-BEYOND THE GUIDE-

INVESTMENT BANKING RECRUIT GUIDE: TECHNICAL QUESTIONS

*DO NOT DISTRIBUTE/SHARE*
TABLE OF CONTENTS
Part 1: Questions Received from Mock Interviews + Real Interviews
1.1 – Accounting
1.2 – DCF, Valuation, and Multiples
1.3 – Mergers and Acquisitions
1.4 – Leveraged Buyouts
1.5 – Restructuring
1.6 – Tech Banking
1.7 – Business Knowledge
1.8 – Brain Teasers

Part 2: Questions by Firm

2.1 – Silver Lake Partners
2.2 – Qatalyst Partners
2.3 – Houlihan Lokey
2.4 – Goldman Sachs
2.5 – PJT Partners
2.6 – Credit Suisse
2.7 – Morgan Stanley
2.8 – Barclays
2.9 – Evercore Partners
2.10 – JP Morgan

Part 3: Miscellaneous Questions

Quick note: Questions marked with * are questions with answers that are not 100% confirmed to be correct
1.1 – Accounting
1. Assuming you purchase a company with $1000 in fixed assets and $800 in liabilities for $1000 in cash
(stock acquisition method). Assuming no asset write-ups, walk through the changes on your balance sheet.

Cash decreases by $1000, fixed assets increases by $1000, goodwill increases by $800. Liabilities increase by
$800. (Good to know: Company should only be worth $200, hence $800 of goodwill created).

2. Assume you purchase $500 in inventory with 10% PIK debt, and you sell half of it for $500 within the
same year. Assuming a 40% tax rate, what is the effect on the 3 statements?

Revenue increases by $500, COGS increases by $250, EBIT increases by $250, interest expense increases by
$50, and pre-tax income increases by $200, so Net Income increases by $120. On the CF statement, Net
Income increases by $120, add back $50 in PIK debt, subtract the $250 increase in Inventory, (CFO down by
$80). Cash from financing increases by $500, net change in cash is +$420. On the BS, Cash increased by $420,
inventory is up by $250, debt is up by $550, retained earnings is up by $120.

3. You acquire a company with $1000 in fixed assets and $800 in liabilities for $100 in cash. Walk through
the changes to your 3 statements immediately after this transaction takes place, assuming a 40% tax rate.

REMEMBER: You have a capital gain of $100 dollars. On the IS, extraordinary income increases by $100 (after
EBITDA), so pre-tax income increases by $100 and net income by $60. On the CF statement, net income
increases by $60, subtract $100 in non-cash income, and cash decreases by $40. CFFF goes down by $100 due
to the acquisition. Net cash change is $140. On the BS, cash is down by $140, assets are up by $1000, liabilities
are up by $800, and retained earnings are up by $60.

4.You buy $100 in capital assets for $50 of debt and $50 of cash. What happens to the 3 statements?

No change on income statement. On CFS, CFFF is up by $50 and CFFI is down by $100, cash overall is down by
$50. On the BS, Cash is down by $50, PP&E is up by $100, and Debt is up by $50 (net $50 increase each side).

5. (Continued from last question) The capital asset has a $40 residual value and a useful life of 4 years. The
interest rate is 10% (5% cash, 5% PIK). Tax rate is 40%. What happens to the 3 statements after 1 year? Commented [DL1]: Payment in Kind: part of interest gets
added on to Principal
IS: CF: BS:

Depreciation: -15 ($100-$40/4) Net Income: -12 Cash +5.5

Interest: -5 ($50 * 0.10) + PIK Interest: +2.5 PP&E -15 (Assets Net: -9.5)

Pre-Tax Income: -20 + Depreciation: +15 Debt +2.5

 Net Income: -12 (-20 * 0.6) CFFO (& Cash in General): +5.5 Retained Earnings -12

6. If $250mm of inventory is purchased using debt (5% bank debt, 5% PIK, 20% amortized), with a 40% tax
rate, then sold at $500mm next year, walk me through the statements for next year.

IS: CF: BS:

Revenue up 500 NI up 135 Cash up 347.5

COGS up 250 Add PIK interest 12.5 Inventory down 250

PIK interest up 12.5 Add inventory change 250 Debt down 37.5

Bank interest up 12.5 Debt amortization down 50 Retained Earnings up 135

Operating Income up 225 Net Cash Flow 347.5

Tax up 90

Net income up 135

7. What kind of items would you see on all 3 financial statements?

Net income, depreciation / amortization, taxes, inventory.

8. You have 2 balance sheets from the start and end of the year. How do you calculate EBITDA?

You would take the difference in Retained Earnings to calculate Net Income, and adjust if necessary for
Dividends using Dividends Payable. Then, add back the ending value of Income Tax Payable to get EBT, and
calculate the interest paid using given interest rates and terms in the footnotes or in the line items to get EBIT.
Finally, look at the difference in Accumulated Depreciation / Amortization for each of the capital assets and
intangibles and add the difference back to get EBITDA.

9. Deferred revenue decreases by $100, how are the 3 statements affected? Assume 40% tax rate. Assume
100% GM.

IS: CF: BS:

Rev +100 NI +60 Cash -40

GP +100 Unearned Revenue -100 Unearned Revenue -100

EBT +100 NCF -40 R/E +60

Tax -40
 NI +60

10. (Continued from last question) What if it increases by $100?

IS: CF: BS:

No effect Unearned Revenue +100 Cash +100

NCF +100 Unearned Revenue +100

11. How does $10 of Deferred Revenue affect the 3 financial statements when the cash is collected? What
about when the revenue is recorded?

See above question.

12. Go from UFCF to LFCF.

Take Unlevered Free Cash Flow, subtract mandatory debt repayments and tax-adjusted interest expense, and
arrive at Levered Free Cash Flow.

13. You have an asset with a gross value of $1000 and a net book value of $400. You sell the asset for $600
cash. What happens to the 3 financial statements, assuming a 40% tax rate?

IS: CF: BS:

Gain on Sale +200 NI +120 Cash +520

EBT +200 Gain on Sale -200 PP&E -400

Tax –80 CFFO -80 R/E +120

NI +120 CFFI +600

NCF +520

14. What are the effects on the 3 statements of a $1000 debt write-down, assuming a 40% tax rate?

IS: CF: BS:

Debt Write-Down +1000 NI +600 Cash -400

Tax -400 Debt Write-Down -1000 Debt -1000

NI +600 NCF -400 R/E +600

15. If a company purchases a chair as a capital asset for $100, what happens to the 3 statements?

Nothing occurs on the IS. On the CF, there is a $100 use of cash in investing activities as CapEx. On the BS, cash
is down by $100 and PP&E rises by $100.

16. (Continued from last question) If a company decides to depreciate it by $15 in its government filings but
$10 on its own books, what happens to the 3 statements? (Assume 20% tax rate)

IS: CF: BS:

Depreciation -10 NI -8 Cash +3

Tax -2 Depreciation +10 PP&E -10

NI -8 DTL +1 DTL +1

NCF +3 R/E -8

17. You retire a $100 face value bond at 90%. How does this affect the 3 financial statements, assuming a
20% tax rate? → The retirement of bonds refers to the repurchase of bonds from investors that had been
previously issued. So here it is repurchased at $90.

IS: CF: BS:

Gain on Retirement of Bond +10 NI +8 Cash -92

Tax -2 Gain -10 Debt -100

NI +8 CFFF -90 R/E +8

NCF -92

18. If you have $100mm of revenue and it takes 30 days for your customers to pay for your merchandise,
what is your average A/R account value?

DSO = [AR / Credit Sales] * 365

Assume all sales are credit and rearrange for AR: AR = Sales * DSO / 365 = $100mm * 30/365 = $8.2mm ~=
$10mm
1.2 – DCF, Valuation, and Multiples
1. When would increasing WACC increase your EV?

If your cash flows for your projection period are mostly negative, then increasing WACC reduces the effect of
these negative cash flows on the PV of your UFCFs (even though your PV of your Terminal Value will be
reduced somewhat).

2. What is the impact on COGS of switching from FIFO to LIFO in an inflationary environment?

This would increase COGS as with LIFO you expense the most recently purchased items in COGS, which were
more expensive.

2.5. What is the impact on your DCF of switching from FIFO to LIFO in an inflationary environment?
While COGS will increase, lowering the taxes paid in cash, regardless of using FIFO or LIFO, in an inflationary
environment the effect on change in NWC (inventory purchases) (increases cash flow similar to how
depreciation increases cash flow) will be the same whether using FIFO or LIFO. Therefore, using LIFO will
actually increase UFCF and thus increase the valuation because the decrease in NI from COGS is lessened by
tax savings, while NWC change has no taxes so makes cash flow increase MORE than from COGS. Explanation Commented [MS2]: Someone explain to me
below: Commented [MS3R2]: If you make the assumption that
the inventory has a higher cost associated with it using
the LIFO method, then you will show a lower inventory
number at the end of the period compared to if you had
used another method. Since you will have a greater
decrease in inventory, it will be a greater source of cash
compared to using another method
https://www.wallstreetoasis.com/forums/why-lifo-higher-
cash-flow
3. If a pharma company is developing a drug but doesn’t yet have one on the market, what is its beta?

0. Any movements are completely uncorrelated with the market.

4. If one company uses cashiers and another uses vending machines, which has the lower EV/EBITDA
multiple?

The vending machine company will have greater depreciation (not factored into EBITDA) but lower wages,
therefore increasing its EBITDA. Therefore, assuming EV stays the same, the multiple is lower.

5. If your company gambles $1000 a day and reports its winnings as earnings, what is its beta?

0. Uncorrelated with the market.

6. As an investor, would you rather have a $10 increase in revenue, a $10 increase in gross profit, or a $10
decrease in CapEx?

Best would be decrease in CapEx (doesn’t affect tax), then increase in gross profit, then increase in revenue (as
this will also increase COGS).

7. What are the differences between Cash Flow from Operations and Unlevered Free Cash Flow?
1. One-time expenses / income that CFFO includes but UFCF does not
2. Capital Expenditures that UFCF includes by CFFO does not
3. Interest Expense & Corresponding Tax Savings that CFFO accounts for but UFCF does not
4. Tax Treatment: in UFCF, it is assumed all tax expense is immediately paid in cash, whereas CFFO only
reflects the amount of tax that the company actually pays

7.5. What are the differences between EBITDA and Cash Flow from Operations?

1. One-time expenses (normalized for in EBITDA)

2. Interest expense (uncounted in EBITDA)
3. Working capital changes (uncounted in EBITDA)
4. Tax payments (uncounted in EBITDA)

8. If the EV/Sales multiple is 2x and the EV/EBITDA multiple is 8x, what is the EBITDA margin?

25%.

8.5. If the EV/EBIT multiple for the same company is 16x, what industry could this be a part of?

Some sort of capital-intensive industry with considerable CapEx and D&A, like manufacturing.

9. What discount rate would you use for NOLs?

NOLs should be discounted using cost of equity, since they do not benefit debtholders at all. NOLs are only
applied to taxes paid, which only affects returns for equity holders. → think of this same as if you were using
net income, you would use the cost of equity since net income is only attributable to equity investors

10. Assume a company issues a surprise dividend with excess cash that it has on its balance sheet. What
should be the change to the company’s intrinsic P/E ratio as a result?

P/E decreases (earnings yield increases – earnings per dollar). P/E is a blended multiple out of all the assets
within the company and cash returns the least earnings to the company. → (Equity Value / Net Income → as
equity value decreases with less assets then p/e decreases) Hence, with fewer assets in the firm due to a
decrease in cash, P/E should decrease as a result. (Alternatively, earnings yield increases with an increase in
dividend, so P/E, the inverse, decreases).

Note to meg: I think you can think of this as equity value = enterprise value – debt + cash , so when cash
decreases equity value falls and so the P/E Decreases /// however if a dividend were to be paid then cash
would increase which would increase equity value and increase the pe ?

11. Company A and B both have $200 in revenue, A acquires B and A now has $450 in revenue. There is no
synergy and no growth. Where did the extra $50 in revenue come from?

2 key possibilities. There could be different revenue recognition policies (when A acquires B, it recognizes $50
in extra revenue from B’s operations), or two combined minority investments in the same company could be
combined to make a majority interest, therefore consolidating its financial profile under company A.

12. Which of the following has a greater impact in a DCF valuation? A $1 increase in revenue, a $1 increase
in cash OpEx (operating expenses not capex), or a $1 increase in changes in NWC? Rank them.

NWC > OpEx > revenue. NWC is the highest as it has no bearing on tax (it follows tax in the model). OpEx will
have a greater impact than revenue because an increase in revenue increases COGS as well.

13. What happens to your EV when CapEx increases by $100 on your DCF? (Answer: Your EV falls because
FCF decreases). (falls because here they didn’t say the capex resulted in a boost to PP&E) If this is the case,
then why does your EV increase when you use $100 of cash to buy a capital asset according to the EV
equation? How do you explain this difference?

Your DCF’s EV valuation decreases because it does not consider the FCF generation of the asset you have
invested in. In the EV equation, by converting cash into capital investment, your EV increases because your
firm’s future cash flow generation increases.

14. Name 3 ways lowering tax rate affects your DCF valuation. What is the overall impact of lowering the
tax rate on your cash flows?

1) Lowers cash tax, increasing cash flow

2) Increases cost of debt as it lessens the tax shield, decreasing cash flow due to increased WACC
3) Increases cost of equity because levered beta is higher, increasing WACC and decreasing cash flow

Overall effect: uncertain.

15. What kind of company or asset would have a negative beta?

Gold! Gold has intrinsic value, so investors pursue gold when the equity markets are down. When equity
markets rise and the intrinsic value of companies looks stronger, gold moves down. Other potential candidates
include bankruptcy firms and low-cost consumer staples businesses. A negative Ke is created, meaning
investments in these assets or companies can be used as insurance.

16. When would you use the Gordon Growth method over the Terminal Multiple method?

• When the business is cyclical

• When the size profile is too large (e.g. Apple) to be bought on a multiple

17. If your company were to find $100 on the ground, what would be the impact on Equity Value and
Enterprise Value? (Note: this is the more correct answer than the one on BIWS because this should not affect
company taxes, maybe say smt like assuming this doesn’t impact company taxes)

Cash would increase by 100, as would Equity Value (same transaction as for an equity infusion). Enterprise
Value would not change – seen through the EV equation (Equity Value increase and cash increase offset each
other) – as it accounts for the operational value of the company.

18. If a company’s revenue is expected to increase by $100, would you rather buy a company with higher
operating leverage or lower? (Note: operating leverage is fixed costs over total costs)

Higher operating leverage, as this implies a greater proportion of costs will be fixed, and therefore the
increase in COGS accompanying the revenue increase will be lower.

19. Which would you rather invest in – a company with capital leases or operating leases?

All else equal, the company with capital leases, as the depreciation and interest associated with a capital lease
is not factored into EBITDA (making EBITDA higher), in turn making the EV/EBITDA ratio lower relative to the
company using operating leases.

20. If a company has $50mm in EBITDA, is trading at 6x, with $200mm in bank debt, $200mm in high yield
debt. What will the debt be trading at? (Jun asked me this in my mock)

Company’s Enterprise Value is $300mm ($50mm x 6). Bank debt is worth $200mm as it is secured. The
remaining debt must be worth $100mm in value. Therefore, it is trading at $100mm/$200mm = $0.50 on the
dollar.
20.5 Is Equity Value negative? What is it doing here?

If a company’s EV is exceeded by its total debt obligations, then the company is insolvent, and the equity
(market) value of the company should be 0 to reflect this.

21. If two companies are trading at 8X EBITDA, one 100% Equity, one 50% Debt and 50% Equity… which has
a higher P/E?

The company financed by 100% equity will have a higher P/E because the Equity Value is double that of the
company funded partially by debt, and the impact of interest will not likely impact the valuation as heavily.

Note: Equity Value = Enterprise Value – Debt + cash // so here the debt with 50% lowers the equity value of the
company and thus the P/E multiple is lower than that of company with 100% equity

22. If a company has Debt/EBITDA of 5x and interest coverage of 5x, and a tax rate of 50%, what is the after-
tax interest rate on the debt?

