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Series 79 study materials
Series 79 study resources

Series 79 practice questions

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Question 1Collection, Analysis, and Evaluation of Data

Which line item is subtracted from revenue to arrive at gross profit on an income statement?

  1. Selling, general and administrative expense
  2. Income tax expense
  3. Interest expense
  4. Cost of goods sold Correct answer.

Explanation

Gross profit is revenue less cost of goods sold, which captures the direct costs of producing the goods or services sold. Operating expenses, interest, and taxes are deducted further down the income statement and never enter the gross profit calculation.

Question 2Collection, Analysis, and Evaluation of Data

Which of the following is classified as a current liability on a classified balance sheet?

  1. Retained earnings
  2. Accounts payable Correct answer.
  3. Goodwill
  4. Property, plant and equipment

Explanation

Current liabilities are obligations expected to be settled within one year or the operating cycle, and trade payables arise from ordinary purchasing activity. The other items are long-lived assets or a component of shareholders' equity.

Question 3Collection, Analysis, and Evaluation of Data

Under US GAAP, cash dividends paid to shareholders are reported in which section of the statement of cash flows?

  1. Operating activities
  2. Supplemental noncash disclosures
  3. Investing activities
  4. Financing activities Correct answer.

Explanation

Dividends paid are a return of capital to providers of equity and are presented as a financing outflow under US GAAP. Interest paid, by contrast, is classified as an operating outflow.

Question 4Collection, Analysis, and Evaluation of Data

A company reports current assets of $600 million and current liabilities of $200 million. What is its current ratio?

  1. 3.0x Correct answer.
  2. 2.0x
  3. 0.5x
  4. 1.0x

Explanation

The current ratio equals current assets divided by current liabilities. Dividing $600 million by $200 million produces 3.0x, indicating substantial short-term liquidity headroom.

Question 5Collection, Analysis, and Evaluation of Data

How is enterprise value calculated from equity value?

  1. Equity value minus total debt plus cash
  2. Market capitalization plus cash minus debt
  3. Equity value plus total debt minus cash Correct answer.
  4. Total assets minus total liabilities

Explanation

Enterprise value measures the value of the operating business available to all capital providers, so debt is added and cash is subtracted as a non-operating asset. Preferred stock and noncontrolling interests are likewise added when present.

Question 6Collection, Analysis, and Evaluation of Data

Under acquisition accounting, goodwill is recognized when which of the following occurs?

  1. Consideration is paid entirely in acquirer stock
  2. The purchase price is less than the fair value of net assets acquired
  3. The target reports negative retained earnings at closing
  4. The purchase price exceeds the fair value of identifiable net assets acquired Correct answer.

Explanation

Goodwill is the residual excess of consideration transferred over the fair value of identifiable net assets acquired. If consideration falls below that fair value, a bargain purchase gain is recorded instead.

Question 7Collection, Analysis, and Evaluation of Data

Which of the following is an example of a cost synergy in a merger?

  1. Elimination of duplicate corporate overhead after closing Correct answer.
  2. A lower discount rate used in the valuation model
  3. A higher purchase price paid to target shareholders
  4. Higher standalone revenue growth for the target

Explanation

Cost synergies arise from combining operations to remove redundant expenses, such as duplicate headquarters functions or overlapping facilities, and they flow directly into combined EBITDA. Revenue synergies, by contrast, come from cross-selling or expanded distribution.

Question 8Collection, Analysis, and Evaluation of Data

What does sensitivity analysis accomplish in a valuation or merger model?

  1. It calculates the exact probability that a transaction will close
  2. It replaces the need for a discounted cash flow analysis
  3. It shows how an output changes as a selected input is varied Correct answer.
  4. It removes all forecasting risk from the model

Explanation

Sensitivity analysis flexes one or more assumptions, such as the discount rate or exit multiple, to display a range of outputs and illustrate how dependent the conclusion is on those inputs. It is a presentation of outcomes, not a probability estimate or a substitute for the primary analysis.

Question 9Collection, Analysis, and Evaluation of Data

A company reports revenue of $1,000 million, cost of goods sold of $600 million, and selling, general and administrative expense of $200 million, which includes $50 million of depreciation and amortization. What is its EBITDA?

