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Trading Comps Modeling Exam Wall Street Prep / Wall Street Prep Premium Exam T ransaction Comps Modeling Wall Street Prep Exam GRADED A+2025/202 ‘The terminal value of a business that grows indefinitely is calculated as fallows - / vv ANSWER-cash flow from period “tt+1" divided by (discount rate-growth rate) the two-stage DCF model is: - VW YANSWER-where stage 1 is an explicit projection of free cash flows (generally for 5-10 years), and stage 2 is a lump-sum estimate af the cash flows beyond the explicit forecast period disadvantages of a DCF do not include - YW / 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 - ¥ ¥ ¥ 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. While equity contribution went as low as the single digits in the 1980's, the current split hetween equity and debt in an LBO deal is best characterized as: - / VW ANSWER-Equity - 35%; Debt 65% What is generally not considered to be a pre-tax non-recurring (unusual or infrequent) item? - ¥ YW ANSWER- Extraordinary gains/losses what is false about depreciation and amortization - ¥ ¥ ¥ ANSWER: DCA may be classified within interest expense Company X's current assets increased by $40 million from 2007- 2008 while the companies current liabilities increased by $25 million over the same period. the cash impact of the change in working capital was - / ¥ V ANSWER-a decrease of 15 million the final component of an earnings projection model is calculating interest expense. the calculation may create a circular reference because - ¥ ¥ ¥ ANSWER interest expense affects net income, which affects FCK, which affects the amount of debt a company pays down, which, in turn affects the interest expense, hence the circular reference a 10-q financial filing has all of the following characteristics except - ¥V¥V¥ANSWERAssued four times a year. Depreciation Expense found in the SGCA line of the income statement for a manufacturing firm would most likely be attributable to which of the fallowing - / 4 ANSWER-computers used by the accounting department If a company has projected revenues of $10 billion, a gross profit margin of 65%, and projected SGCA expenses of $2billion, what is the company’s operating (EBIT) margin? - Vv ¥ ANSWER-45% Accompany has the following information, 1, 2014 revenues of $5 billion,2013 Accounts receivable of $400 million, 2014 accounts receivable of $600 million, what are the days sales outstanding - VV VANSWER36.5 . Preferred dividends of $100 million in 2014 . Common dividends of $400 million in 2014 What is the retained earnings balance at the end of 2014? - ¥VVANSWER-15 billion in order to find out how much cash is available to pay down short term debt, such as revolving credit line, you must take - ¥ VV ANSWER-eginning cash balance + pre-debt cash flows - min. cash balance - required principal payments of LT and other debt to calculate interest expense in the future, you should do which of the following - VV VANSWERapply a weighted average interest rate times the average debt balance over the course of the year enterprise (transaction) value represents the: - ¥ ¥ / ANSWER value of all capital invested in a business A debt holder would be primarily concerned with which of the following multiples? 1 Enterprise (Transaction) Value / EBITDA I. Price/Earnings TIL. Enterprise (Transaction) Value / Sales - VW /ANSWER-1 and 3 only 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 2020 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. Histimate the present value of the projected free cash flows through 2020, discounted at the stated WACC. Assume all cash flows are generated at the end of the year (i.e., no mid- year adjustment): - VV VANSWERS37 million 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. Calculate Company X's implied Enterprise Value by using the discounted cash low method: - ¥ Vv ANSWER-2951.2 million 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: . Acquirer has 4 thousand shares outstanding . Target has 2 thousand shares outstanding What is the exchange ratio for the deal? - /¥ WANSWER-L.7x . Acquirer purchases 100% of target by issuing additional stock to purchase target shares . No premium is offered to the current target share price . Acquirer share price at announcement is $30 . Target share price at announcement is $50 . Acquirer EPS next year is $3.00 . Target EPS next year is $2.00 . Acquirer has 4 thousand shares outstanding . Target has 2 thousand shares outstanding Assuming a 40% tax rate, what are the necessary pre-tax synergies needed