Debt/EBITDA of 5x implies that there is 5x as much debt as EBITDA. Interest coverage of 5x implies that there
is 5x as much EBITDA as interest expense. Interest expense is 1/5 * 1/5 = 1/25 of the debt. 1/25 = 4%.
Accounting for the tax shield, (1-0.5)(4%) = 2%. The after-tax interest rate is 2%.

23. What premium would a company trading at 15x P/E pay for a company trading at 12x P/E? (Assuming
break-even)

Take ratio of earnings yields --> [1/12] / [1/15] = 1.25 --> 25%

OR 15 = 12 (x) → x = 1.25 = 25%

24. How would WACC change if we moved to Brazil? (lol answer here doesn’t even explain the question) I
want to know how WACC / CAPM is different in developing countries as well.

In emerging markets, there are 2 problems:

1. Government debt may not be viewed as risk free

2. There may be no market-based long-term government rate

25. What are the pros and cons of EBITDA as the proxy to value EV?

Pros: Easily comparable across various capital structures (capital structure neutral), neutralizes impact of
varying tax schemes, neutralizes impact of different accounting standards (impacting depreciation)
Cons: Does not account for D&A and therefore inappropriate for asset-heavy business models like
manufacturing, not applicable for early-stage companies (without earnings), not applicable for balance-sheet
centric business models

26. When would you rather invest in a company with lower Operating Leverage?

If you are investing in a company with demand uncertainty or considerable cyclicality, it is important that the
company has lower Operating Leverage so it can weather periods of lower revenue and reduce costs.

27. What kind of industries / companies would have EBITDA close to Net Income?

Companies with low leverage and minor D&A expense, which implies low capital expenditures and an asset-
light business model. Some examples include software companies.

28. What kind of industries / companies would have a higher proportion of TV compared to the 5-10-year
projection period make up their final valuation?

Companies that are very cyclical and are valued during a downturn in the economy for the projection period,
an early-stage company or a company with large increases in cash flows in the final years of projections (e.g. a
pharma company with a drug launch in the later stages of the projection period). Alternatively, a company
with a very high exit multiple (like a technology services company) would also derive a greater proportion of
its final valuation from the TV.

29. If a company has $300m in EBITDA and it grows at 15% per year, what is the EBITDA in 5 years?

Using the rule of 72, 72/15 = 4.8 ~ 5 years. Therefore, EBITDA roughly doubles over 5 years, so EBITDA is just
under $600m.

30. A company has a ROA of 10%. It is financed with 50% debt and 50% equity. The cost of debt is 5%. What
is the cost of equity? Commented [DL4]: Say WACC instead of ROA

ROA = WeKe + WdKd --> 0.10 = 0.5(Ke) + 0.5(0.05) --> ROA = 15%

31. Chimaera Corp will generate EBITDA in calendar year 2016 of $100mm, will incur interest expense of
$10mm, depreciation of $20mm, and will spend capex of $20mm. In addition, accounts receivables
increased by $50MM, and accounts payable increased by $30MM. No other changes in current assets or
liabilities. Chimaera has a 25% effective tax rate. Management expects free cash flow to grow at a 5%
annual rate. Chimaera also has $50mm of cash and $200mm of debt on its balance sheet. What is the
company worth based on a discount cash flow (DCF) analysis? Assume a 10% discount rate.

Using Mid-Year Convention:

2016 2017 2018 2019 2020

EBITDA 100
 -D&A -20

EBIT 80

-Tax -20

NOPAT 60

+D&A +20

-CapEx -20

-Change in -(50-30)
NWC

UFCF 40 42 44.1 46.305 48.62025

Discounted 38.14 36.41 34.75 33.17 31.66

UFCF

Terminal Value = 48.62025(1+0.05)/(0.1-0.05) = 1021.02

Discounted TV = 979.02525 / (1.1)4.5 = 637.57

EV = 38.14 + 36.14 + 34.75 + 33.17 + 31.66 + 637.57 = $811.7

32. How does a dividend issuance impact your P/E, EV/EBITDA, and P/BV ratios?

P/E falls as price decreases, EV/EBITDA stays the same because a decrease in cash is offset by a decrease in
equity value. P/BV would stay the same if it was 1, increases if it was greater than 1, and decreases if less than
1.

Note: this is kind of similar to an above question → If we think Equity value = enterprise value – debt + cash,
then as you do a dividend issuance, your cash will fall which will lower your equity value and decrease P/E →
similarly enterprise value = equity value + debt – cash, so there will be no changes to the enterprise value
number as the dividend is issues → lastly, with p/BV it will depend! Think of P/BV as = Equity Value / Book
Value of Equity // Book value of equity = assets – liabilities // Assets will fall because of cash decrease, also
equity value will fall because of cash decrease SO SINCE BOTH the numerator and denominator fall, this results
in the same value is it was 1 to begin with

Think if P/BV was initially greater than 1, and cash outflow of 10, then 120/100 = 1.2 → 110/2=90 = 1.2222

33. One precedent transaction had a selling multiple of 10x while another was 5x – why could this be the
case?

Some possible reasons:

 • One company may be acquired by a financial sponsor rather than a strategic sponsor
• One transaction may have been acquired during a market upswing
• The transactions may vary by geography
• The size profile of the companies may differ
• One company may be going through litigation
• One company may have a competitive advantage
• One process may have been a more competitive bidding process

34. What are 3 things wrong with a DCF? (More are listed here)

1. A considerable majority of the company’s value is placed on the terminal value (which is heavily reliant
on assumptions, difficult to estimate and extremely sensitive to projections) (e.g. biotech companies)
2. Capital expenditure projections are typically presumed to be entirely maintenance-based and
therefore do not represent accretion of company value through associated topline growth. It is
therefore difficult to model specific growth opportunities in the future
a. Maintenance CapEx refers to CapEx that is necessary for the company to continue operating in
its current form. Growth CapEx is expenditure on new assets that are intended to grow the
company's productive capacity.
3. General uncertainty and assumption levels: the entire model is built entirely on assumptions based on
prior performance (from discount rate to growth rate)
4. Not applicable to business models that are balance-sheet centric (financial institutions, real estate /
energy / mining) Commented [aw5]: why
5. Not very effective for cyclical businesses or businesses that have negative free cash flow

FCF is important for DCF. FCF = Net income + adjustments - change in NWC - capex. Here's why DCFs don't
work for banks:

- Cash flow statement. You can't tell whether an item is CFO or CFF. Theoretically, borrowing money
should be CFF for regular businesses, but for banks, it's how they operate. Therefore you can't draw the
difference.
- NWC. Banks have customers deposits as long term liabilities, but you can never tell when customers are
taking their deposit back, which immediately makes in current liabilities. The same goes for assets. Long
term loans could either be defaulted or payed early. Conclusion: NWC is hard to estimate and too
volatile.
- CapEx . Normal businesses invest in buildings and machines to operate. Banks don't invest in those
items hence this item is insignificant. It's hard to estimate.

Those are the reasons I could think of. Feel free to add anything

35. $100 in debt is issued, how does it impact your P/E and EV/EBITDA ratios?

ASSUMING DEBT RAISED IS JUST CASH:

P/E ratio doesn’t change as Equity Value remains unchanged and the Earnings are identical
 EV/EBITDA doesn’t change because the additional cash cancels out the increase in debt

ASSUMING DEBT IS SPENT ON A VALUE-GENERATING CAPITAL PROJECT:

P/E remains constant, but EV/EBITDA should increase as cash doesn’t change but Total Debt is
increased

36. A company is trading at 10x EV/LTM EBITDA. Do you expect the EV/NTM EBITDA multiple to rise or fall?

This would depend on the state of the company and the industry it belongs to, but generally you expect the
multiple to fall. Most companies anticipate (and deliver on) growth in EBITDA while the numerator (Enterprise
Value) is the present-day value and does not vary in either of these ratios. As a result, you expect the EV/NTM
EBITDA multiple to be lower than 10x.

37. You’re running a DCF on a biotech company and a consumer staples company both with the same WACC
– which has a higher terminal value as a % of EV and why?

A biotech company is less mature and far less stable than a consumer staples company, and the high R&D
expense likely reduces the amount of FCF it has throughout the holding period. Further, because these
companies are valued for their growth potential, they trade at high multiples, so they would derive a greater
portion of their EV from the TV than the consumer staples.

38. You have a target with an EV of $100 million and a debt / total cap of 60%. A 50% premium on the share
price is given. What is the equity value of the firm?

The market value of the Equity Value is 40% of $100 million, or $40 million. If there is a 50% premium on the
share price, the Equity Value is $60 million.

39. Why do you use Cost of Equity in a DDM?

In a Dividend Discount Model, rather than using the concept of free cash flow to value a business’ value
creation, future proceeds are projected through dividends issued (a measured of the company’s “excess
cash”). However, dividends are only attributable to equity holders, and therefore should be discounted at the
opportunity cost for equity investors – the Cost of Equity.

40. A company’s EV/EBITDA goes from 10x to 20x and EV/Sales goes from 2x to 4x. What is happening to
the company and its EBITDA margins?

Relative to the company’s Enterprise Value, the company’s sales (revenue) has halved (2x to 4x). Its top-line
has shrunk by 50%, as has EBITDA, so the company’s EBITDA margins have not changed, remaining at 20%
(2x/10x --> 4x/20x).

41. You have LFCF yield of 10% and UFCF yield of 20%. Your interest rate is 10%, tax rate is 50% and you
have no cash on your balance sheet. What is your debt/EV ratio? Commented [aw6]: lol hulp
As there is no cash on the balance sheet, net debt = total debt. Therefore, EV = Equity Value + Total Debt. Let x
be Equity Value, let y be Total Debt. Assume no amortization (but remember to ask if during an interview).

UFCF – Tax-Adjusted Interest Payments = LFCF --> 0.20x – 0.10(1 – 0.50)y = 0.10x --> -0.05y = -0.10x --> x = y/2

Debt / EV Ratio = y / (y/2 + y) = y / (3/2y) = 2/3

Therefore, the Debt / EV ratio is 2/3.

42. A company experiences $100 million in fines it will have to pay. Before it pays it off, what is the impact
to the equity and enterprise values of the company? What about after? Commented [aw7]: help

Before you pay off the fines, you have a $100 million liability which is attributable to equity holders (increase
in Total Debt and fall in Equity Value offset each other) – no change in Enterprise Value.

After you pay off the fines, the equity value remains lower, but cash has fallen to pay off the liability, so the EV
has also not changed.

(first – think ENT VAL = EQUITY VAL (DEC) + DEBT (INC) – CASH )

(second – think ENT VAL = EQUITY VAL + DEBT (DEC) – CASH (DEC) )

43. You have a debt/equity multiple of 1.25x. Common equity of $4 million, with 160,000 shares and a
current share price of $25 per share. You have $1 million in convertible bonds, with par values of $1000 –
they can convert into 50 common shares at a time. Are they in the money? How does your debt/equity
multiple change once it is exercised?

(FIRST – solve for how much debt you have on hand which is debt/equity = 1.25 → debt / 4 mil = 1.25 → debt
= 5 million)

Yes, these convertibles are in the money as the implied exercise price per share is $1000/50 = $20. If they are
exercised, then there are now 50,000 more shares outstanding (from 50 common shares at a time and you
have 10,000 bonds from 1 mil / 1000 par value), and the common equity has risen by 50,000 * $25 = Commented [DL8]: Can’t use treasury stock method
$1,250,000 while the debt has fallen by $1,000,000 (1 mil as represented by the convertible bonds). The debt because no cahs inflows. Since convertible bonds have
nothing to do with actual cash inflows, can’t. But if you did
balance is now down to $4 million, while the equity value is $5.25 million. The new multiple is 4/5.25 = ~0.76x. options, you receive cash inflows so you can do treasury
stock
44. If you raise $100 debt to buyback $100 in shares, how does that affect the EV? Commented [MS9R8]: Don’t understand math
Commented [aw10R8]: help
There is no change in Enterprise Value. The increase in net defbt is offset by the decrease in Equity Value from
Commented [MS11R8]: ok I understand it now, its not
repurchasing the shares. like the typical TSM questions, you have to do some multiple
flipping stuff
45. Would you invest in a company with 30% growth and 5% ROIC or 10% growth and 15% ROIC?

It depends on the WACC (cost of capital) of the company. If the WACC is above 15%, invest in neither. If it is
between 5% and 15%, then invest in the company with the 15% ROIC. If it is below 5%, then if you are a short-
term investor – invest in high growth; if you’re a long-term investor, invest in the company with higher
consistent returns.

(ROIC measures the return a company earns as a percentage of the money shareholders invest in the business,
a higher return is always better than a lower return. ... A higher ratio indicates that management is doing a
better job running the company and investing the money from the shareholders and bondholders.)

46. A company trades at 7x EV/EBITDA with $100mm in EBITDA, $100mm in cash, $300mm in debt, and
100mm shares outstanding. What is the implied share price?

The Enterprise Value is 7 * $100mm = $700mm.

Equity Value = EV + Cash – Debt = $700mm + $100mm - $300mm = $500mm

Implied Share Price = $500mm / 100mm = $5.

46.5. Now you raise $100mm of debt – how does this change your equity value?

This has no impact on your equity value.

47. In 2017, EV/Revenue = 8x and EV/EBITDA = 12x. In 2018, EV/Revenue = 6x and EV/EBITDA = 12x. Is this
company growing, and why or why not?

Assuming EV remains identical, while EBITDA (and therefore profitability) is not growing year-to-year, the top-
line of the company is still growing by 33.3%, and therefore the company is still growing. Commented [DL12]: Don’t understand math
Commented [MS13R12]: 1/1.3333 = 0.75
47.5. What is the EBITDA margin for both years? 8x * 0.75 = 6.0x
OR
The EBITDA margin for 2017 is 66.7%, and the EBITDA margin for 2018 is 50%. 8*(1/(1+x))=6 solve for x = 0.333

48. Does increased depreciation increase or decrease your valuation?

Increased depreciation increases your valuation as it reduces EBT, thereby reducing the cash tax expense paid.
This increases FCF every year, ultimately leading to a higher valuation.

49. There are 2 companies with the same profiles and 0% gross margin, one with 15% and one with 20%
growth – what metric would you use to differentiate between them?

Use a revenue growth multiple like [EV/Revenue] / Revenue Growth.

50. How would you value an acquired company’s pool of NOLs?

According to the Section 382 Limitation, acquired NOLs can only be used with the following maximum annual
use constraint: the FMV of the acquired company * “Federal Long-Term Tax-Exempt Rate”. Therefore,
calculate the annual NOL use with this formula, project the income shielded per year and multiply by the
appropriate tax rate, then apply a discount rate and sum up the projections.

51. A company has EBITDA of $40 and a market cap of $150. The P/E multiple is 10x, and the company has
$5 in D&A and $5 in interest expense. What is the company’s tax rate? Commented [DL14]: Really good question

As the P/E ratio is 10x, the Net Income of the company is $15 ($150 / 10). With EBITDA of $40, the EBT must
be $30 ($40 - $5 - $5). To get from EBT --> NI, subtract $15 of tax. Therefore, the company’s tax rate is 50%.

52. Company A has an EV/EBITDA of 8x and EV/EBIT of 10x. Company B has an EV/EBITDA of 10x and an
EV/EBIT of 8x. Which of these scenarios is impossible?

The Company B scenario is impossible. As the EV/EBIT multiple is lower, this implies that EBIT is greater than
EBITDA – a case that cannot be, because depreciation and amortization cannot be negative.

53. A company is acquired for a 50% premium and its EV/EBITDA multiple rises from 10x to 15x. What can
you say about the company?

If a company is acquired for a 50% premium, this means the equity value, not inherently the enterprise value,
has risen by 50%. However, if EV/EBITDA also rises by 50%, as is the case here, then EV must increase by 50%
as well. EV = Equity Value + Net Debt, therefore Net Debt must be $0.