  1. $300 million
  2. $200 million
  3. $150 million
  4. $250 million Correct answer.

Explanation

EBITDA is earnings before interest, taxes, depreciation and amortization, so the $50 million of depreciation embedded in SG&A must be added back. Revenue of $1,000 million less $600 million of cost of goods sold less $150 million of cash operating expense equals $250 million.

Question 10Collection, Analysis, and Evaluation of Data

A company has a cost of equity of 12%, a pre-tax cost of debt of 6%, a 25% tax rate, and a capital structure that is 40% debt and 60% equity on a market value basis. What is its weighted average cost of capital?

  1. 9.0% Correct answer.
  2. 9.6%
  3. 10.2%
  4. 8.4%

Explanation

WACC weights the after-tax cost of each capital source: 60% times 12% equals 7.2%, and 40% times 6% times (1 minus 25%) equals 1.8%, for a total of 9.0%. The interest tax shield is what makes the after-tax cost of debt lower than its coupon.

Question 11Collection, Analysis, and Evaluation of Data

Under the Gordon growth method, how is terminal value calculated in a discounted cash flow analysis?

  1. The sum of all forecast-period free cash flows
  2. Equity value divided by the terminal-year price-to-earnings ratio
  3. Next year's free cash flow divided by (WACC minus growth) Correct answer.
  4. Terminal-year EBITDA multiplied by the current trading multiple

Explanation

The perpetuity growth method capitalizes the first cash flow after the forecast period by dividing it by the spread between the discount rate and the long-run growth rate. The growth rate must be below the discount rate and is typically set at or near long-run inflation plus real growth.

Question 12Collection, Analysis, and Evaluation of Data

A comparable company analysis indicates an enterprise value to EBITDA multiple of 8.0x. The subject company has EBITDA of $100 million and net debt of $200 million. What is its implied equity value?

  1. $600 million Correct answer.
  2. $800 million
  3. $400 million
  4. $1,000 million

Explanation

The multiple is applied to EBITDA to derive enterprise value of $800 million, from which net debt is then subtracted to reach equity value of $600 million. Equity value is what remains for shareholders after lenders are satisfied.

Question 13Collection, Analysis, and Evaluation of Data

Why do precedent transaction multiples generally exceed comparable company trading multiples for the same target?

  1. They reflect only current public trading prices
  2. They typically include a control premium and expected synergies Correct answer.
  3. They are derived solely from liquidation values
  4. They exclude any control premium from the analysis

Explanation

Precedent transactions record prices actually paid to obtain control, so they embed a premium over undisturbed trading levels plus any synergies the buyer expected to realize. Trading comparables, by contrast, reflect minority stakes traded in the public market.

Question 14Collection, Analysis, and Evaluation of Data

A company has total debt of $400 million and EBITDA of $100 million. What is its total debt to EBITDA ratio?

  1. 2.0x
  2. 3.0x
  3. 4.0x Correct answer.
  4. 5.0x

Explanation

Total debt to EBITDA divides gross debt by EBITDA, giving $400 million divided by $100 million, or 4.0x. Leverage multiples are a core input to credit analysis and to assessing debt capacity in a leveraged transaction.

Question 15Collection, Analysis, and Evaluation of Data

A company reports EBITDA of $150 million and cash interest expense of $100 million. What is its EBITDA interest coverage ratio?

  1. 3.0x
  2. 1.5x Correct answer.
  3. 2.0x
  4. 2.5x

Explanation

Interest coverage equals EBITDA divided by cash interest expense, so $150 million divided by $100 million yields 1.5x. A ratio at this level leaves a thin cushion and is typically viewed as highly leveraged by lenders.

Question 16Collection, Analysis, and Evaluation of Data

A company generates EBIT of $150 million and depreciation and amortization of $40 million, and incurs capital expenditures of $50 million and an increase in net working capital of $20 million. With a 30% tax rate, what is its unlevered free cash flow?

  1. $75 million Correct answer.
  2. $85 million
  3. $95 million
  4. $65 million

Explanation

Unlevered free cash flow is EBIT times (1 minus the tax rate), plus depreciation and amortization, less capital expenditures, less the increase in net working capital. Here that is $105 million plus $40 million less $50 million less $20 million, or $75 million.

