure of a stock or portfolio's volatility relative to the overall market, used in CAPM for WACC
If the P/E of the acquirer is 12x and the P/E of the target is 8x, is the deal accretive or dilutive?
If equity: accretive since buyer’s P/E is higher
If all debt at 10% interest rate:
Assume 40% tax rate
Due to tax shield on debt, the debt P/E should be 1/.06 = 16.6
16.6 PE vs 8x PE = accretive If mix of debt and equity: Since both debt and equity are accretive = accretive
Which of the following companies would be least likely to have a negative beta?
a.) a luxury clothing brand company
b.) bankruptcy advisory firms
c.) trade school management firms
d.) high quality investments such as gold
A.) a luxury clothing brand
In an LBO, would you rather pay down $1 of debt or increase EBITDA by $1?
An extra dollar of debt paydown increases your equity value by only one dollar; an extra dollar of EBITDA is multiplied by the exit multiple, which results in a greater value creation.