54. Name 9 valuation methods.

1. DCF Model / DDM / NAV Model

2. Comparable Companies Analysis
3. Precedent Transactions Analysis
4. LBO Analysis
 5. Future Share Price Analysis (projecting a company’s share price based on P/E multiples of public
comps, then discounting back to present value)
6. M&A Premiums Analysis (analyzing M&A deals and figuring out the premium paid by each buyer)
7. Sum-of-the-Parts Valuation
8. Liquidation Valuation
9. Replacement Value (valuing a company based on the cost of replacing its assets)

55. If a company is contracted for 10 years of projects but none beyond that, how would you value it?

Project out the company’s revenue for the first 10 years with terms of the contracts, and then use historical
data on contract value and growth to determine a growth rate for the terminal value. It can also be argued
that you can use only the T-bill yield for discount rate for the first 10 years as there is greater certainty for this
revenue.

56. If a company’s post-growth FCF is half of EBITDA and the growth rate is 2% and WACC is 10%, what is
EV/EBITDA? Commented [MS15]: Lol good q
Commented [MS16R15]: - Gordon Growth to solve for
EV/EBITDA = ([EBITDA/2]/[0.10-0.02])/EBITDA = 6.25x Terminal Value = Final Year Free Cash Flow * (1 +
Growth Rate) / (Discount Rate - Growth Rate)
57. Into perpetuity, what would be the relationship between D&A and CapEx?

D&A is the loss of capital, and CapEx is the growth of capital. D&A makes a company shrink while CapEx makes
a company grow.

57.5. Let’s say at the end of the projection period, they’re both 10%, and assumed into perpetuity. Does
that imply that the company can’t grow?

It technically assumes that the company remains the same size into perpetuity, however if they did not
converge, that would mean that the company would become infinitely large (CapEx > D&A) or would have 0
assets (D&A > CapEx).

58. What are the 3 ways you would personalize WACC for a specific company?

1. Modifying beta to make it reflect its peers

2. Changing the market risk premium to something more industry-specific
3. Adding size premium to the company

59. If two companies have an EV / LTM EBITDA of 10x, one has an NTM ratio of 15x and the other an NTM
ratio of 5x, which company would you invest in?

Invest in the company with an NTM ratio of 5x because it means the EBITDA is rising into the next 12 months
(the numerator doesn’t change whether using LTM or NTM ratios). As a result, investing in the company with
an NTM ratio of 5x is investing in a growing company, which is more desirable than the investment with the
15x ratios.

60. What type of companies could have a negative Enterprise Value?

 • Financial institutions with large cash balances
• Companies in distressed situations
• Tech companies with large accumulated losses  think about as a DCF method not EV equation

61. What type of companies would have a low ROA but high ROE?

As the return (the numerator) is identical for both formulas, equity must be response for a small part of the
capital structure, and therefore the company is highly levered. An example of a company profile that fits this is
a financial institution, which has a large cash balance, or an asset-heavy business model company like
manufacturing.

62. An airline company has $3000 in revenue, $300 in variable costs, and $1000 in fixed costs. A trucking
company has $3000 in revenue, $900 in variable costs and $400 in fixed costs. Which is riskier?

The airline company is riskier because it has higher operating leverage – a higher proportion of fixed costs. As
a result, in economic downturns when revenue falls, the company continues to pay significant fixed costs and
operating leverage compresses more significantly.

62.5. What is the relationship between revenue and operating profit for each company?

For the airline company, operating profit fluctuates more significantly with the top-line as the reduced
variable costs create greater profit in times of high revenue while the high fixed costs reduce operating profit
in downturns. The trucking company’s operating profit varies less significantly as the more significant variable
costs change in-line with the top-line.

63. Imagine a sensitivity table set up like so below. The EBITDA ratio in the table corresponds to the market
valuation. The company’s WACC is 8%. Moving down each column and across each row, what happens to
the multiple?

ROIC

4% 8% 16% 24%
Earnings Growth

4% 7.1x ? ? ?

6% ? ? ? ?

8% ? ? ? ?

10% ? ? ? ?

Moving across each row, as ROIC increases, the return for all investors (including equity) increases, which will
increase the ratio as investors are willing to pay more for higher-return investments. However, when ROIC is
below WACC (the return is below the expected return for investors), moving down the column (4%) the
multiple declines with increasing earnings growth because the company is becoming more value destructive.
Moving down the 8% column, the multiple remains the same as more value is neither being created nor
destroyed. Moving down the 16% and 24% columns, more value is being created with increased growth, so
the multiple increases. (YOU WANT ROIC TO BE OVER WACC SO THAT VALUE CAN BE CREATED)

64. Which would have a higher WACC – Dominos or a small pizza store?

Generally, the small pizza store would have a higher WACC as it represents an investment that is illiquid and
likely riskier, given its smaller potential target audience and limited human capital.

64.5. In what circumstances would the small pizza store be less risky?

A small pizza store may be less risky if it has a very captive audience (e.g. a University student population).

65. There are two companies – one has a higher P/E but lower EV / EBITDA than the other. How could this
be?

Once company is more capital intensive, has a different capital structure, or different tax rate.

66. A company has a Net Debt / EBITDA of 10x and sells off a positive-EBITDA generating business for 5x EV
/ EBITDA. What happens to the Net Debt / EBITDA ratio?

The whole company prior to the divestiture has an EV / EBITDA of >10x. (because net debt / ebitda is 10x, so
ev/ebitda must be greater, because EV must be greater than net debt for the company // lets say ebitda is
100m then net debt / ebitda is 100m * 10 = 1000 // and ebitda is 100 then if ev/ebitda is 11x then 100 * 11 =
1100) While the payback of debt with cash will reduce net debt, the divesture’s sale at a lower valuation
means more EBITDA was given up relative to the sale value than the average of the entire firm. As a result,
EBITDA declines by more than net debt, and the ratio increases.

67. What are 3 reasons why a DCF would have a higher valuation than an LBO?

1. In an LBO, most of the cash flows from the projection period are used to repay debt, and therefore
aren’t available to accrue to the valuation
2. Cost of Equity for an LBO is higher because the sponsor expects greater returns due to high leverage
and illiquidity
3. The higher amount of leverage and higher interest expense therefore limits both organic value creation
and growth projects, producing a lower valuation

68. What would be the impact of a share buyback on P/E? Why does the yield change?

The P/E ratio would fall because the repurchase of shares lowers the Equity Value of the company while
earnings remain the same. (Equity Value = Enterprise Value – Debt + Cash) The yield increases because
earnings are spread across fewer shares, so each share has a proportionally larger share of earnings.

69. You have an EPS of $2, 100 shares outstanding, a P/E of 4x, $200 in debt, $75 in NCI, $50 in cash and
$100 in inventory. What is the EV?

EPS * Shares Outstanding = NI --> $2 * 100 = $200.

P/E * NI = Equity Value --> 4 * $200 = $800

EV = Equity Value + Debt + NCI – Cash = $800 + $200 + $75 - $50 = $1025.

70. You have a P/E of 20x, EV/EBITDA of 10x, interest expense of $20mm, 5% interest rate, depreciation of
$20mm, and a market cap of $200mm. What is the effective tax rate?

Market Cap / (P/E) = NI --> $200mm / 20 = $10mm.

Total Debt = $20mm / 0.05 = $400mm.

Enterprise Value = $200mm + $400mm = $600mm (assuming no NCI, preferred or cash).

EBITDA = EV / (EV/EBITDA) = $600mm / 10 = $60mm.

EBITDA – D&A – Int = Pre-Tax Income = $60mm - $20mm - $20mm = $20mm.

$10mm / $20mm = 50%. The effective tax rate is therefore 1 – 0.5 = 50%.

1.3 – Mergers & Acquisitions

1. Company A has Net Income of $500, 100 shares outstanding and a share price of $100. Company B has
Net Income of $300, 100 shares outstanding and a share price of $45. Company A acquires Company B in an
all-stock deal with no synergies. How accretive or dilutive is this deal?

EPS of Company A prior to Number of new shares issued: New EPS:

acquisition:
$45 * 100 = $4500 ($500 + $300)/(100 + 45) = $5.51
$500/100 = $5
$4500 / $100 = 45

$5.51/$5 – 1 = ~10% Accretive

1.5. (Continued from last question) Now imagine Company A buys B with 50% stock and 50% debt. Tax rate
is 20%. What interest rate would lead to the same level of accretion?

$2250 in debt issued, 22.5 new Net Income / 122.5 = 5.5 2250(1-0.2)Kd = 800 – 673.75
shares issued.
Net Income = 673.75 Kd = 0.07014 = 7.014%
To maintain accretion level, EPS is
the same. Therefore, interest expense must
be the difference between pro-
forma net income and 673.75.
2. Company A has a 20x P/E multiple. Company B has a 10x P/E multiple. Company A acquires Company B
with 50% stock and 50% debt. What is the after-tax interest rate required to make this deal neither
accretive nor dilutive (breakeven)?

Equate earnings yield of B to 0.10 = 0.5Ke + 0.5(1-t)Kd (1-t)Kd = 0.15

weighted cost of equity and debt
issued. 0.10 = 0.5(0.05) + (0.5)(1-t)Kd

0.075 = 0.5(1-t)Kd

3. Company A has a market cap of $100, Net Income of $20, and 10 shares outstanding. Company B has a
market cap of $80, Net Income of $20, and 5 shares outstanding. Company A buys Company B at a 50%
premium (all stock). Is this accretive or dilutive, and by how much?

EPS of Company A: $20 / 10 = $2 $120 / $10 = 12 new shares issued $1.82/$2 – 1 = -9% (9% Dilutive)

New Market Cap of Company B New EPS: ($20 + $20) / (10 + 12) =
with 50% Premium: $120 $1.82

4. Company A has a P/E of 10x and Company B has a P/E of 20x. Company A buys Company B for 50% in
debt and 50% in equity, and the interest rate is 10%. What must the tax rate be to breakeven?

0.05 = 0.5(1-t)Kd + 0.5Ke 0.05 = 0.5(1-t)(0.1) + (0.5)(0.1) t=1

Kd = 0.10, Ke = 0.1 0 = 0.5(1-t)(0.1) Therefore, tax rate must be 100%.

5. Company C has Net Income of $200, a share price of $6 and 10 shares outstanding. Company D has Net
Income of $200, a share price of $5, and 6 shares outstanding. Company C buys D in an all-stock deal at a
20% premium. No synergies. How accretive or dilutive is this acquisition?

Current EPS for C: $200/10 = $20 New shares issued: $36/$6 = 6 $25/$20 – 1 = 25% accretive

New Market Cap for D: $5 * 6 * New EPS for C: ($200 +

1.2 = $36 $200)/(10+6) = $25

6. Company A has 1 million shares outstanding at a price of $25, with $4 million in Net Income. Company B
has 500K shares outstanding at a price of $15 with $1 million in Net Income. Company A acquires Company
B with 40% equity and 60% debt and $250K of hard (post-tax) synergies are created. Interest rate is 6%, tax
rate is 40%. How accretive or dilutive is this deal?

Current EPS for A: $4mm/1mm = Number of new shares issued: New EPS: $5,088,000/1,120,000 =
$4 $3mm / $25 = 120,000 new shares 4.54

$4.54/$4 – 1 = 13.6% Accretive

 Mkt Cap for B: $15 * 500K = Pro-Forma NI w/ Synergies: $4mm
$7.5mm + $1mm + $250K - $7.5mm * 0.6 *
0.06 * (1-0.4) = $5,088,000
Equity Purchase Val: $7.5mm * 0.4
= $3mm

7. Company A has a Market Capitalization of 100M and a P/E of 20x. Company B has a Market Capitalization
of 200M and a P/E of 10x. Company B purchases Company A at a 50% premium. Is this accretive or dilutive?
How much in synergies would be required to make this deal breakeven?

You’re buying a company that trades at a higher PE, so the premium is irrelevant in determining that this deal
will be dilutive. However, with a 50% premium, Company A’s valuation will be affected, effectively increasing
its Market Capitalization to 150M, and thus its PE multiple will increase to 30x. There must be an increase in
earnings to lower Company A’s PE to 10x. Based on the Market Cap and PE ratio, you know that Company A
has earnings of 5M, therefore there must be 10M of net income synergies to lower its PE ratio to 10x and
make this deal breakeven.

8. Freya Corp has a market capitalization of $100mm and trades for a P/E multiple of 20x. Loki Corp has a
market capitalization of $200mm and trades for a P/E multiple of 10x. If Loki acquires Freya in an all-stock
transaction that values Freya at $150mm, will the transaction be accretive or dilutive to Loki’s shareholders,
assuming the transaction yields no synergies (remember to show your work)? What amount of synergies
would be necessary for the transaction to be breakeven on an EPS basis?

Freya Corp Loki Corp

Market Cap – 100mm Market Cap – 200mm

P/E – 20x P/E – 10x

Acquired Market Cap – 150mm

New P/E – 30x

Loki acquires Freya for $150 all-stock.

Loki’s Earnings Yield = 1/10 = 10%. Freya’s Earnings Yield = 1/30 = 3.3%

As Freya’s Earnings Yield is below Loki’s, the transaction will be dilutive in an all-stock deal as Loki must issue
stock with a higher yield to acquire stock with a lower yield.

For the transaction to breakeven, the P/E of Freya must be 10x.

10x = $150mm / ? --> Earnings = $15m. Earnings are currently $100mm/20 = $5mm. Therefore, $10mm of
synergies are needed to breakeven.

9. What are the 4 types of M&A synergies?

 • Revenue Synergies (Cross-selling, etc.)
• Cost Synergies (Reduce redundant costs, economies of scale)
• Tax Synergies (relocate HQ to take advantage of tax rate)
• Financing / Leverage Synergies (refinance debt of target with lower interest rate debt)

10. Why would a company not want to spend all of its available cash on an acquisition?

• Minimum amount of cash necessary to meet working capital requirements

• Dividend payments necessary
• Litigation expenses --> especially important in an industry with considerable litigation risk (healthcare,
etc.)
• R&D spend
• Covenants may require a minimum cash balance on hand
• Company may want to pursue other projects

11. How can you fund an M&A transaction and what are the qualities of the 3 options?

An M&A transaction can be funded through (1) cash, (2) debt, and (3) equity. Cash is generally the cheapest
source of capital to fund a transaction, as cash has the lowest foregone interest received. However, it can be
ill-advised to use cash if there is excessive R&D spend, restrictive debt covenants, litigation expenses,
mandatory dividend payments or a required amount of cash to meet working capital requirements (see M&A
Q10). Debt is generally cheaper than equity and more expensive than cash, and should be used if the company
is underlevered and/or the target has significant stable cash flows projected into the future. Equity is the most
expensive way to fund an M&A transaction and is generally flexible – it may be used if the stock is trading at
an all time high or if the company is already highly levered and has a low cash balance.

12. We’re advising Company A on the potential acquisition of Company B. Our client wants to use 50% debt,
25% cash and 25% stock to fund this acquisition, and wants to determine if it is accretive or not. Company A
has a Share Price of $10, 100 shares outstanding, debt of $300, cash of $100, Net Income of $200. Company
B has a Share Price of $10, 25 shares outstanding, debt of $75, cash of $25, and Net Income of $25. The tax
rate is 40%, pre-tax Kd is 5%, and pre-tax foregone interest on cash is 1.0%.

1) Earnings Yield of the Company = 1/(P/E) = 1/10 = 10%.

2) Cost of debt = 5% * (1-40%) = 3%. Cost of cash = 1%*(1-40%) = 0.6%. P/E = $10 / ($200/100) = 5. Cost of
Equity = 1/5 = 20%.

3) Cost of capital = 50% * 3% + 0.6% * 25% + 20% * 25% = 6.65%.

Return = 10%, cost of capital = 6.6%, therefore accretive.

13. Company A has a P/E of 10x, stock price of $5, EPS of $0.50, and 50 shares outstanding. Company B has a
P/E of 20x, EPS of $0.20, 10 shares outstanding. Company A buys B for $100 with 50% stock and 50% cash,
and the after-tax interest foregone on cash is 10%. How accretive or dilutive is this deal?

Net Income for Company A = $0.50 * 50 = $25. Net Income for Company B = $0.20 * 10 = $2.

New Shares Issued: ($100 * 0.50) / $5 = 10 new shares issued

New EPS for MergeCo: ($25 + $2 - $50(0.10)) / (50 + 10) = 22/60 ~0.367

0.367 / 0.50 = 0.7333. Therefore, the deal was ~27% dilutive.

