Basic Technical Investment Banking Practice Test

These questions are part of the practice quiz. Start practicing

• When merging two income statements, which items are typically added together?
• Which industry-specific multiple is commonly used for Real Estate Investment Trusts (REITs)?
• What is the difference between Goodwill and Other Intangible Assets?
• In an LBO model, what primarily determines the investor's return at exit?
• After Depreciation, which describes the Balance Sheet changes?
• What are the accounting effects of a $100 government bailout that is an equity investment?
• Levered Free Cash Flow is money available to which group?
• Why is the income statement not affected when inventory sits in a warehouse and has not been sold?
• Which is a flaw of precedent transactions?
• Which of the following is NOT a feature of an ideal LBO candidate?
• In an LBO model, which variable typically has the greatest impact on projected returns?
• If cash collected upfront is not recorded as revenue, where does it typically go on the balance sheet?
• Which valuation framework is more commonly used for evaluating financial institutions?
• What is the standard formula for Enterprise Value?
• After Year 3, with a $80 PP&E write-down and $100 loan payoff, which statement is true about the Net Change in Cash?
• Under which circumstance would Goodwill increase?
• In which scenario would you not use a discounted cash flow (DCF) approach to value a company?
• What does floor valuation mean in the context of an LBO?
• What is the role of the median multiple in valuation?
• How is Purchase Price typically determined for a public target in terms of premium?
• If you use Levered Free Cash Flow, what value does it yield?
• If Apple orders $10 of inventory with cash and nothing further is produced or sold yet, which statement is true?
• In a company with a high debt load that pays down principal each year, how are principal repayments treated in a standard DCF?
• Why do we look at both Enterprise Value and Equity Value?
• What is the starting point on the Cash Flow Statement?
• With a $10 depreciation increase, what is the impact on Cash Flow from Operations?
• What percentage of Enterprise Value is typically contributed by Terminal Value in a mature DCF, indicating overreliance?
• Which of the following is NOT a valid DCF sensitivity pair?
• What is the purpose of un-levering and re-levering Beta in the Cost of Equity calculation?
• Could negative shareholders' equity occur, and if so, what does it mean?
• What does Future Share Price Analysis involve?
• An increase in inventory of $10 paid with cash has what effect on Cash Flow from Operations and Net Change in Cash?
• Why is cash subtracted when computing Enterprise Value?
• If a deal involves cash and debt, what should you compare to assess accretion?
• In which scenario would you prefer EV/EBIT over EV/EBITDA?
• What is the purpose of the 'Sources & Uses' section in an LBO model?
• In a vending machine business, would you pay a higher multiple for leased machines or owned machines?
• What is a flaw of basing terminal multiples on public comparables?
• Where is valuation commonly presented and used to demonstrate fairness near deal closing?
• What are the most common variables looked at in a merger model?
• What is debt comps used for?
• If the PE firm is concerned about meeting interest payments and wants a lower-cost option, they might use bank debt.
• Which statement about the typical valuation difference between a DCF and an LBO is accurate?
• How would you determine how much debt can be raised and how many tranches there would be?
• What are the three major valuation methodologies?
• What is the correct sequence to go from Revenue to Unlevered Free Cash Flow?
• After selling iPods for revenue of $20 and cost of $10, with a 40% tax rate, which statement is true?
• In the mortgage analogy for an LBO, which does the 'Down Payment' correspond to?
• On the Income Statement, what is the final line?
• How do you get to Beta in the Cost of Equity calculation?
• Which sensitivity combination would be considered inappropriate in a DCF sensitivity analysis?
• If two companies have identical capital structures, which company would have the higher WACC based on size alone?
• What would you use with Unlevered Free Cash Flow multiples?
• Why is debt often cheaper than equity in the WACC calculation?
• What is the difference between Equity Value and Shareholders' Equity?
• What best describes the role of exit multiples in planning an LBO?
• In a DCF, which methods estimate Terminal Value?
• In a DCF, what two components determine Enterprise Value?
• Why is Preferred Stock added to reach Enterprise Value?
• Accrued Compensation up by $10: What happens to Operating Expenses and Net Income?