Question 17Collection, Analysis, and Evaluation of Data

An acquirer trading at a price-to-earnings ratio of 20x acquires a target trading at 12x in an all-stock deal with no synergies assumed. What is the expected effect on the acquirer's earnings per share?

  1. Dilutive, because the target's multiple is below the acquirer's
  2. Dilutive, because the acquirer's multiple is higher than the target's
  3. Accretive, because the target's earnings are acquired at a lower multiple than the shares issued Correct answer.
  4. Neutral, because no synergies are assumed in the transaction

Explanation

In an all-stock transaction, accretion depends on the relative price-to-earnings ratios: issuing shares at a higher multiple to buy earnings at a lower multiple increases combined earnings per share. Synergies affect the magnitude but are not required for accretion.

Question 18Collection, Analysis, and Evaluation of Data

Which statement correctly describes the sources and uses schedule in a leveraged buyout model?

  1. Sources must equal uses Correct answer.
  2. Debt financing is not counted as a source of funds
  3. The transaction must be funded entirely with equity
  4. Uses must exceed sources by the amount of transaction fees

Explanation

The sources and uses table is a balancing schedule in which all funding sources, including new debt, rolled equity, and sponsor equity, equal all uses such as the purchase price, refinanced debt, and fees. Transaction fees are themselves a use of funds.

Question 19Collection, Analysis, and Evaluation of Data

In a merger model, how are run-rate cost synergies typically reflected in the pro forma income statement?

  1. Combined selling, general and administrative expense is reduced by the savings Correct answer.
  2. Combined selling, general and administrative expense is increased by the savings
  3. The target's effective tax rate is increased
  4. The purchase price is increased by the present value of the savings

Explanation

Cost synergies are modeled as a reduction in the combined operating expense base, which raises combined EBITDA and flows through to net income. Analysts usually phase the savings in over time and often show a separate line item so investors can see the underlying and synergy-inclusive results.

Question 20Collection, Analysis, and Evaluation of Data

A company has 100.0 million basic shares outstanding and 20.0 million options with an exercise price of $20, when the average share price is $25. Using the treasury stock method, what is diluted share count?

  1. 102.0 million
  2. 104.0 million Correct answer.
  3. 100.0 million
  4. 110.0 million

Explanation

The treasury stock method assumes option proceeds buy back shares at the average price: 20.0 million options times $20 equals $400 million of proceeds, which repurchases 16.0 million shares at $25. The 4.0 million net new shares raise the diluted count to 104.0 million.

Question 21Collection, Analysis, and Evaluation of Data

In a stock acquisition with no tax election, a $200 million write-up of target assets to fair value is recorded for book purposes while the tax basis remains unchanged. With a 30% tax rate, what deferred tax liability is recognized at closing?

  1. $0
  2. $60 million Correct answer.
  3. $40 million
  4. $30 million

Explanation

Because the book basis rises while the tax basis does not, a temporary difference of $200 million arises that will reverse as the assets are depreciated for book but not tax purposes. Multiplying that difference by the 30% tax rate yields a $60 million deferred tax liability.

Question 22Collection, Analysis, and Evaluation of Data

A comparable company has a levered beta of 1.20, a 25% tax rate, and a debt-to-equity ratio of 1.0 on a market value basis. What is its unlevered beta?

  1. 0.60
  2. 0.90
  3. 0.69 Correct answer.
  4. 0.80

Explanation

Unlevering removes the effect of financial leverage using the formula levered beta divided by [1 plus (1 minus tax rate) times debt-to-equity]. That gives 1.20 divided by 1.75, or approximately 0.69.

Question 23Collection, Analysis, and Evaluation of Data

An acquirer has net income of $200 million and 100 million shares outstanding. It acquires a target with net income of $50 million for $800 million in cash, financed with debt carrying an 8% interest rate, in a transaction with a 25% tax rate and no synergies. What is pro forma earnings per share?

  1. $1.96
  2. $2.00
  3. $2.02 Correct answer.
  4. $1.90

Explanation

Pre-tax interest on the new debt is $64 million, or $48 million after tax, so combined net income is $200 million plus $50 million less $48 million, or $202 million. Dividing by the unchanged 100 million shares gives $2.02 per share, which is $0.02 accretive to the standalone $2.00.