14. Company A has a tax rate of 40% and B has a tax rate of 30%. A acquires B. Is the deal accretive or
dilutive?

The acquisition is dilutive because the realized pre-tax earnings of the company acquired will decrease with
the higher tax rate of the new company, lowering the overall earnings per share post-acquisition.

15. If Company A has an EV of $500mm and Company B has an EV of $100mm and Company A purchases
Company B for $200mm by raising $200mm in equity, what is the final enterprise value of Company A?

$700mm ($500mm originally + $200mm additional Equity Value).

16. If an acquisition is announced for $10, and the stock currently trades at $5, why would it only rise to $8?

Execution Risk: It would not rise to the full value of the announced price because of investor skepticism that
the deal will not go through.

16.5. Why might the share price rise above $10?

The price might rise further if investors believe there may be other bidders that may attempt to outbid the
existing price. It could also vary with differences in transaction structure.

1.4 – Leveraged Buyouts

1. PAPER LBO: You buy a company (LTM EBITDA of $100) for 5x LTM EBITDA, levered up 3x. EBITDA grows
by $10 per year. You sell after a 5-year holding period for 5x. There is a 20% LFCF margin from EBITDA.
Assume bullet maturity. What is the IRR?

Purchase Price: $500 Sources: Debt - $300, Equity - $200

Holding Period Year 1 2 3 4 5

EBITDA 110 120 130 140 150

 LFCF 22 24 26 28 30

Ending Equity Value: $150 EBITDA * 5x EBITDA - $300 (Debt Principal) + $30 + $28 + $26 + $24 + $22 = $580

$580/$200 = ~2.9 MOIC

Use rule of 114: IRR = 114/5 = 22.8% ~22% (as 2.9 < 3)

2. PAPER LBO: You buy a company with $50 EBITDA for 6x EBITDA with 4x leverage, hold it for 6 years, and
sell at 6x with no EBITDA growth. 5% interest rate (paid as a percent of the starting principal at the time of
the transaction), 20% tax rate, $20 in D&A, $3 in CapEx per year, and $15 in increased Working Cap
efficiencies per year. All FCF is used to pay off principal. What is the IRR?

Purchase Price: $300 Sources: Debt - $200, Equity - $100

Holding Year 1 2 3 4 5 6

EBITDA 50 50 50 50 50 50

D&A -20 -20 -20 -20 -20 -20

Interest -10 -10 -10 -10 -10 -10

Pre-Tax Inc. 20 20 20 20 20 20

Net Income 16 16 16 16 16 16

+D&A 20 20 20 20 20 20

CapEx -3 -3 -3 -3 -3 -3

-ΔNWC -15 -15 -15 -15 -15 -15

FCF 48 48 48 48 48 48

Cash 0 0 0 0 40 48
accruing to
equity

Ending Equity Value: $50 * 6 + 40 + 48 = $388

$388/$100 = 3.88 MOIC

Use rule of 144: IRR = 144/6 = ~24%

3. Which of the following makes a stronger LBO candidate: a company that provides services or a company
that manufactures products?
A company that provides services, because there is additional cash available to pay off debt through reduced
COGS (remember margins for manufacturing companies at like 10%, also since it’s a service there are not
many variable costs so therefore less cogs), and also because there is significantly reduced CapEx.

3.5. Is there anything bad about investing in a service business?

There are fewer assets, so less collateral for taking on debt (worse for the LBO).

4. As a private equity buyer, would you rather purchase a company with $5mm in CapEx or $10mm in
CapEx, if the first has $4mm in maintenance CapEx and the second has $1mm in maintenance CapEx?

Buy the company with $10mm in CapEx ($1mm of which is maintenance), as you can optimize the business’
growth and reduce the amount of growth expenditure needed.

5. What are 3 ways to increase IRR?

1. Decrease the purchase price, increase exit

2. Increase leverage
3. Improve operating metrics (revenue growth, EBITDA margin, LFCF margin, etc.)

6. Should IRR be higher, or WACC?

IRR represents the Cost of Equity of the target (the expected return of the financial sponsor), and as the
company will be highly levered with debt that is less expensive than equity, the WACC should be lower.

7. A company has $10m in EBITDA. You purchase at 10x EV/EBITDA with 5x leverage for a 4-year holding
period and sell at 10x with no EBITDA growth. You pay down all the debt during the period and LFCF is
break-even. What is the IRR?

The initial equity stake is $50m. After paying off all debt after 4 years, the equity stake is the full $100m selling
price. $100m / $50m = 2x MOIC. Using the rule of 72, 72/4 = 18% IRR.

8. A company has $300mm of EBITDA. You purchase the company at 10x EBITDA with 40% equity stake. It
generates LFCF of $400mm. EBITDA does not grow, and after a period of time you sell for 10x EBITDA. Your
MOIC is 3.0x. How many years did you hold the company for?

MOIC = (Final Equity Stake) / (Initial Equity Stake). Let t be the time in years.

3 = (400t + 1200)/1200

t=6

9. A financial sponsor (private equity fund) acquires Leverage Corp for $400mm, representing an 8.0x entry
multiple based on $50mm of EBITDA for the trailing twelve-month period. They finance their acquisition
with $300mm of debt and the remaining $100mm is financed with equity from the financial sponsor. Debt
carries an interest of 5%. EBITDA in year 1 is $60mm, depreciation is $10mm capital expenditure is $20mm,
and there are no other cash inflows or outflows. Tax rate is 20%. What is the excess free cash flow available
to pay down debt?

EBITDA $60mm

-D&A -$10mm

-Interest -($300mm)(0.05)

EBT $35mm

-Tax -$7mm

Net Income $28mm

+D&A +$10mm

-CapEx -$20mm

LFCF $18mm

Therefore, $18mm is available in excess FCF to pay down debt.

9.5 In year 5, assume $150mm of debt is paid down. What exit multiple (on the basis of trailing 12-month
EBITDA of $60mm), will be necessary for the sponsor to realize a 4.0x return on their equity investment
(money multiple)?

Sources / Uses: 300mm Debt, 100mm Equity --> 400mm Purchase Price

Assume no FCF accrues to the equity position. Let y be the exit multiple.

4 = (60mm * y – (300mm – 150mm)) / 100mm

400mm = 60mm * y – 150mm so… y = 9.17x

10. A private equity firm buys a business with $100 in EBITDA at 4x EV/EBITDA. The company will continue
to generate $100 in EBITDA for all future years and will be sold in 5 years for $400 plus all the FCF that has
been generated by the business during the 5-year hold period. No debt is paid off during the hold period.
D&A is $40, interest rate is 10%, there is no tax, no change in NWC, and CapEx is $40. If the private equity
firm generated MOIC of 2.5x, what was the original equity cheque at entry?

Entry = Equity + Debt = 400.

Exit = 2.5*Equity + Debt = 400 + 5*FCF

FCF = EBITDA – Interest Expense – Change in NWC – CapEx

FCF = 100 – 0.1*Debt – 40

FCF = 60 – 0.1*Debt

2.5*Equity + Debt = 400 + 5*(60 – 0.1*Debt)

2.5*Equity + Debt = 400 + 300 – 0.5*Debt

2.5*Equity + 1.5*Debt = 700 (Equation 1)

Debt = 400 – Equity (Equation 2)

2.5*Equity + 1.5*(400 – Equity) = 700

Equity + 600 = 700

Equity = 100, Debt = 300.

Therefore, the original equity cheque was $100mm.

11. You buy a company for 10x EV/EBITDA with $100mm in EBITDA and 6x leverage. You sell in 5 years at
$150mm EBITDA, paid off $250mm in debt, and sold for 10x. What is the MoM and IRR?

NOTE: Assuming cash sweep.

Purchase Price: $1bn Sources: Debt - $600mm, Equity - $400mm

Exit Price: $150mm * 10x = $1.5bn. Remaining Debt: $600mm - $250mm = $350mm

MoM: ($1.5bn – $350mm) / $400mm = $1.15bn / $400mm = 2.875 ~= 3

Use rule of 114: 114/5 = 22.8%. Therefore, the IRR is likely slightly less than 22.8%.

12. What is more important – MoM multiple, or IRR?

Both metrics are important – MoM is useful for quickly determining the equity value at the exit, and IRR Commented [MS17]: Review what is the definition of
demonstrates the annualized return and can be benchmarked against the market return. However, IRR is the MoM

more important metric because it considers the length of the holding period (something that MoM does not)
and is therefore a more comparable return for reference.

13. How can a company increase its exit multiple without changing its EBITDA?

• Becoming more efficient in its operations

• Economic improvements
 • Switching industries
• Gaining a competitive advantage

14. What are 3 ways that P/E firm can return equity from an LBO?

1. Dividends
2. Dividend recaps Commented [MS18]: Explain what is a dividend recap and
3. Exits why might we use it instead?

15. PAPER LBO: Bought a company at $500 with $400 in debt and $100 in equity. FCF each year is $100, debt
is amortized at $75 a year. Sold for $500 after 5 years. What is the MoM?

Purchase Price: $500 Sources: Debt - $400, Equity - $100

MoM: ($500 + $100 * 5 - $400) / $100 = 6 --> Therefore, the MoM is 6.

16. How do you decide how much leverage to use?

Look at historical performance and understand the business profile. If it’s cyclical with high operating leverage,
you may not be able to put many turns of EBITDA (<4x of debt), while if it has proven to be stable and still
growing effectively, you can put on additional leverage – then optimize mechanically.

17. PAPER LBO: You have entry EBITDA of $200mm, and you purchase the company at 10x with leverage of
6x. Your exit EBITDA is $300mm, and you sell at 10x with 4x leverage. Assume no LFCF generation. What is
the MoM and IRR, assuming a 4-year hold?

Purchase Price: $2bn Sources: $1.2bn debt, $0.8bn equity

Exit Price: $3bn Remaining Debt: $1.2bn

MoM= ($3bn - $1.2bn) / $0.8bn = $1.8bn / $0.8bn = 2.25x

Slightly over MoM of 2x, so use Rule of 72: 72/4 = 18%. Therefore, the IRR was slightly higher than 18%.

1.5 – Restructuring
1. Why would a company prefer to negotiate in an out-of-court restructuring?

In an out-of-court restructuring, there are greatly reduced legal fees, greater flexibility in negotiating
strategy and ability, and the process is generally quicker. However, if a company has a complex capital
structure with many tranches of debt, it may not be possible to settle all creditor relationships out-of-court.

THIS MAY BE THE most difficult due to HOLDOUT PROBLEM

In finance, a holdout problem occurs when a bond issuer is in default or nears default, and launches an exchange
offer in an attempt to restructure debt held by existing bond holders. Such exchange offers typically require the
consent of holders of some minimum portion of the total outstanding debt, often in excess of 90%, because, unless
the terms of the bond provide otherwise, non-consenting bondholders will retain their legal right to demand
repayment of their bonds at par (the full face amount). Bondholders who withhold their consent and retain their
right to seek the full repayment of original bonds, may disrupt the restructuring process, creating a situation
known as the holdout problem.

Why would a company prefer to negotiate in an in-court restructuring?

In an in court restructuring – a company files for a formal bankruptcy supervised by the court, (
AUTOMATIC STAY - temporarily prevents creditors, collections agencies, government entities, and
individuals from pursuing debtors for amounts owed ) xxx // Can bind dissenting creditors if a majority vote is
reached and court deems it fair // Also beneficial because company gets DIP financing and can sell assets
easily // Worst case scenario: liquidation

Debtor-in-possession (DIP) financing is a special kind of financing meant for companies that are in bankruptcy. Only companies that have
filed for bankruptcy protection under Chapter 11 are allowed to access DIP financing, which usually happens at the start of a filing. DIP financing is
used to facilitate the reorganization of a debtor-in-possession (the status of a company that has filed for bankruptcy) by allowing it to raise capital
to fund its operations as its bankruptcy case runs its course.

2. What are the differences in work and strategy in approaching a debtor engagement and a creditor
engagement?

The strategy of a debtor engagement is more reactive in its analysis compared to a creditor and provides a
more holistic look at the company’s capital structure in all aspects, and also takes into consideration the ability
of the firm to become a going concern (Going concern is an accounting term for a company that has the
resources needed to continue operating) moving forward. In working for a creditor, the analysis is more
proactive and there is additional strategy in terms of capital recovery. Both involve examining and working
within the legal framework.

A debtor is a person or an organization that agrees to receive money immediately from another party in
exchange for a liability to pay back the obtained money in due course of time.

A creditor is a person or an organization that provides money to another party immediately in exchange for
receiving money at some point in the future with or without additional interest. In other words, a creditor
provides a loan to another person or entity.

3. You buy a bond for $0.70 on the dollar, with a 14% coupon and a 5-year maturity. Assume there are 5
years left to maturity. What is the YTM on the bond?

There are 2 components to the yield to maturity: the coupon yield and the principal yield.

Coupon Yield: $0.14 / $0.70 = 0.20 = 20%

Principal Yield: $1.00 / $0.70 – 1 = 0.4286 / 5 = 0.0857 = 8.57% annually (dividing by 5 to approximate)

Total Yield = 20% + 8.57% = 28.57%

4. There are two tranches of debt with the same interest rate: one is convertible, one is not. Which would
you rather invest in?

It depends on the situation. If the company (and economy) is healthy, then you would take the convertible
option as it provides the optionality of taking an equity ownership stake in the company. However, if the
company is in distress, you would rather take the non-convertible option as it is often more senior in the
capital stack and is seen as less risky.

5. What are some common transactions seen in a corporate restructuring?

• Could involve either paying out existing debt holders for their principal or renegotiating better terms
on debt repayments and interest
• Could involve an asset sale to raise funds
• The exchange of debt obligations for equity for some creditors in the fulcrum security tranche

Also known as fulcrum debt. The security most likely to convert to (or receive) equity in a reorganized company
after it emerges from Chapter 11 of the Bankruptcy Code. Some investors purchase this security as part of a
strategy to take ownership of the company.

6. If two bonds have the same maturity, same coupon, and both are secured, why could one have a YTM of
10% and the other a YTM of 20%?

The yield-to-maturity is a two-part calculation including the annualized yield of the principal payment and the
coupon payment yield. As both coupons are the same, the difference must be in price (the higher the price the
lower your yield, the lower the price the higher your yield). Some reasons:

• One bond may be convertible - Investors will generally accept a lower coupon rate (so pay a higher price for that of)
on a convertible bond
• One bond may be callable - Callable or redeemable bonds are bonds that can be redeemed or paid off by the issuer prior to the
bonds' maturity date // Callable bonds are usually riskier than non-callable bonds, so investors usually receive a higher yield (lower price)
to help compensate for the greater risk. If both the bonds offer the same interest rates, the market price of the callable bond will be lower
than that of the non-callable bond. // Many companies issue callable bonds so they can avoid paying high interest rates. For an investor,
the practice makes callable bonds a riskier investment. Many investors choose to invest in non-callable bonds whereby the interest rate is
fixed regardless of market movements.
• Even though both are secured, they are unlikely to be secured against the same assets, and some
collateral may be easier to extract value from than others
• Differences in covenants may also play a factor - a covenant is a promise in an indenture, or any other formal debt
agreement, that certain activities will or will not be carried out or that certain thresholds will be met // Possible bond covenants might
include restrictions on the issuer's ability to take on additional debt, requirements that the issuer provide audited financial statements
to bondholders and limitations on the issuer's ability to make new capital investments. // A common penalty for violating a bond
covenant is the downgrading of a bond's rating, which could make it less attractive to investors PRICE WOULD FALL

7. A company has $50 in EBITDA and trades at a 5x EV/EBITDA multiple. It has $180 in bank debt and $120 in
high-yield debt. How much is each tranche trading at? What is the equity value?

The $180 in bank debt is secured and can be supported by the enterprise value of the company (there is
collateral to meet principal payments). Therefore, it is trading at par ($1). There is $120 in face value of high
yield debt, but only $70 in EV left to cover the debt. Therefore, it trades at 7/12 of a dollar, or ~$0.58 on the
dollar. The equity value is either 0, or barely positive as investors may believe the company has turnaround
potential and may want the call option of being able to partake in potential future profits if the company
becomes a going concern again. Commented [MS19]: Read about this from somewhere I
don’t understand
8. What are 2 reasons why a bond would trade below its face value?