to break-even? - / ¥ ¥ ANSWER- Pushdown accounting: - Vv ¥ ANSWER Refers to the establishment of a new accounting and reporting basis in an acquired company's separate financial statements Use the following information to answer the question below:e Acquirer purchases 100% of target by issuing $100 million in new debt to purchase target shares, carrying an interest rate of 10% 7 Excess cash is used to help pay for the acquisition . Acquirer expects to be able to close down several of the target company’s old manufacturing facilities and save an estimated $2 million in the first year . Target PPCE is written up by $25 million to fair market value . Investment bankers, accountants, and consultants on the deal earned $30 million in fees Which of the fallowing adjustments would be made to the pro forma income statement? - vv ¥ ANSWER-Advisary fee expense of $30 million Depreciation expense increase due lo PPCE write-up Pre-tax synergies of $2 million Use the following information to answer the question below: . Acquisition takes place on July 1, 2013 . Acquirer FYE - June 30 . ‘larget FYE - December 31 . Acquirer expected EPS for FYE June 2014 is $2.40 . Target consensus EPS for FYE Dec 2013 is $1.12 . Target consensus EPS for FYE Dec 2014 is $1.78 Assuming 360 days in a year for simplicity, calculate target EPS adjusted to acquirer FYE in the transaction year (FYE June 2014) - / ¥ VANSWER-$1.45 A 338(h)(10) election: - Vv ¥ ANSWER-Requires that both buyer and seller must jaintly elect to have the IRS deem the acquisition an asset sale for tax purposes A good LBO candidate has which of the following characteristics? - VV V/ANSWER Little to no existing leverage, steady cash flows and little investment in business through capex and working capital Which of the following is NOT a disadvantage of performing an LBO analysis? - VW / ANSWER-Stand-alone LBO may overestimate strategic sale value by ignoring synergies with acquirer EBITDA multiple at exit year is the same as the current multiple, . Required rate of return is 25% . Exit year EBITDA projected to be $3.0 billion 7 ‘The company's year-end leverage ratio is 1.6x What is the initial Equity Value? - Vv VW ANSWER-8.8 billion On December 30, 2013: . Company Y trades at $10 per share . Enterprise Value / EBITDA multiple of 5.0x . Leverage ratio of 0.6x (Net debt/EBITDA) . 2013 EBITDA = 52.0 billion 7 Assume no cash on company Y's balance sheet On December 31, 2013: . Company Y undergoes an BO and is recapitalized 7 The company's new leverage ratio becomes 5.0x . Financial sponsor exil is planned for Year 5. Assume that the EV/ EBITDA multiple at exit year is the same as the current multiple. . Required rate of return is 25% . Exit year EBITDA projected to be s3.0 billion . ‘The company's year-end leverage ratio is 1.6x Haw much debt is paid down by the exit year (since the LBO announcement)? - / vv ANSWER-5.2 billion On December 30, 2013: . Company Y trades at $10 per share . Enterprise Value / EBITDA multiple of 5.0x . Leverage ratio of 0.6x (Net debt/EBITDA) . 2013 EBITDA = $2.0 billion . Assume no cash on company Y's balance sheet On December 31, 2013: . Company Y undergoes an LBO and is recapitalized . ‘The company's new leverage ratio becomes 5.0x . Financial sponsor exit is planned for Year 5. Assume that the EV/ EBITDA multiple at exit year is the same as the current multiple. . Required rate of return is 25% . Exit year EBITDA projected to be $3.0 billion . ‘The company's year-end leverage ratio is 1.6x What is the initial equity necessary to achieve the rate of return required by the financial sponsors? - v VV ANSWER-3.34 billion Non-equity claims that should be deducted from Enterprise Value to find Equity Value include all of the following EXCEPT: ¥¥V/ANSWER Minority interest, preferred stock, capitalized leases LTM (Last Twelve Months) is calculated as follows - ¥ v ¥ ANSWER- Latest completed fiscal year results + Latest reported stub period results - Same stub period results from one year ago Company A shares are currently trading at $50 per share. A survey af Wall Street analysts reveals that FPS expectations for Company A for the full year 2014 are $2.50 per share. Company A has 300 million diluted shares outstanding. Company A's major competitors are trading at an average share price / 2014 Expected EPS of 23.0x. Using the comparable company analysis valuation method, Company A shares are: - VV V ANSWER-7.5 per share undervalued A debt holder would be primarily concerned with which of the following multiples? 1. Enterprise (Transaction) Value / EBITDA 