Question 24Collection, Analysis, and Evaluation of Data

Which of the following is a red flag in a quality of earnings review of a target company?

  1. Days sales outstanding rising materially faster than revenue Correct answer.
  2. Inventory turnover in line with the industry average
  3. Operating cash flow tracking closely with net income
  4. Gross margin holding steady relative to peers

Explanation

Receivables growing faster than sales suggests lengthening collection periods, loosened credit terms, or aggressive revenue recognition, any of which can signal that reported earnings are not converting to cash. A quality of earnings review focuses on whether EBITDA is sustainable and cash-backed.

Question 25Collection, Analysis, and Evaluation of Data

A purchase agreement sets a working capital peg for a target company. What does the peg represent?

  1. The target's working capital on the closing date, with no adjustment mechanism
  2. A normalized average working capital level used to set the post-closing true-up Correct answer.
  3. The target's long-term debt balance to be refinanced at closing
  4. The acquirer's own working capital measured at signing

Explanation

The peg reflects a normalized average level of working capital for the business, typically measured over a trailing twelve-month period, and the closing balance is compared with it to determine the purchase price adjustment. This mechanism prevents the buyer or seller from bearing an arbitrary swing in working capital at closing.

Question 26Collection, Analysis, and Evaluation of Data

When calculating enterprise value from equity value, which item is added?

  1. Cash and cash equivalents
  2. Total debt Correct answer.
  3. Accounts receivable
  4. Retained earnings

Explanation

Enterprise value equals equity value plus total debt, preferred stock, and minority interest, less cash and cash equivalents. Debt is added because a buyer assumes it, while cash is subtracted because it offsets the net purchase price.

Question 27Collection, Analysis, and Evaluation of Data

Which item is excluded from unlevered free cash flow in a discounted cash flow analysis?

  1. Cash interest expense Correct answer.
  2. Capital expenditures
  3. Depreciation and amortization add-back
  4. Increases in net working capital

Explanation

Unlevered free cash flow is calculated before financing cash flows, so interest expense is excluded. It represents cash available to all capital providers, both debt and equity.

Question 28Collection, Analysis, and Evaluation of Data

Which item is most appropriately added back when calculating adjusted EBITDA?

  1. Interest paid on outstanding debt
  2. Cash income taxes paid
  3. Routine maintenance capital expenditures
  4. Non-recurring restructuring charges Correct answer.

Explanation

Adjusted EBITDA adds back items that are non-recurring or non-operating so the metric reflects sustainable operating earnings. Restructuring charges are a classic add-back.

Question 29Collection, Analysis, and Evaluation of Data

A working capital peg in an acquisition agreement is typically set based on which measure?

  1. The acquirer's net working capital at closing
  2. The target's net working capital on the date the letter of intent is signed
  3. The target's projected net working capital one year after closing
  4. The average normalized net working capital over a trailing period Correct answer.

Explanation

The peg represents a normalized level of net working capital that the buyer expects to inherit, usually an average over the trailing twelve months. It adjusts the purchase price at closing if actual working capital differs.

Question 30Collection, Analysis, and Evaluation of Data

How does an acquirer account for direct transaction costs such as investment banking and legal fees in a business combination?

  1. Capitalized as part of goodwill
  2. Deferred and amortized over the acquired intangibles' lives
  3. Recorded as a reduction of additional paid-in capital
  4. Expensed as incurred Correct answer.

Explanation

Under acquisition accounting, direct transaction costs are expensed as incurred rather than capitalized into the purchase price. Only consideration transferred to the sellers is part of the acquisition cost.

Question 31Collection, Analysis, and Evaluation of Data

In financial analysis, LTM refers to which period?

  1. The most recent twelve months of reported results Correct answer.
  2. The twelve months immediately following the most recent fiscal year end
  3. The twelve months of the target's approved annual budget
  4. The twelve months immediately following the transaction closing

Explanation

LTM, or last twelve months, aggregates the most recent four quarters to reflect the latest performance and to smooth seasonality. It often combines the prior fiscal year with interim periods.

Question 32Collection, Analysis, and Evaluation of Data

Which multiple is generally considered capital-structure neutral when comparing companies with different leverage?