1. The market rate is higher than the bond’s coupon

2. The company is in distress and repayment is unlikely

9. What can trigger a restructuring?

• Economic downturns, higher operating costs

• Liquidity issues:
o Covenants - The breach of a covenant can have an impact on a debtor's liquidity and solvency. If the covenant
gives the lender the right to request the immediate payment of the loan, the debt involved becomes a current
liability for the debtor, potentially altering their financial health.
o Interest payments
o Principal repayments
• Large one-time expenses
• Drops in stock price → reflects investors of weak fundamentals, market downturns, etc.

10. What are the different kinds of debt and characteristics of each?

1. Revolver, term loan 1, term loan 2 --> 1-5 years, floating, amortization of some sort, most senior,
financing from conservative banks usually, maintenance covenants (for the company asking for
money), secured
2. Senior notes --> fixed rates, higher rates, longer terms, bullet amortization, Hedge Funds and other
types of Financial Institutions are the investors, unsecured, incurrence covenants
3. Subordinated Notes --> fixed rates, even higher rates, longer terms, bullet amortization, HFs and other
types of FIs, unsecured, incurrence covenants
4. Mezzanine Debt --> fixed rates, highest rates, longer terms, PIK or cash interest, bullet amortization,
HFs and other types of FIs, unsecured, incurrence covenants

11. If debt is trading below par, but no insolvency is anticipated (meaning its value is entirely covered), what
could be the reason?

• Coupon may be below the prevailing market rate

• There might be risks of the bond being called
• There might be a liquidity discount due to low demand

12. A company’s debt has a face value of $100 and is trading at $80. It pays an 8% coupon and matures in 5
years. What is YTM?

Coupon Yield: $8 / $80 = 0.10 = 10% annually → formula for coupon yield = annual coupon payment / bond price
Principal Yield: $100 / $80 – 1 = 0.25 / 5 = 5% annually (divide by 5 to approximate)

Total Yield = 10% + 5% = 15% annually

12.5. Since this is an approximation, would the actual yield be higher or lower?
Since the yield compounds, the return per year for the principal is actually lower than 5%, therefore the YTM
is actually lower. → YTM assumes that all coupon payments are reinvested at a yield equal to the YTM and that the Commented [MS20]: I don’t understand
bond is held to maturity. i think its cause YTM assumes that you hold till maturity and reinvest all the coupons
thus the coupon compounds but since in reality you might not do that, the actual yield should be shorter?

13. There are 3 tranches of debt, each $100m. One is senior secured that trades at 100 cents on the dollar
with 5% interest. The second is unsecured with 7% interest and trades at 70 cents on the dollar. The last is
10% high yield debt that trades at 30 cents on the dollar. With an EBITDA of $50m and a multiple of 3x,
which tranche of debt would you rather invest in? (ask for cash balance, tax rate, NWC and CapEx) Commented [MS21]: wtf

Find YTM for all 3. Conduct waterfall analysis. Right answer is 10%??? Find FCF (which will be negative), and
use cash balance to figure out how long the company will stay solvent for.

14. If a company has two tranches of debt – senior debt at 60 cents on the dollar and unsecured bonds at 12
cents on the dollar – why might the unsecured bonds still have any value if the senior tranche doesn’t have
full recoverable value?

• Interest payments for the time before the default could be of some value Commented [MS22]: how can they still make interest
payments if the principal is unable to be paid?
• Since the senior debt isn’t fully collateralized, the bonds might be entitled to some of the collateral
since unsecured assets are paid equally to creditors on the same level and the partial collateral may
be the only reasons for seniority

15. You have $1bn in unsecured debt trading at 30 cents on the dollar. If the company issues a debt swap for
$600mm trading at 60 cents on the dollar, what is the gain or loss on this trade?

The current debt held is worth 0.30 * $1bn = $300mm. The new debt is worth 0.60 * $600mm = $360mm.
Therefore, there is a gain of $360mm - $300mm = $60mm on the trade.

A debt/equity swap is a transaction in which the obligations or debts of a company or individual are
exchanged for something of value, namely, equity. In the case of a publicly-traded company, this generally
entails an exchange of bonds for stock.

16. You have an ABL revolver worth $90mm secured against $100mm in A/R with 85% recoverable value. If
$35mm is already drawn on the revolver, $10mm due to vendors, and $50mm in cash, what is the
company’s liquidity?

Cash represents $50mm in liquidity as a base. $10mm is due to vendors, so total liquidity before the revolver
is used is $40mm. The revolver is secured up to $85mm, with $35mm already drawn: $85mm - $35mm =
$50mm left to be drawn. $50mm + $40mm = $90mm total liquidity.
17. If two bonds have the same price, face value and coupon but the only difference is their maturity, which
has a higher yield to maturity?

The two bonds have the same YTM. The only way for bonds with different maturities to have the same price
and coupon is if they are both trading at par. At par, bond 1’s YTM equals its coupon, and bond 2’s YTM equals
its coupon. Since the coupons are the same, then the YTM is the same.

18. What industry is likely to need restructuring advice? Can you think of a specific company?

Retail (Toys R Us), Oil & Gas (+ Services),

1.6 – Tech Banking

1. How would you value Amazon?

Amazon has 3 major divisions: 1) North America, 2) International, and 3) Amazon Web Services (AWS). The
first 2 divisions specialize in the shipping of goods, while AWS provides hosting and other software back-end
services. North American division brings in $79 billion in revenue and $2 billion in profit, while International
division brings in $43 billion in revenue and loses $1.2 billion. Given the difficulty in projecting out macro
trends and consumer spending, use a relative market valuation. The AWS division brings in $12 billion in
revenue and makes $4 billion in profit. Given that it is a SaaS model, very easy to project out an intrinsic
model.

2. What is a semiconductor? What are the three business models in semiconductor manufacturing?

A semiconductor can act as either a conductor or insulator depending if there is an electrical current passing
through it. It can act as a switch (a binary storage unit), and in aggregate can store data. The three business
models are 1) Integrated Device Manufacturing (or fabrication in-house), 2) Fabless (in which the company
designs the chip but outsources the manufacturing), and 3) Foundries, Assemblies & Testers, which develop
wiring and other background components. Often, a hybrid manufacturing strategy is used.

3. What are some important metrics in evaluating a SaaS business model?

Some important metrics in evaluating the efficiency and profitability of a SaaS model are the retention rate
(for recurring revenue streams), the churn rate (the percentage of customers lost), the cost to acquire a
customer (CAC), and the lifetime value from a customer (LTV) as well as the Monthly LTV / CAC is a common
ratio used in valuation: 2-4 is healthy, while ~3 is a golden ratio. If greater than 4, may want to accelerate
customer acquisition strategies, whereas if less than 2, there may be a problem with the product.
1.7 – Business Knowledge
1. What distinguishes a good business from a good investment?

You need to be able to buy into a good business at an attractive price for it to be a good investment.

2. Company A can produce oil at $50 / barrel. Company B can produce oil at $30 / barrel. Oil sells for $70
today and will sell for $100 in a year. Which company would you rather invest in?

Invest in Company A --> margins will expand from $20 to $50 (versus $40 to $70 for Company B), a far greater
relative margin expansion.

3. What makes a good business?

Look at this from a top-down analysis.
Belongs to a strong industry (tailwinds, growth, low regulatory risk, high barriers to entry) --> Competitive
Advantage (supply-side, demand-side, economies of scale) --> Good Management Team (flexibility) --> Stable
Cash Flows, Low Maintenance Capex, etc.

4. Why would a company stay private?

• Not at the whims of public shareholders that want strong quarterly results – makes you freer to
optimize operations and not worry about short-term gains
• Less strict reporting requirements – get to keep financials private
• Less intense accounting standards
• Save on the costs of reporting and releasing financials

5. A company sells two types of chairs. In two years, it sells the same total number of chairs and the same
volume of chairs, but its gross margin increases. How could this happen?

1. The company sells more of the chair that is cheaper to produce.

2. The input prices for the chairs decrease.
3. Accounting standards change.
6. If there are two companies in the same industry, what qualitative factors would cause one to trade at a
higher price point than another?

It all comes down to risk and growth prospects. Major news points, competitive advantages, management,
future growth prospects, etc., could all be valued into the company with a higher price point.

7. Scylla Corp trades for a P/E multiple of 4x. Charybdis Corp trades for a P/E multiple of 10x. Both
companies are in the same industry and have similar business models. List as many reasons as you can think
of that could explain such a difference.

• Charybdis may have a strong competitive advantage not reflected in its financial statements
• Major litigation or news may depress Scylla Corp’s valuation and/or improve the market sentiment on
Charybdis
• Future growth prospects may be stronger for Charybdis than Scylla
• A strong management team may also inspire more investor confidence in Charybdis
• Charybdis may have recently exceeded earnings expectations, or Scylla may have missed guidance

8. What are some common uses of cash on a company’s balance sheet?

1. Capital Expenditures (investments into the company)

2. Dividends
3. Debt Repayments
4. Stock Buybacks
5. M&A (artificial growth through acquisition)

9. You invest $50m in a company. It generates $0 in LFCF currently. You can either sell your stake for $55m
immediately or invest another $50m in the company and it will begin to generate $3m in LFCF into
perpetuity. Which would you rather invest in?

It depends. Selling your stake initially generates a 10% return instantly, which can then be reinvested into the
market. The value of doubling your investment depends on the discount rate. For example, if these securities
are guaranteed by the government, then if the risk-free rate (the effective discount rate) is low, it makes sense
to choose this option. However, if they are not guaranteed by the government and the market return is higher
than 3%, it makes sense to sell the stake immediately.

10. When is a company over-levered?

A company is over-levered when the burden of interest payments and mandatory debt repayments damages
the company’s ability to grow effectively and pursue new growth opportunities (the original purpose of taking
on additional leverage) through excessive use of cash. A company is insolvent when it can no longer meet
those debt obligations.

11. Does a weaker $CAD help or hurt exports? Why and when would it hurt?

A weaker $CAD typically helps exports as it reduces the relative price of exported goods and makes them more
competitive in the international markets, improving commerce. It would hurt exports if the value of the dollar
deflates significantly due to high inflation, making it unstable as a currency, which would inhibit trade.

12. A holding company and operating company both have debt on their balance sheets. Which debt is likely
to be more senior?

The debt of the operating company is likely to be more senior as (1) it has more assets available for collateral,
and can therefore secure its debt, and (2) it generates its own internal operational cash flow, whereas a
holding company simply holds other assets that generate cash flow.

13. If a company has international offices, and has cash in the system, how would you transfer cash to one
of the international jurisdictions?

To transfer cash to one of the international jurisdictions (as there are limitations in place to transferring
wealth across sovereign borders), raise debt in the intended target jurisdiction collateralized against the
company’s subsidiary with the cash balance (regardless of its location).

14. Which sectors have the most spending fluctuations?

Typically, natural resources and technology have the most and greatest spending fluctuations. Natural
resources and mining firms typically forecast expenditure based on specific geographical and time-sensitive
projects, with significant growth capital fluctuations as a result of new well-drilling and initial operation. In
turn, these projects are driven by returns that are based on overall health of the economy and commodity
prices (the latter of which can swing wildly). Technology firms also require significant equity funding for
specific new ventures and do not take on significant additional debt (until reaching suitable scale and
profitability). As a result, with many companies not yet at this mature stage, capital is deployed in stages
coinciding with funding and specific projects.

15. If you are running a company with no cash balance, good cash flow, and you wish to delever, how can
you do this?

1. Use operational cash flow to pay down debt at a reasonable rate.

2. Raise equity in the public markets
3. Raise equity in the private markets

16. If you run a company that has prepaid contracts and A/P of 30 days, will you need a cash loan?
If the company has prepaid contracts, it is receiving payment upfront before completing the contract. As a
result, its DSO (or days of receivables outstanding) is negative, which significantly reduces the length of cash
conversion (Cash Conversion Time = DSO + DIO – DPO). Therefore, it is unlikely the company will need a cash
loan.

17. How do you determine an appropriate capital structure for a business?

In general, a stable company should take on debt to improve its ability to execute on growth projects (whether
organic (greenfield, brownfield) or inorganic), but should not impede the company’s stability and ability to
grow earnings past the short-term. Once debt begins to significantly diminish cash flow and hurts growth
prospects, the company is over-levered. However, the specific capital structure of a business depends on its
strategy.

Depends on the strategy of the business.

• Businesses that are early-stage (i.e. looking to grow rapidly, but very risky) are likely to be financed
almost entirely with equity – like tech and bio-tech start-ups
• Taking on significant additional debt can also be acceptable when purchased by a financial sponsor as
long as the business supports it
1.8 – Brain Teasers
1. A 5x5x5 cube is dropped in paint. How many cubes are touched?

Method 1: Count the cubes on the outside. 25 on top and bottom, 15 on each of 2 sides, 9 on each of 2 other
sides. Total 98.

Method 2: Subtract 3x3x3 cube volume from 5x5x5 cube volume. 125 – 27 = 98.

2. There are 8 marbles, all identical. One is heavier than the rest but you can’t tell from looking. You only
have a scale – how do you figure out which is the heavier ball in the most efficient way?

Weigh 3 on one side and 3 on the other.

1) If both sides balance, then weigh the other 2. Find the heavier one.

2) If one side is heavier, take 2 of the 3 balls and weigh them. If they balance, the one not being weighed is the
heaviest. Otherwise, determine the heaviest one by which one weighs the scale down most of the two.

3. What angle does the hour and minute hand of the clock form if the time is 3:15?

At 3:15, the minute hand is at a 90-degree angle. The hour hand is one-fourth of the way between 3:00 and
4:00. Each hour is 360 / 12 = 30 degrees. 30 / 4 = 7.5 degrees. Therefore, the hands form a 7.5-degree angle.

3.5. What about 1:15?

At 1:15, the minute hand is at a 90-degree angle. The hour hand is one-fourth of the way between 1:00 and
2:00. Therefore, the distance between the two is 90 degrees – 37.5 degrees = 52.5 degrees.

4. There is a 1-mile racetrack. You spend 2 minutes for the first mile. How fast do you have to run in the
second mile for you to average 60 miles/hr at the end of 2 miles?

This isn’t possible. You would have to travel 1 mile per minute, but since it has already been 2 minutes, you
would have to travel the second mile instantly, which is impossible.
5. You have 2 fair coins. Landing on heads gives you $1, tails gives you $0. What’s the expected return after
you flip each once?

First coin: $1(1/2) + $0(1/2) = $0.50. Second coin: $1(1/2) + $0(1/2) = $0.50.

Expected return = $0.50 + $0.50 = $1.00

6. You have 25 horses and a race-track that races 5 horses. If you can only compare speed by racing the
horses, how do you find the 3 fastest horses in the group?

Conduct 5 races and find the top from each heat.

Race the top 5 and the find the fastest horse.

Take 2nd and 3rd from finals heat, and 2nd and 3rd from heat of the fastest horse, and 2nd from the heat of the
second fastest heat. Determine the second and third fastest.

7. There is a rickety bridge that an MD, VP, Associate and Analyst must cross to get to a meeting. If you need
a flashlight to cross and only two can cross, the times to cross are 10 mins, 5 mins, 2 mins, and 1 min
respectively, can the group make it across in 17 mins?