• Depreciation on the Income Statement can appear as which forms?
• Why show a range of exit multiples rather than a single number?
• What largely determines reasonable leverage and coverage ratios in an LBO?
• Which item is not reflected in EBITDA but can cause a company to be cash-flow negative and potentially bankrupt?
• Which debt type is usually amortized?
• Why would a PE firm prefer high-yield debt instead?
• What does it mean for convertible bonds to be in-the-money?
• What is a key reason PE firms use debt in an LBO rather than funding entirely with equity?
• If you could view two statements to reconstruct cash flow, which two would you choose?
• Which intangible item could also impact the combined company beyond Goodwill and Other Intangibles?
• What is the general rule about leverage in LBOs?
• Which scenario could cause Goodwill to increase, according to common accounting practice?
• When valuing a company with no profits, which multiples are commonly used instead of EV/Revenue or EV/EBITDA?
• Why is the Treasury Stock Method not used for calculating dilution from convertible bonds?
• Two companies are exactly the same, but one has debt and one does not — which will have the higher WACC (up to a point)?
• What is the correct difference between accounts receivable and deferred revenue?
• On the Assets side of an LBO balance sheet, which item is used as a plug to balance the sheet?
• Why do most M&A deals fail?
• Which of the following correctly describes the Year 3 balance sheet effects after the write-down and loan payoff?
• Why would a PE firm do a dividend recapitalization?
• Sum of the Parts valuation should be used for which type of company?
• Which statement about terminal value methods is accurate?
• How can Terminal Value be calculated?
• Which type of company would have a higher Beta?
• When can private company data be used in valuation?
• Provide a cost synergy example commonly cited in merger modeling.
• What is the purpose of un-levering Beta in valuation?
• To estimate debt capacity for a merger, which sources are typically reviewed?
• How are Net Income and the Cash Flow Statement linked?
• Why would an industry-specific multiple like EV per unique visitor use Enterprise Value rather than Equity Value?
• Which statement about the Cash Flow Statement is true during a dividend recap?
• In a merger model, foregone interest on cash is accounted for by adjusting which line item?
• In the 2004 Facebook example, when the company had no profit or revenue, which valuation approach was recommended?
• What is meant by the "tax shield" in an LBO?
• What is the purpose of the Gordon Growth method?
• Which statement about a TV purchase paid with a credit card illustrates cash-based vs accrual accounting?
• What happens to Cost of Equity when a company takes on more debt?
• What is a Deferred Revenue Write-off used for in an acquisition?
• In the EV formula EV = Equity Value + Debt + Preferred Stock + Minority Interest - Cash, what happens to EV if a company holds a large cash balance while other inputs stay the same?
• How are revenue and cost synergies typically incorporated in merger models?
• In a dividend recap, which balance sheet change occurs?
• Liquidation Valuation could produce the highest value under which scenario?
• A $100 write-down of debt has what effect on the income statement and cash flow, assuming a 40% tax rate?
• Which statement accurately reflects when negative working capital can be healthy?
• Why re-lever Beta after un-levering?
• Which statement best describes the difference between GAAP and non-GAAP earnings for many firms?
• Operating Working Capital is defined as which of the following?
• When inventory increases by $10 and is paid with cash, which statement is true?
• Why must Minority Interest be added to Enterprise Value?
• In the mortgage analogy, what does 'Mortgage Interest Payments' correspond to in an LBO?
• Why would you not use a DCF for a bank or other financial institution?
• In an all-stock M&A deal, when is the deal accretive?
• For private sellers, which valuation methodologies are weighed more heavily?
• What are the two types of synergies in mergers and acquisitions?
• When adjusting the Balance Sheet in an LBO, what happens to Shareholders' Equity on the Liabilities & Equity side?
• Why are Goodwill & Other Intangibles created in an LBO?
• Goodwill impairment commonly occurs when:
• What is meant by excess cash in the context of Enterprise Value?
• Which of the following would be capitalized (rather than expensed) because it has a useful life of more than one year?
• An LBO analysis is often used to establish what for valuation?
• When valuing a private company, what discount to public comps multiples is commonly applied due to illiquidity?