Analyst + Associate Cross --> 2 mins

Analyst Goes Back --> 3 mins

VP + MD Cross --> 13 mins

Associate Goes Back --> 15 mins

Analyst + Associate Cross --> 17 mins

*Initial time for crossing is the one with the highest time needed*

*Always send back the lowest time one to bring flashlight back*
2.1 – Silver Lake Partners
1. WACC is on the Y axis and Debt/Equity is on the X axis, what does the WACC curve look like?
Should look like a parabola. Initially, increasing Debt/Equity will lower WACC as debt is cheaper than equity.
However, at a specific point, the risk brought upon by the leverage will outweigh the cheapness of the debt
and cause WACC to increase.
2. There are two oil companies: A’s cost per barrel is $50 and B’s cost per barrel is $30. The price of oil is
currently $70, but you are bullish on oil prices and expect prices to rise to $100. Which company would you
invest in?
I would invest in company A. Under the assumption that oil prices will rise to $100, company A’s margin will
increase from $20 to $50 (+150%) while company B’s margin will increase from $40 to $70 (+75%). Since
company A’s margin percentage increase is double than that of company B, I expect their stock price to rise
significantly higher relative to their current price with news of oil prices rising to $100.
3. Paper LBO Case: EBITDA 100M, bought for 10x, sold for 13x (no EBITDA growth), funded by 50% equity
and 50% debt (250 is PIK (10%) and 250 is bank debt (4%)) - Any missing information had to be asked
4. You have the previous year’s balance sheet and the current year’s balance sheet, give me EBITDA
First, I take the difference between the two Retained Earnings to determine Net Income, adjusting for any
Dividends using Dividends Payable. Second, I add back the ending value of Income Tax Payable to get EBT.
Third, I calculate interest paid using given interest rates and terms provided in the footnotes to get EBIT.
Lastly, I take the difference between accumulated depreciation/amortization of each capital asset and
intangible and add the difference back to get EBITDA.
5. The company has 5x Debt/EBITDA and 5x EBITDA/Int Exp, what is the effective interest rate?
The effective interest rate is 4%. First, we multiply the two multiples giving us a Debt/Int Exp of 25x (since
EBITDA will cancel out). Then, we take the reciprocal (Int Exp/Debt) to arrive at the effective interest rate.
6. How will switching from FIFO to LIFO affect your valuation?
In an inflationary environment, switching to LIFO will increase COGS which will lessen the amount of tax paid
raising FCF and your valuation. There are no changes to NWC switching between LIFO and FIFO.
7. A financial instrument gives you cash flows of $100 in year 1, $200 in year 2, $300 in year 3 and so on into
perpetuity…What is the price of this security? Assume 5% discount rate

1 2 3 4 5
100 100 100 100 100
 PV: 2000 100 100 100 100
PV: 2000 100 100 100
PV: 2000 100 100
PV: 2000 100
PV: 2000
Basically receiving $2000/year
Perpetuity of 2000 PV: $2000/0.05 = $40,000
Add PV together: $2000 + $40,000 = $42,000
2.2 – Qatalyst Partners
1. Income Statement to LFCF walk through.
Start with revenue, subtract COGS to get gross profit. Subtract operating expenses to reach operating profit.
Subtract interest expenses, gain/losses, etc. to come to pre-tax profit. Subtract taxes to get net income. From
there, you add back D&A, subtract CAPEX and change in NWC to determine LFCF.
2. If deferred revenue goes up, does LFCF go up or down?
Deferred revenue increasing would increase LFCF by decreasing the change in NWC.
3. Company A acquires Company B. Company A has a P/E of 10, Company B has a P/E of 20, Accretive or
dilutive? What assumptions are you making? (Part 1)
I can’t say without knowing how the deal is financed. However, if it is an all stock deal, it will be dilutive since
Company A’s P/E is lower than Company B’s
4. What would the tax rate have to be for a company A acquires company B with a cost of debt of 10%, and
inflict a neutral impact? (Part 2)
Company B’s yield is 5% (1/20), therefore, we will need an after-tax cost of debt of 5% as well to make the
deal neutral (10%*(1-TR) = 5%). So, the tax rate needs to be 50%
5. Paper LBO, LFCF margin given, asked for MOIC/IRR. (5x EV/EBITDA purchase & sell, 3x Leverage, 20% LFCF
margin, hold for 5 years, LTM EBITDA of $100)
Purchase Price: 5*$100 = $500 ($300 debt, $200 equity)
Selling Price: 5*$100 = $500 ($200 debt, $300 equity) → Reduced debt by $100 with $20 LFCF for 5 years
MOIC = $300/$200 = 1.5x
6. You buy a chair for 100 in year 0, in year 1, you depreciate on your book for $10, and on your tax filings
for $15, walk me through the flow throughs in year 1 & 0 (Assume 40% TR)
Year 0:

IS: CFS: BS:

No change CFI -100 Cash -100

Overall Cash Change: -100 PPE +100

Year 1:

IS: CF: BS:

D&A -10 Net Income -6 Cash +6

Taxes -4 D&A +10 PPE -10

Net Income -6 DTL +2 DTL +2

Overall Cash Change: +6 RE -6

7. You buy a factory for 200, useful life of 10 years, financed using 10% interest rate debt, walk me through
year 0, year 1, and year 2 where the asset breaks down, and all debt is paid.
Year 0:

IS: CFS: BS

CFI -200 PPE +200

CFF: +200 Debt +200

Overall Cash Change: 0

Year 1:

IS: CFS: BS:

D&A -20 Net Income -24 Cash -4

Int Expense -20 D&A +20 PPE -20

Net Income -24 Overall Cash Change: -4 RE -24

Year 2:

IS: CFS: BS:

D&A -20 Net Income -120 Cash -140

Int Expense -20 Retirement +160 D&A -20

Retirement -160 D&A +20 PPE -160

Net Income -120 Debt Repayment -200 Debt -200

 Overall Cash Change: -140 RE -120

8. You have a company with 50/share price, 200 S/O, 50 options outstanding at an avg exercise price of $20,
30 RSUs, $6000 worth of convertible bonds ($1000 par value, $40 conversion rate), what is the diluted
equity value? (Part 1)
1. Options are in-the-money. So, we create 50 additional shares. However, we used the funds from these
options ($20*50=$1000) to buy back our shares. $1000/$50 = 20 shares bought back
+30 shares
2. RSUs simply get added to the share count
+30 shares
3. There are 6 convertible bonds which are in-the-money. At a conversion rate of $40, there are 25 shares
created per convertible bond, so we create 150 shares (25 shares * 6 bonds)
+150
Now we have, 30+30+150+200 = 410 shares * $50 = $20,500
9. Assume the same company has $10,000 in debt, $6,000 in cash, $1,000 in NCI, what is the diluted
enterprise value? (Part 2)
EV = 20,500 + 10,000 + 1,000 - 6,000 = 25,500
2.3 - Houlihan Lokey – Restructuring (LA)
1. 50M EBITDA, Trading at 6 times, 200M in Bank Debt, 200M in High Yield Debt, what will the debt be
trading at? (Part 1)
The Enterprise Value of this company is 300M. Therefore, Bank Debt will be trading at par (higher seniority
than HY Debt) and their High Yield Debt will be trading at 50 cents on the dollar
2. Is Equity Value negative? What is it doing here? (Part 2)
No, the equity value of this company is not negative. Since the company’s debt exceeds its EV, we know it is
insolvent and therefore, will have an equity value of 0
3. 250M Inventory purchased using debt (5% bank debt, 5% PIK, 20% amortized), 40% TR, sold at 500 next
year, walk me through the 3 statements for next year

IS: CFS: BS:

Revenue +500 Net Income +135 Cash +347.5

COGS -250 PIK +12.5 Inv -250

Int Exp (Bank) -12.5 Inv +250 Debt -50

PIK -12.5 CFF -50 PIK + 12.5

Net Income +135 Overall Cash Change: +347.5 RE +135

4. Difference between CFO and UFCF?

Differences include one-time items, CAPEX, and tax-adjusted interest expense
5. Walk me through EBITDA to UFCF.
Subtract out D&A then multiply by (1-TR) to determine NOPAT. Then, add back D&A, subtract CAPEX and
change in NWC to arrive at UFCF
6. What are the three sections of the cash flow statement?
CFO, CFI, and CFF
*7. What is the impact of cash interest on the cash flow statement?
Included in Net Income within CFO
8. You have 1B in unsecured debt trading at 30 cents on the dollar. If the company issues a debt swap for
600M trading at 60 cents on the dollar, what is the gain or loss on this trade?
$1B*0.3 = $300M, $600M*0.6 = $360M
Gain of $60M
9. You have an ABL revolver worth 90M secured against 100M in AR with 85% recoverable value. If 35M is
already drawn on the revolver, 10M due to vendors, and 50M in cash, what is the company's liquidity?
First, they have $50M in cash. With $10M due to vendors, total liquidity before the revolver is $40M. The
revolver is secured up to $85M but with $35M drawn, we have $50M available. Therefore, our liquidity
position is $90
10. If a bond is trading at 80 cents on the dollar with an 8% coupon and 2 years to maturity, what is the
YTM?
Coupon Yield: $0.08/$0.80 = 1%
Principal Yield: $1.00/$0.80 – 1 = 0.25/2 = 0.125 → 12.5% annually
Total Yield: 13.5%
11. If a company has an EBITDA of 50M and a multiple of 5x with 180M in senior secured and 120M in
unsecured, what is the unsecured debt trading at?
Enterprise Value = 50*5
Senior trading at par = 250 – 180 = 70
70/120 = 58.3 cents on the dollar
12. What are adjustments you make from EBITDA to Adj EBITDA?
For a distressed company:

• COGS: Lack of discounts & deteriorating relationships with suppliers

• Non-recurring professional fees: Consulting, litigation, advisory fees
• Public costs: Filing with the SEC
13. What can a company do with its excess cash?
Repurchase shares, invest in capital, pay down debt, and issue dividends
14. What can a distressed company do with its excess cash?
Repurchase outstanding debt at a discount
15. Paper LBO: EBITDA of 200M and a 5x multiple and 50% leverage. If cashflows breakeven with debt what
is the IRR if EBITDA and multiples don't change after 5 years?
15% (assuming the question means we used all cashflows to pay off debt) → Double investment in 5 years
16. What could the company do to restructure its debts?

• Exchange offer
 • Refinance
• Proactively, file for chapter 11

2.4 - Goldman Sachs – SF TMT, LA

1. 2 companies, same profiles, GM 0%, one with 15% and one with 20% growth, what metric would you use
to differentiate between them?
Use a revenue growth multiple: (EV/Revenue)/Revenue Growth
*2. You have an apartment (2-bedrooms) given to you for 2Mil, how would you assess its fair value? (Part 1)
Use comparable 2-bedroom apartments within the same area with similar features to determine a fair value
3. What if all your comps are only 1-bedroom apartments, what metric would you use? (Part 2)

4. $1000 now or 10 payments of $100?

$1000 right now. Due to the TMV, receiving cash flows earlier is better as I can reinvest it.
5. Interest rates go up, what happens to the dollar?
As interest rates go up, demand for US debt securities from global bond investors will rise. Therefore, the
dollar will strengthen as people seek to purchase USD.
6. Value an apple tree producing $100 in revenue a year - now value it if it was 100,200,300,400…
Look on page 42
*7. You use debt to purchase the apple tree, cost of debt is 10%, 40% tax rate - how much you paying?
Use the after-tax interest rate as the discount rate to value the apple tree
8. Does increased depreciation increase or decrease your valuation?
Increased depreciation will lower pre-tax income and hence, lower the amount of taxes a company will pay
and raise FCF. Therefore, increased depreciation will increase our valuation
*9. Would you rather have higher lease expenses or depreciation expenses?
I would prefer higher depreciation expenses as it is a non-cash expense and will result in tax benefits
*10. What are the different types of capex?
Maintenance CAPEX and Growth CAPEX
2.5 – PJT Partners – NY
1. 7x EV/EBITDA, 100m EBITDA, 100m cash, 300 debt, 100 shares outstanding, implied share price? (Part 1)
EV = 7*$100 = $700
Equity value = $700 + $100 - $300 = $500
Share price = $500/100 shares = $5
2. Now you raise 100m of debt, how does this change your equity value? (Part 2)
It does not change your equity value unless you used that money to purchase a revenue generating asset
3. 10x EV/EBITDA, 100m EBITDA, 6x leverage, how much equity? (Part 1)
Purchase price = 10*100 = 1000
Leverage = 6*100 = 600
1000 – 600 = 400
4. You sell in 5 years at 150m EBITDA, paid off 250 debt, sold for 10x. What's the MoM and IRR? (Part 2)
Selling price = 10*150 = 1500
Current debt = 600 – 250 = 350
1500 – 350 = 1150
1150/400 ~ 3x MOIC
Using rule of 114: 114/5 ~ 23% IRR
5. 2017 - EV/Rev 8x, 2018 - EV/Rev 6x, 2017 EV/EBITDA, 12x, 2018 EV/EBITDA 12x - is this company growing,
why or why not?
Assuming EV did not change, the company is experiencing top-line growth but has become less operationally
efficient. Nonetheless, the company is growing.
6. EBITDA margin for both years?
2017 EBITDA Margin: 66.7%
2018 EBITDA Margin: 50%
2.6 - Credit Suisse – SF, TO
1. Buy company at 1000M, sell at 750M, debt stays at 500M, is there any investor return?

2. A company has $100 million in EBITDA and an EV/EBITDA of 10x. Company has $150 million in minority
interest, $300 million in debt, and $50 in cash. How much did equity holders receive and what premium
does this imply?
EV = Equity value + debt + NCI – cash
1000 = Equity value + 300 + 150 – 50
Equity value = 600
3. Does tax rate impact your cost of debt? Cost of equity?
Yes, as interest expense is tax deductible. For cost of equity, it will affect the calculation of my levered beta
4. Paper LBO - company bought and sold for $300 million, what was the IRR (you need to ask questions)?
What are three ways you can increase returns?
Questions to ask:

• Amount of leverage?
• Any LFCF available to service debt?
To increase returns:

• Multiple expansion
• EBITDA growth
• Dividend recaps
5. What's a type of company in which they would have a negative EV?
1. Financial institutions
2. Distressed/insolvent companies
Meg’s Notes: It means that the company has an extremely large cash balance, or an extremely low market
capitalization (or both). You often see it with companies on the brink of bankruptcy, and sometimes also with
companies that have enormous cash balances.
6. Where do you find dividends in the financial statements? Dividends according to CFS is different than BS
and IS – why?
You can find dividends on the balance sheet (dividends payable) and CFS (CFF)
8. Explain to me the difference between an LBO and DCF – what discount rates do you use for each?
A DCF focuses on determining the intrinsic valuation of an asset while an LBO’s main purpose is to determine
an appropriate purchase price a financial sponsor could pay in order to achieve a specific targeted return (IRR)
in a highly levered capital structure.
Discount rate for LBO would be the cost of equity as we are discounting levered FCF. DCF could be WACC or
cost of equity depending on the FCF used.
9. When would CapEx be included in Cash Flow from Operations?

10. You have LFCF yield of 10% and UFCF yield of 20%. Your interest rate is 10%, tax rate is 50% and you
have no cash on your balance sheet. What is your debt/EV multiple?
As there is no cash on the balance sheet, net debt = total debt. Therefore, EV = Equity Value + Total Debt. Let x
be Equity Value, let y be Total Debt. Assume no amortization (but remember to ask if during an interview).
UFCF – Tax-Adjusted Interest Payments = LFCF --> 0.20x – 0.10(1 – 0.50)y = 0.10x --> -0.05y = -0.10x --> x = y/2
Debt / EV Ratio = y / (y/2 + y) = y / (3/2y) = 2/3
Therefore, the Debt / EV ratio is 2/3.
*11. Your EV/Sales multiple is 5x and EBITDA margin is 15%, what is your EV/EBITDA multiple?
33.3x?
12. A company experiences $100 million in fines it will have to pay. Before it pays it off, what is the impact
to the equity and enterprise values of the company?
The $100 million in fines is a liability attributed to equity holders, therefore equity value decreases and debt
increases by the same amount (no change to EV of the company)
13. You have a debt/equity multiple of 1.25x. Common equity of $4 million, with 1.5 million shares and a
current share price of $28 per share. You have $1 million in convertible bonds, with par values of $1000 -
they can convert into 50 common shares at any time. Are they in the money? How does your debt/equity
multiple change once it is exercised?
Implied conversion rate: $1000/50 = $20 (They are in the money)
Convertible bonds: 1000*50 = 50,000 shares issued
Debt = $5MM - $1MM = $4MM
Increase in equity value = $25*50,000 = $1,250,000 + $4,000,000 = $5,250,000
Your debt/equity multiple will decrease and become less than 1.00x (4M/5.25M)
14. Your company trades at 10x P/FCF and is buying a company with a 20x P/FCF. With 50% debt and 50%
stock financing at a rate of 33%, what is the breakeven interest rate? What if this changes to 75% debt and
25% stock?
*15. A company (he gives you a BS) has negative non controlling interest in their balance sheets - what does
this mean? How does it affect EV? Does it need to be adjusted for in your EV because it's negative?
Negative NCI means that the losses attributable to the subsidiary are greater than the NCI’s equity. Since we
add this to EV, this will decrease EV. We can adjust it out if the financials of the subsidiary is adjusted out of
the parent’s financials and metrics such as EBITDA

2.7 - Morgan Stanley – LA, TO

1. A company is acquired for a 50% premium, EV/EBITDA goes from 10X to 15X what does this tell you about
the company
If a company is acquired for a 50% premium, this means the equity value, not inherently the enterprise value,
has risen by 50%.
However, if EV/EBITDA also rises by 50%, as is the case here, then EV must increase by 50% as well. EV =
Equity Value + Net Debt, therefore Net Debt must be $0.
2. Three reasons why a DCF has a higher valuation than an LBO
1 - LBO – Between LBOs and DCFs, the DCF should have a higher value because the required IRR (cost of
equity) of an LBO should be higher than the public markets cost of equity in WACC for the DCF. The DCF
should be discounted at a lower rate and yield a higher value than an LBO.
2 – Cash Flows are smaller because it is used to pay off debt  no because were using levered free cash flow
but in a DCF isn’t that using unlevered free cash flow and subtracting debt off later?
3 – It is the Floor Valuation “floor valuation” because PE firms almost always pay less for a company than
strategic acquirers would
*Rest of the questions are basic*

67. What are 3 reasons why a DCF would have a higher valuation than an LBO?

1. In an LBO, most of the cash flows from the projection period are used to repay debt, and therefore
aren’t available to accrue to the valuation
2. Cost of Equity for an LBO is higher because the sponsor expects greater returns due to high leverage
and illiquidity
3. The higher amount of leverage and higher interest expense therefore limits both organic value creation
and growth projects, producing a lower valuation
2.8 – Barclays – Toronto
1. What is the difference between Equity Value and Enterprise value? Calculation/Formula? Give me a real-
world example
Equity value is the value of business’ assets available to equity holders. Enterprise value is the value of the
business’ core operations available to debt and equity holders.
Equity Value = Shares outstanding*Share Price
EV = Equity value + debt + NCI - Cash
2. How is UFCF and LFCF different?
UFCF is cash flow available to both debt and equity holders of the company while LFCF is cash flow only
available to equity holders. Therefore, the difference between the two are tax affected interest expense and
debt repayments
3. What do you discount LFCF by?
We discount LFCF by the Cost of equity as it is a cash flow that is only available to equity holders
4. What do you get in a DCF using LFCF?
Equity Value
5. If you are creating a model and recognize debt will be issued in the 4th year, do you include that in your
LFCF Model?
Yes, as this will affect the interest I will need to pay and in turn, alter my LFCF generation
6. How do you determine Market Risk Premium?
Market Risk Premium is the difference between the expected return of the market and the risk-free rate (10-
year treasury)
7. Company A is acquiring Company B, is it accretive or dilutive? A: NI = 500, SO = 100, P = 100 B: NI = 300,
SO = 100, P = 45 …… All Stock Deal (Part 1)
Deal is accretive. First, we determine the market cap of each company by multiplying the shares outstanding
by the price per share. Then, we divide that by their net income to determine their respective P/E multiples.
Comparing the two, A has a greater P/E; therefore, in an all stock deal, it will be accretive.
8. What is the post merger EPS? (Part 2)
$5.52. We know the earnings of the combined entity will be $800 and Company A currently has 100 shares
outstanding. To determine how many shares must be issued to acquire B, we divide B’s market cap by
Company A’s share price which comes to 45. Therefore, 800/(100+45) = $5.52.
9. Assume now that it is 50% debt and 50% stock, what interest rate on the debt would allow for this deal to
be accretive at the exact same level of accretion - 20% tax rate (Part 3)
6.88% → Solve for i: (500 + 300 – 2250*(1-0.2)*i)/(100+22.5) = $5.52
10. Why would you ever do a sum of the parts valuation?
If we are trying to value a conglomerate, a sum of the parts valuation is a useful approach
11. What is the purpose of doing an LBO?
The purpose of an LBO is to determine a valuation a financial sponsor could pay for to achieve a specific
targeted IRR with a highly levered capital structure
12. If you were to rank precedents, comps, DCF and LBO from lowest to highest valuation how would you do
that?
1. Precedents
2. DCF
3. Comps
4. LBO (Floor valuation)
*No decisive answer from my research*

2.9 - Evercore Partners – NY (M&A + RX)

1. If two companies are trading at 8X EBITDA, one 100% Equity, one 50% Debt and 50% Equity…Which has a
higher PE?
Assuming everything equal, the company with 100% equity should have a higher P/E as its equity value is
double that of the one with 50% equity. The interest expense from the debt will unlikely lower its P/E by much
Enterprise Value is the SAME SAME SAME so since EV = Equity + Debt, then Equity Value of the 50% and 50%
must be lower
2. A company is trading at 10x EV/LTM EBITDA, do you expect it to go up or down in the EV/NTM EBITDA
multiple?
Assuming the company is growing, I would expect their EV/NTM EBITDA multiple to be lower as EBITDA grows
3. You're running a DCF on a biotech company and a consumer staples company both with the same WACC -
which has a higher terminal value as % of EV and why?
The biotech firm would most likely have a higher Terminal Value as % of EV as the firm’s value will be more
dependent on its future growth and ability to patent new technologies relative to the consumer staples
company
4. What two ways do you use to get to a terminal value? Expand on what figures you use on each
Gordon Growth Method or Multiples Method. For the Multiples Method, we use comparable companies to
determine an appropriate EV/EBITDA multiple. From there, we simply multiply our Terminal Year EBITDA by
the Multiple to arrive at a Terminal Value. For the Gordon Growth Method, we will use a conservative growth
rate (most likely in line with GDP growth, inflation, etc.) and use the perpetuity formula to determine a
Terminal Value.
5. Deferred revenue increases by $10, how are the 3 statements affected? What if it goes down by $10 (no
tax)?
If deferred revenue increases by $10, nothing happens on the income statement. On the cash flow statement,
we’re up $10 on cash. On the balance sheet, Assets are up by $10 (cash) as well as liabilities (deferred
revenue). Therefore, we are balanced.
6. How can you increase IRR in an LBO?
We can increase IRR in an LBO in many ways including a dividend recap, paying off debt, multiples expansion,
improving margins, etc.
7. Which is often higher - EV/EBITDA or EV/EBIT?
EV/EBIT will be often higher as EBIT should be lower than EBITDA.
8. Two companies in the same industry trade at 10x and 7x EV/EBITDA - what could the cause of the
difference?
Investors expects the company with the higher multiple to have greater growth prospects; therefore, they are
willing to pay more for every $1 in EBITDA generated.

9. What's the difference between EV/EBITDA and P/E? Which do you prefer?
EV/EBITDA is a multiple that is independent of capital structure, taxes, and depreciation/amortization;
therefore, it is better for comparing companies with different leverage levels or ones that operate in different
industries. One isn’t necessarily better than the other, it depends on the situation. For example, a P/E multiple
may be more useful when valuing financial institutions where interest income is a core part of their business.
10. A company has an EV/Sales of 2x and an EV/EBITDA of 8x, what is the EBITDA Margin? If the EV/EBIT is
16x, what industry could this company be in?
The EBITDA margin is 25%. Simply, take the reciprocal of EV/EBITDA, then multiply it by EV/Sales. EV will
cancel out and you will be left with EBITDA/Sales = 2/8 which is 25%.
11. Which one has the most positive impact on a DCF? $10 million increase in revenue, $10 million decrease
in operating expenses, or $10 million decrease in CapEx? Which is second most positive?
The $10M decrease in CAPEX would have the most positive impact as it is not affected by tax. Second would
be a $10M decrease in operating expenses as an increase in revenue will come with COGS.
12. In what cases would a $10 million increase in revenue have the same impact as $10 million decrease in
operating expenses? What if it’s a furniture company?
If the company had no COGS.
13. You have a target with an EV of $100 million and a debt/total cap of 60%, a 50% premium on the share
price is given - what is the equity value of the firm? Let's say the company had $4 million in net income and
the acquirer has a P/E of 15x, if it's an all stock deal, is it accretive or dilutive?
The equity value of the firm would be $60M. The deal would be neutral as both their P/E multiples would be
15x when considering the 50% premium we are placing on the share price.
14. Follow up question to above - let's say the acquirer had net income of $10 million and shares
outstanding of 10 million, is the acquisition accretive or dilutive to EPS?
Dilutive. Acquirer has a lower P/E than the target.
15. One precedent transaction was 10x and the other was 5x, why is this the case?
Could be many reasons including different market conditions, one may be private, one may have greater
growth prospects, etc.
16. What's the difference between DCF and DDM, walk me through both.
DCF is discounting UFCF or LFCF, while DDM’s valuation is based on future projected dividends. The models
will mechanically work the same way.
17. Why cost of equity in DDM?
We are discounting dividends which is only available to equity holders.
18. Company EV/EBITDA goes from 10x to 20x and EV/Sales goes from 2x to 4x. What is happening to the
company and its EBITDA margins?
Margins remained the same. Sales shrunk by 50% as did EBITDA.
19. What are 3 things wrong with a DCF?
1. Largely based off assumptions based on past performance
2. TEV accounts for a majority of the valuation (Difficult to estimate)
3. Projected CAPEX is assumed to be entirely maintenance-based
20. What are the 3 most important considerations in an LBO? How do you determine how much debt is
used?
1. Purchase Price
2. Selling Price
3. Amount of leverage
Use comparable companies to evaluate the appropriate amount of leverage to place on the company’s capital
structure so that the company is still able to grow and service debt adequately over the investment horizon.
21. $100 in debt is issued, how does it impact your P/E and EV/EBITDA?
If debt is simply issued for cash, P/E and EV/EBITDA will experience no immediate impact
22. How does a dividend impact your P/E, EV/EBITDA, and P/B ratio?
P/E: Lower P/E
EV/EBITDA: No effect
P/B: Depends on my current P/B ratio. If it is 1, no change. Less than 1, lower. More than 1, higher.
23. When is a company over levered?
When the company is unable to meet interest expenses and repay debt, thus, insolvent.
24. Would you rather have a really high coverage or leverage ratio?
High coverage ratio
25. Why might a company have a NI that is close to EBITDA. Give me an example
A company with little to no leverage or physical assets. Example: Tech start-up.

26. You own a magazine subscription company, you make $10 dollars per month, one client pays for the
entire 12 months up front, then 6 months later you earn that revenue… what happens to 3 statements
initially then 6 months later?
Initially:

IS: CFS: BS:

No change Deferred Revenue +120 Cash +120

Overall change in cash: +120 Deferred Revenue +120

6 Months Later:
 IS: CFS: BS:

Revenue +60 Net Income +36 Cash -24

Assume no COGS Deferred Revenue -60 Deferred Revenue -60

Net Income +36 Overall change in cash: -24 RE +36

27. You have 200 shares, 20 options, exercisable at $5 dollars, Share Price = $10, what’s the dilution to
market value and shares and what are the totals?
Options are in the money. Initially, 20 additional shares are created but using the $100 in funds we repurchase
10 shares. Therefore, shares outstanding is 210.
Original equity value: $2000
New equity value: $2100
28. Valuing a tree that drops golden apples worth $100 every year and it is indestructible; how much is it
worth?
The cash flows are guaranteed (no risk), therefore, an appropriate discount rate would be the T-Bill. Let’s say
the T-Bill is yielding 2% so: $100/0.02 = $5000.
29. If you have a company with 100 EBITDA, 4x Multiple, 300 Secured, 200 Unsecured, what are recoveries?
(Part 1)
EV = 4*100 = 400
Secured is trading at part and unsecured is trading at 50 cents on the dollar
*30. Now assume secured debt’s collateral only worth 100, how does that change answer? (Part 2)
No recovery for unsecured creditors
31. If a company has 5x Leverage ratio and 5x interest coverage ratio, what is interest rate?
EBITDA/Int = 5x
Debt/EBITDA = 5x
1/25 = 4%
32. If I buy a bond at 80, matures to 100 in two years with a coupon of 10%, what’s YTM?
YTM = [10 + (100-80)/2]/[(100+80)/2] = 22.22%
33. How would you go about screening for potential restructuring opportunities?
*34. If a company’s bond is trading at 110, would it be better to buy them back or issue more?
Buy them back. The bond is trading at a premium as market interest rates are lower than our coupon rate.
Therefore, we are paying more interest than similar bonds.
35. If I know the bonds will trade at 105 next year, and I can refinance right now for 25bps cheaper, should I
refinance now or wait to buy back next year?
36. If I buy 100 of PPE (useful life of 10 years) and fund it with PIK Debt (10%), walk me through how it
affects the statements?
Initial Change:

IS: CFS: BS

No change CFI -100 PPE +100

CFF +100 PIK Debt +100

Overall change in cash: 0

Year 1

IS: CFS: CFF:

PIK -10 Net Income -12 Cash +8

D&A -10 PIK +10 PPE -10

Net Income -12 D&A +10 PIK Debt +10

Overall change in cash: +8 Retained Earnings -12

37. Say you have two companies with same total enterprise value and trade at same multiples, but one is
industrial, and one is pharmaceutical company, i.e. one has a much higher asset beta. Which one’s market
cap would be higher?

38. If my company has EV of 200, secured debt of 100, two unsecured tranches of 100 and 200 that are pari,
what are the recoveries?

39. Net Income = 20, cash = 30, debt = 50, P/E = 11x, and EV/EBITDA = 8x. What’s the company’s EBITDA?
Need to determine EV → EV = Equity Value + Debt – Cash
Equity Value = 11*20 = 220
So…EV = 220 + 50 – 30 = 240
EBITDA = 240/8 = 30
40. Why do you fundamentally use P/E ratios as apposed to EV/EBITDA ratios?
If the capital structure is an integral part of the business, P/E would be a better ratio to use as apposed to
EV/EBITDA. For example, financial institutions main source of income is interest which is important to include
when valuing businesses within that industry
41. Do you include tax rate when calculating Enterprise value? What about the debt rate?
42. Company A’s equity value is $200, has an EBIT of $100, tax rate of 50%, and a net income of $50.
Company B’s P/E ratio is 4.5x. A acquires B in an all-stock deal, accretive or dilutive? Explain this is laymen
terms
Company A’s P/E: 200/50 = 4x → Dilutive
B trades higher relative to its earnings compared to A. Because of this, when we are acquiring company B in
all-stock deal, we are essentially buying their earnings at a more expensive rate than what our shares are
offering. Therefore, the deal is dilutive.
43. Depreciation of $50 with a 20% tax rate. Walk me through the 3 statements.

IS: CFS: BS:

D&A -50 Net Income -40 Cash +10

Net Income -40 D&A +50 PPE -50

Overall change in cash: +10 Net Income -40

44. What sort of premium or discount would you put on the discount rate or discounting a company due to
the fact that its private?
Additional discount to account for liquidity. Private assets are more illiquid than public ones.
45. Sold $60 worth of inventory for $100. Walk me through the 3 statements.

IS: CFS: BS:

Revenue +100 Net Income +24 Cash +84

COGS -60 Inventory +60 Inventory -60

Net Income +24 Overall change in cash: +84 Retained Earnings +24

One company trades at 15x and the other at 10x, why might it be different?
 1 – Different EBITDA Margins. Usually, there is a correlation between growth and valuation
multiples. So if one company is growing revenue or EBITDA more quickly, its multiples for both
of those may be higher as well.
2 – One company is a market leader and controlling market share. /industry that its in is
different
3 – The other company was hit by bad news. // this company had great earnings come out
4 – The company is an acquisition target.
5 – different industries with different median multiples

One precedent transaction was 10x and the other was 5x, why is this the case?

- Both are part of an acquisition, but the process is more competitive for one of the two companies.

If I'm an investment banker and you only had time to show your client 3 pages of your deck, what
would it be?