• Which type of synergy is generally considered more straightforward to realize and thus given more emphasis in practice?
• When assessing an acquisition, which value more accurately reflects the price an acquirer pays?
• What is a commonly used target IRR in an LBO valuation example?
• How do Depreciation & Amortization impact the comparison between EV/EBIT and EV/EBITDA?
• If banks write down an asset by $100 with a 40% tax rate, which statement correctly describes the three statements?
• When accounting for competitive advantage, which practice is suggested?
• What is the Gordon Growth Terminal Value formula?
• In which scenario is Liquidation Valuation most commonly used?
• Why is a DCF trickier for a private company?
• If the options' exercise price is $15 while the current share price is $10, what is the dilutive effect?
• Are there shortcuts in LBO modeling, or must you project all three financial statements?
• Is there a fixed ranking of the three valuation methodologies from highest to lowest value?
• In a basic merger model, which step ultimately determines the combined earnings per share (EPS)?
• In a company that owns 70% of a subsidiary, what does Minority Interest represent in EV calculations?
• Which statement about beta and dividends is correct?
• An alternative way to calculate Free Cash Flow aside from taking Net Income, adding back Depreciation, and subtracting Changes in Operating Assets / Liabilities and CapEx?
• Fully diluted shares include which of the following?
• Which metric is commonly used by REITs to measure cash flow by adding back depreciation and excluding gains on property sales?
• Why do many companies report both GAAP and non-GAAP earnings?
• What are the three main criteria used to select Comparable Companies and Precedent Transactions?
• What does the 'football field' valuation graph represent?
• What approach should you take if you don't believe management's projections for a DCF model?
• Can precedent transactions sometimes not yield a higher value than comparables?
• A buyer with a higher P/E acquiring a seller with a lower P/E: is this accretive or dilutive, and under what condition?
• How do you select the exit multiple for Terminal Value?
• What is a common use of valuation results?
• Non-cash charges commonly excluded in non-GAAP earnings include which of the following?
• If a company has 100 shares outstanding at $10 and 10 in-the-money options with $5 exercise price, what is the fully diluted equity value?
• What happens to the seller's financial statements after the acquisition is completed?
• Which statement is true about high-yield debt compared to bank debt?
• Should dividend yields be factored into the Cost of Equity, or are they already captured elsewhere?
• What shape describes how increasing debt affects WACC as debt increases?
• Sum of the Parts valuation is most appropriate when a company has what?
• Which statement best describes cash-based versus accrual accounting?
• Which has a bigger impact if you change revenue by 1% versus the discount rate by 1%?
• Why is a long-term growth rate over 5% considered aggressive for mature economies?
• Following the depreciation change, what happens to Shareholders' Equity and Net Income?
• In merger model sensitivities, EPS accretion/dilution is typically shown against which relationships?
• Why would you use leverage when buying a company?
• Should cost of equity be higher for a $5 billion or $500 million market cap company?
• How should convertible bonds be treated in the Enterprise Value calculation when they are in-the-money vs out-of-the-money?
• How do you calculate WACC?
• Walk me through a basic LBO model. Which sequence correctly describes the steps?
• Future Share Price Analysis projects a company's share price by what method?
• If a buyer could choose with unlimited resources, which financing method would it typically prefer to use when acquiring another company?
• Which has greater impact on a company's DCF valuation - a 10% change in revenue or a 1% change in the discount rate?
• What is the net change in Cash Flow from Operations after depreciation and interest in Year 2 with a 40% tax rate?
• Do you ALWAYS use the median multiple of a set of public company comparables or precedent transactions?
• Why do many large companies use accrual accounting instead of cash-based accounting?
• What is an appropriate growth rate for Terminal Value in mature economies?
• What do you usually use for the discount rate?
• How do you pick purchase and exit multiples in an LBO model?
• What is Goodwill on the balance sheet typically associated with?
• In an all-stock deal, which approach helps assess accretion?
• If you use Levered Free Cash Flow, what discount rate should you use?
• Which factor could justify a premium valuation relative to comparable companies?
• How is the football field valuation graph constructed?
• P/E multiples are especially used for which types of companies?