Difference between EV/EBITDA and P/E

EV/EBITDA Considered Capital Structure Neutral // Equity value + debt - cash. Increase in debt is offset by
subtracting the cash raised. Enterprise value does not change.
2.10 - JP Morgan – NY, SF
1. You have an empty factory that blows up, what happens to the 3 financial statements? Does change in
net income outweigh change in cash flow? Why?
Write off the asset,
2. If a company issues a dividend, how do the P/E, EV/EBITDA, and P/B ratios change?
P/E decreases (equity value decreases)
EV/EBITDA remains unchanged (equity value decrease is offset by cash decrease)
P/B depends on the ratio prior to the dividend

• = 1: Unchanged
• > 1: Increases
• < 1: Decreases
3. How do you value financial institutions? How does it differ from a DCF?
Since they are balance sheet-centric, using a DDM would be more appropriate for valuing financial institutions
for several reasons:
1. To capture the impact of important line items such as interest income/expense
2. Banks use debt in a fundamentally different way: Create products rather than re-invest into business
Compared to a typical DCF, a DDM discounts dividends by the cost of equity rather than discounting cash
flows by WACC
4. Why would you use comps/precedents instead of intrinsic valuation?
Two biggest reasons: Comps are better for determining a valuation in a timely and easy manner. Additionally,
a DCF can be less helpful for companies with unpredictable cash flows
5. You have a gun with 6 chambers and 2 bullets are placed consecutively. I shoot and I don't die. If I gave
you the chance to re-calibrate or not, what would you do?
I would not re-calibrate. Under the current circumstances, there are four potential spots the gun is current
positioned at so I have a 25% chance of dying but if I spin again, I will go back to a 33.33% (2/6) chance of
dying
6. How do you calculate FDSO using treasury stock method?
If options are in-the-money, I will assume all options are exercised. Using the proceeds from this sale of stock,
I will repurchase shares at the current share price to mitigate the dilution of this exercise to determine my
FDSO

7. What's a risk of being benchmarked to the TSX?

Firstly, if you’re a company operating in the States, benchmarking your performance against a stock exchange
heavily dominated by Canadian companies may not be the most representative of the general market in which
you operate in. Secondly, many of the companies listed on the TSX are mining and O&G companies which also
may not be an appropriate benchmark for performance if you operate within a very different sector
8. What are some risks of a conglomerate divesting certain subsidiaries?

9. Walk me through what happens when there's an asset write-down of $10

IS: CFS: BS:

Asset Write Down -10 Net Income -6 Cash +4

Net Income -6 Asset Write Down +10 Asset -10

Overall change in cash: +4 Retained Earnings -6

10. If my company has been profitable for the past couple years, how can it go bankrupt?
Profitability does not mean it is liquid. While a company can show positive net income on the income
statement, that does not mean it is generating sufficient cash flows to continue operating. Upcoming interest
payments and debt maturities can force “profitable” companies to file for chapter 11
3.1 - Miscellaneous Questions
1. Company A is a $100b company trading at P/E = 10x with 1B Shares outstanding (CSO).. Company B
trades at 5x with a market cap of $10B. A buys B with $2B in hard synergies and offers $20B in equity is this
accretive or dilutive? All stock-deal
Old EPS: $10
Number of shares needed to issue: $20B/$100 = 200,000,000 shares
Pro-Forma EPS: ($10B + $2B + $2B)/1.2B shares = $11.67
16.7% accretive
2. Company buys a factory for $200 with 50/50 D/E and interest 10% and half of debt is PIK walk me
through year 1 assuming useful life 10 and taxes 40%

IS: CFS: BS:

PIK -10 Net Income -18 Cash +12

D&A -20 D&A +20 PPE -20

Net Income -18 PIK +10 Debt +10

Overall change in cash: +12 RE -18

3. Company A with P/E = 10x buys B who trades at 5x how large of a premium could A pay?
100% premium without becoming an accretive deal
4. Would you rather have a 10% increase in revenue or a 2% increase in margin?
Depends on what the current revenue and margin is. For example: If revenue is $100 and our margin is 20%,
the 10% increase in revenue and the 2% increase in margin result in the same outcome!
5. Leanne is the owner of a public company. Her company generates $80 in revenue, $20 in EBITDA, and she
has $25 of Debt and $5 of cash. Matteo’s company generates $45 in revenue, $35 in debt, and $5 in EBITDA

• They both have an EV/EBITDA multiple of 10x. What is the value of their equity?
o Leanne: 180, Matteo: 15
• Leanne wants to acquire Matteo’s company; how can she finance this acquisition?
o Issuing equity or debt; less likely cash since it’s only 5
• You given the following information, Operating Income, Tax rate, and WACC. What other
information do you need to determine valuation?
o D&A, CAPEX, and change in NWC
• What is leverage? Follow up: What is Matteo and Leanne’s Leverage ratio?
o Leverage refers to the amount of debt on a company’s balance sheet
o Leanne: 1.25x, Matteo: 7x
• Why might some companies have a higher cost of debt than others?
o Companies with lower credit ratings are inherently riskier to invest in for creditors. Therefore,
investors will demand a higher interest rate to compensate. For example, Matteo is currently
highly levered and will have a higher cost of debt than Leanne
• Two PE firms want to acquire a certain target, what might be the reasons why one PE firm can pay a
higher price?
o Receiving synergies with one of its other portfolio companies
o One PE firm may have strong relationships with creditors and have more favorable lending
terms. Thus, allowing them to pay a higher price
o Simply, one PE firm may have more capital (dry powder) to deploy
• Leanne has $15 more in EBITDA, but only $5 more in operating cash flow. Why might this be?
o Higher interest expense
o Paying greater taxes
• Leanne wants to purchase a factory by raising $50 in debt, walk me through the impact of the three
financial statement at this stage.

IS: CFS: BS:

No change CFI -50 PPE +50

CFF +50 Debt +50

Overall change in cash: 0

• Leanne’s factory has 5 years of useful life at straight line depreciation. Assuming an interest rate of
10%, and principal repayment of $10, walk me through the three financial statements at the end of
the year.

IS: CFS: BS:

D&A -10 Net Income -9 Cash -9

 Int Exp -5 D&A +10 PPE -10

Net Income -9 CFF -10 Debt -10

Overall change in cash: -9 RE -9

6. You raise $3 million in debt in year 2. What is the effect on your DCF?
Depends on levered or unlevered FCF:

• Levered: Lower FCF (interest payments and potentially mandatory debt repayments) + Cost of Equity
increases
• Unlevered: Cost of Equity increases + Cost of Debt increases + Overall WACC generally decreases
(depending on current leverage)
7. What is the effect of PIK Debt on your DCF (levered)?
FCF during the life of the bond increases (as PIK interest in non-cash). However, at maturity, the payment for
the PIK Debt will result in a large decrease in FCF
8. This business is heavily contract-based. They have 5 contracts which will expire 5 years later, from which
only one of them will be renewed after 5 years. Tell me what does DCF look like.
Terminal value will resemble a lower percentage of the valuation assuming the contract that is renewed isn’t
abnormally larger than the others
9. Gillette wants to acquire a smaller company. Gillette’s cost of capital is very low, and it is highly levered.
What form of consideration should Gillette use to acquire this target?
Debt: Existing capital structure is heavily levered; avoid
Cash: Cash will be needed to meet interest payments; avoid
Equity: Issuing equity is most likely the best choice
10. If you short a stock, and the stock was delisted from the stock exchange. Does that mean you win
everything?
Having a short sell position on a stock that gets delisted is the optimal scenario for that investor as their
obligations become 0
*11. Cash flows of a company are increasing but networking capital is decreasing, can you tell me why?
Company is beginning to receive cash from AR increasing cash flow and may also be deferring payment to
suppliers
*12. ROA increase 10-15%…. ROE decrease 3% why?
Possible scenario: The company issued a large amount of equity and used the cash proceeds to pay off debt.
This increases shareholder’s equity yet does not increase total assets (no increase in cash reserves)
13. What is the circular reference in the DCF?
To calculate our implied share price, we divide our implied equity value by the fully diluted shares outstanding.
However, to determine the fully diluted shares outstanding we need to compare the strike price to our implied
share price. Thus, creating a circular reference.

14. Paper LBO: Purchased at 5x NTM EBITDA at the end of Year 0, debt-to-equity ratio 60:40, interest rate is
10%, NTM revenue is $100M with 40% EBITDA margin (remains flat), revenue YoY increase is 10%, CAPEX is
15% of sales, working capital is expected to increase $5M a year, depreciation is $20M each year, 40% tax
rate, held for 5 years, and exit at 5x FTM EBITDA. What is my MOIC and IRR?
Purchase price is $200M financed by $120 in debt and $80 in equity.

Year 1 2 3 4 5 6
Revenue $100 $110 $121 $133 $146 $161
EBITDA $40 $44 $48 $53 $59 $64
DA $20 $20 $20 $20 $20 $20
Int. Exp. $12 $12 $12 $12 $12 $12
Pre-Tax $8 $12 $16 $21 $27 $32
Income
Taxes $3 $5 $7 $8 $11 $13
Net Income $5 $7 $8 $13 $16 $19

DA $20 $20 $20 $20 $20

CAPEX $15 $17 $18 $20 $22
Change in $5 $5 $5 $5 $5
NWC
LFCF $5 $6 $7 $8 $9

EV = $320 - $120 + $35 = $235 (ending equity value)

• ~3x MOIC
• Using the rule of 114: 114/5 ~ 23% IRR
*15. You have 3 companies, a newspaper printing company, furniture company, then a soft services group.
Which company would you sell? Now you have a loan that needs to be paid off in 10 days, which one would
you sell? You have a loan that needs to be paid off in 10 hours, which would you sell?
Sell: Newspaper printing company → Digital disruption has significantly affected their business models
10 days: Furniture company → Can liquidate and sell-off assets in a fire sale to quickly build cash
10 hours: Still the furniture company for the reason listed above
16. 5 data points: Gold price, housing, currency ex Cad/USD, Oil, and inflation. Pick 3 and tell me how they
are correlated.
Possible answer: As oil prices increase, there will be a general increase in inflation due to the creation of jobs
and more capital projects. With inflation, the currency ex CAD/USD will be affected
17. 10-year T-bill is at 3%, S&P is at 18x forward P/E…Tell me about what is happening in the stock market
The S&P is yielding ~ 5%. Therefore, the market risk premium is 2% which tells me that the stock markets are
relatively stable considering investors are only demanding a small premium
*18. Can your WACC be higher than your cost of equity?
No, as equity holders would never accept a lower return than debt holders considering they are subordinate
to them in the event of a liquidation (lowest claim in the capital structure). However, they could be equal if a
firm is financed purely with equity
19. Rank EV/EBITDA, P/E, and EV/EBIT for the "general" company
P/E, EV/EBIT, then EV/EBITDA
20. How would you value NOLs?
Generally, you value it separately from the operations of the firm. So, you would look at your projections, and
offset taxable income from your projections with the NOL balance. Do this until the NOL has run out, and then
discount the tax savings to PV
21. You sell a subscription that is $12 per year, delivered monthly. Walk me through the 3 statements right
after you sell the subscription (the $12 is delivered at the beginning of the year all at once). (Part 1)

IS: CFS: BS:

No change Deferred Revenue +12 Cash +12

Overall change in cash: +12 Deferred Revenue +12

22. Walk me through the 3 statements after one month. Assume 100% GM. (Part 2)

IS: CFS: BS:

 Revenue +1 Net Income +0.60 Cash -0.40

Net Income +0.60 Deferred Revenue -1 Deferred Revenue -1

Overall change in cash: -0.40 Retained Earnings +0.60

23. What kind of company would have the same EBITDA and Net Income.
A company with no outstanding debt, no PP&E, and pays no taxes (performing poorly). Potentially, a poor
performing service company

24. A company acquires $200 worth of PP&E. Walk me through the 3 statements for each of the following
variations for initial changes: 1) 100% cash purchase; 2) Operating Lease; 3) Capital Lease (Part 1)
Variation 1:

IS: CFS: BS:

No change CFI -200 Cash -200

Overall change in cash: -200 PPE +200

Variation 2:

IS: CFS: BS:

No change No change No change

Variation 3:

IS: CFS: BS:

No change No change PPE +200

Capital Lease Obligation +200

Note: Operating leases are the only scenario in which the firm does not own the asset
25. Rank each of the variations in terms of EBITDA, Net Income and EBIT from high to low. (Part 2)
EBITDA: Cash purchase, Capital Lease, Operating Lease
EBIT: Cash Purchase, Capital Lease, Operating Lease
Net Income: Cash Purchase, Operating Lease, Capital Lease (this represents early years where interest paid for
capital leases is high, operating and capital lease should be switched in the later years)
26. Why might two companies with the same financial profile have different EV/EBITDA multiples?
Different beliefs surrounding growth and potential intangible characteristics not captured in the financial
profile that is deserving of a premium (ex. Stronger management track record)
27. What's the relationship between the D/E ratio and the value of a company?
As D/E increases, WACC decreases; therefore, increasing the value of the company (this only holds true until
the risk brought upon by leverage exceeds the cheapness of the debt)

28. How does an increase in the tax rate affect the value of a company?
1. Lowers FCF
2. Lowers the cost of debt
3. Lowers the cost of equity (as levered beta is lower)
Unclear what the change will exactly do to the value of the company
29. A company has an EV of $100, no cash and $400 of debt. How is this possible?
The company is distressed and insolvent; therefore, their debt obligations exceed the value of the business
30. How much would you pay for an asset that pays you $100 a year, guaranteed?
Since payments are guaranteed, we can use the risk-free rate as the discount rate (assume its 2%).
So… $100/0.02 = $5000
31. There is a company that manufactures pots from steel. The company purchases $500 of manufacturing
equipment and $500 of steel financed by $1000 of debt. The company has a 10% cost of debt with no debt
amortization and depreciates its manufacturing equipment using straight line depreciation over 5 years
with no residual value. Walk me through the 3 statements right after the purchase. (Part 1)

IS: CFS: BS:

No change Inventory -500 Inventory +500

CFI -500 PPE +500

 CFF +1000 Debt +1000

Overall change in cash: 0

32. Say the company sells $900 of pots and uses $300 of its steel. It has $200 in SG&A expense and has a
40% tax rate. Walk me through the 3 statements at the end of Year 1. (Part 2)

IS: CFS: BS:

Revenue +900 Net Income +120 Cash +520

COGS -300 Inventory +300 Inventory -300

SG&A -200 D&A +100 PPE -100

D&A -100 Overall change in cash: +520 Retained Earnings +120

Int. Exp. -100

Net Income +120

33. Say the company switches to FIFO accounting from LIFO and that the price of steel is declining. What
happens to the company's free cash flows and what happens to the value of the company? (Part 3)
Since prices are declining, I am recognizing more in COGS than I would be otherwise under LIFO. Thus, I am
paying less in taxes which increases my FCF and finally, increasing the value of the company.
34. A company has a $100 market capitalization. There are 100 options with strike price of $5. Current share
price is $10. What's the fully diluted market capitalization?
Securities are in-the-money. 50 new shares will be created (using the treasury stock method). So, fully diluted
market capitalization is 60*$10 = $600
35. If you buy a company trading at 20x P/E and the deal is financed 100% with debt at 5% interest, is the
deal accretive or dilutive?
Assuming this is the after-tax cost of debt, this deal will be break-even
36. Does mid-year convention result in a higher or lower valuation?
Should result in a higher valuation since you are receiving a portion of the cash flows earlier (rather than
assuming you receive them at the end of each year)
37. What are some pros/cons of a strategic and financial acquirer from the perspective of the target
company?
Strategic Acquirer
 • Higher purchase price (+)
• Synergies (+)
• Can offer stock as consideration (+)
• Can sometimes require FTC approval (-)
Financial Acquirer

• Deal more likely to go through (+)

• Potential profitable exit when acquirer wants to realize their return (IPO) (+)
• Will pay less than a strategic acquirer (-)
• Generally, no potential synergies (-)
38. When calculating beta for Apple, would it be appropriate to regress it against the NASDAQ (A heavy tech
influenced index)? Why or why not?
No, it would be more appropriate to regress it against an index such as the S&P 500 that is more
representative of the general market in order to properly calculate Apple’s cost of equity
39. What’s the P/E of $100 cash?
Cash in a savings account will generally generate interest of 2%. Therefore, $100/$2 = 50x