• In a debt write-down of 100, what is the impact on assets, liabilities, and shareholders’ equity?
• Why would a strategic acquirer typically be willing to pay more for a company than a private equity firm?
• Which of the following could explain why a company with similar growth and profitability to its Comparable Companies trades at a premium?
• How would you typically present the range of valuations implied by different methodologies?
• When accounting for competitive advantage, which adjustment is recommended?
• What is the key size relationship difference between a merger and an acquisition?
• Which are the three major financial statements?
• In most cases, should debt be added to Equity Value when calculating Enterprise Value?
• Depreciation increases by $10 with a 40% tax rate. What is the impact on Net Income?
• What happens when a deal is priced far above fair value in terms of goodwill?
• Which valuation approach involves analyzing the premium paid in M&A deals to help establish what the company is worth?
• Which of the following is an example of a scenario where cash is collected from a customer upfront but revenue is not recorded immediately under GAAP?
• What metric does a private company valuation primarily show as opposed to an implied per-share price?
• Why does the cash balance stay unchanged at the start of Year 1 in the scenario where factory investment is financed by debt?
• What is a dividend recapitalization?
• In a dividend recap, what happens to the Cash Flow Statement with respect to financing?
• Can a company have a negative Enterprise Value, and what does that indicate?
• Which covenants are typically described as incurrence covenants?
• Can a company have a negative Equity Value? What is true?
• How do you calculate WACC for a private company?
• In a typical discounted cash flow, what threshold indicates the model is too dependent on future assumptions because too much value comes from Terminal Value?
• What happens in an all-stock deal if the buyer's stock drops after the deal is announced?
• What do Goodwill and Other Intangibles represent in an acquisition?
• Which formula represents Cost of Equity WITHOUT using CAPM?
• In the WACC formula, how does the tax rate affect the after-tax cost of debt?
• After two years, the factories are written down to zero and the loan is paid off. Which of the following statements is true?
• Which statement about depreciation in cash flow analysis is correct?
• At the start of Year 1, after Apple borrows $100 to buy factories, which statement is true about the three financial statements?
• If you could only look at one statement to assess overall health, which would you use and why?
• What is the typical range for accounts receivable days?
• When would you use Gordon Growth instead of the Multiples Method?
• Why is Equity Value / EBITDA generally not used as the primary cross-sectional metric for comparing companies?
• Deferred revenue on the balance sheet represents cash collected but not yet earned. Over time, what happens to this balance?
• After one year, with depreciation 10% and 10% interest, and a 40% tax rate, which of the following statements is true?
• Which valuation method relies on projecting free cash flows and discounting them to present value?
• Why are sensitivity tables used with purchase and exit multiples in an LBO?
• Which statement is true about premiums analysis or future share price analysis for private companies?
• Which statement best distinguishes Unlevered Free Cash Flow from Levered Free Cash Flow?
• On the Balance Sheet, which equation must balance?
• Which of the following is an effect of using cash to finance an acquisition?
• A company has 1 million shares outstanding at 100 per share and 10 million of convertible bonds with par value 1,000 and a conversion price of 50. How many diluted shares will be outstanding after accounting for the convertibles?
• From which publication is the Equity Risk Premium commonly sourced?
• To estimate the amount of debt a company could issue in a merger, which approach aligns with the described method?
• Liquidation Valuation might yield a higher value than other methods when which condition holds?
• An LBO analysis is primarily used to determine what?
• Why does Buffett prefer EBIT multiples to EBITDA multiples?
• Provide an example of revenue synergy.
• How do you calculate the Cost of Equity?
• In a merger model, which metric is used to judge whether the deal is favorable for shareholders?
• Why use 5 or 10 years for DCF projections?
• What role does a merger model play in deal negotiations?
• In EV calculations, should you subtract only excess cash rather than all cash?
• Which valuation methodology involves valuing a company's assets as if they are sold off and liabilities are subtracted to determine equity value?
• What is a Purchased In-Process R&D Write-off?
• Which characteristic of banks makes a DCF less suitable, leading to the use of the dividend discount model instead?
• Why would a private equity firm buy a company in a "risky" industry, such as technology?