  1. Price-to-earnings
  2. EV-to-EBITDA Correct answer.
  3. Dividend yield
  4. Price-to-book

Explanation

EV-to-EBITDA is capital-structure neutral because enterprise value includes debt and cash while EBITDA is measured before interest. This allows comparison of companies with different financing structures.

Question 33Collection, Analysis, and Evaluation of Data

Under the exit multiple method, terminal value in a DCF is calculated by applying a multiple to which amount?

  1. The terminal year's net income
  2. The terminal year's EBITDA or EBIT Correct answer.
  3. The present value of the terminal year's free cash flow
  4. The initial equity investment

Explanation

The exit multiple method applies a selected multiple, often based on comparable companies, to the terminal year's EBITDA or EBIT. The resulting value is then discounted back to the present.

Question 34Collection, Analysis, and Evaluation of Data

A company has days sales outstanding of 45, days inventory outstanding of 60, and days payable outstanding of 30. What is its cash conversion cycle?

  1. 75 days Correct answer.
  2. 135 days
  3. 15 days
  4. 45 days

Explanation

The cash conversion cycle equals DSO plus DIO minus DPO: 45 + 60 − 30 = 75 days. It measures how long cash is tied up in operating working capital.

Question 35Collection, Analysis, and Evaluation of Data

A target's days sales outstanding have risen from 50 to 75 over the past year while revenue growth has slowed. Which conclusion is best supported?

  1. The company has likely shortened credit terms to customers
  2. Revenue may be recognized faster than cash is collected Correct answer.
  3. The company has improved its collection efforts
  4. The company's inventory turnover has improved

Explanation

Rising DSO with decelerating growth suggests slower collections or aggressive revenue recognition, a common quality-of-earnings red flag. Analysts should examine aging schedules and subsequent cash receipts.

Question 36Collection, Analysis, and Evaluation of Data

A target's days inventory outstanding have increased sharply while sales are flat. Which risk does this most likely indicate?

  1. Obsolete or slow-moving inventory Correct answer.
  2. Overstated cash flow from operations
  3. Understated accounts payable balances
  4. Understated cost of goods sold relative to revenue

Explanation

Rising inventory days with flat sales suggest inventory is building faster than it is sold, pointing to obsolescence and potential write-downs. Diligence should test inventory aging and reserves.

Question 37Collection, Analysis, and Evaluation of Data

In purchase accounting for an acquisition, acquired deferred revenue is typically recorded at which amount?

  1. Fair value, generally below carrying amount Correct answer.
  2. The gross amount originally billed to customers
  3. Its full carrying amount on the target's books
  4. Zero, because deferred revenue is not a liability

Explanation

Under acquisition accounting, deferred revenue is recorded at fair value, which is often below carrying value because the remaining obligation is limited to a reasonable profit. This haircut reduces post-acquisition revenue.

Question 38Collection, Analysis, and Evaluation of Data

Acquired inventory is written up to fair value in a business combination. What is the effect on the acquirer's post-combination income statement as that inventory is sold?

  1. Lower amortization expense over the inventory's useful life
  2. Higher cost of goods sold and lower gross margin Correct answer.
  3. Higher revenue and higher gross margin
  4. No effect, because the step-up is recorded in equity

Explanation

The inventory step-up increases the cost of goods sold when the inventory is sold, temporarily depressing gross margin. The effect reverses once the acquired inventory has been sold through.

Question 39Collection, Analysis, and Evaluation of Data

Why are target and peer financials often calendarized to a common date in a comparable company analysis?

  1. To adjust for differences in accounting standards
  2. To eliminate the effects of foreign currency translation
  3. To align differing fiscal year ends to a common period Correct answer.
  4. To convert enterprise value into equity value

Explanation

Calendarization aligns fiscal years that end on different dates so that multiples compare the same economic period. It prevents distortions from mismatched reporting periods.

Question 40Collection, Analysis, and Evaluation of Data

Applying the mid-year convention in a DCF, all else equal, will have which effect?

  1. Decrease the present value of cash flows
  2. Increase the terminal growth rate
  3. Have no effect on enterprise value
  4. Increase the present value of cash flows Correct answer.

Explanation

The mid-year convention assumes cash flows arrive mid-period rather than at period end, shortening the discounting period. The result is a higher present value.

Question 41Collection, Analysis, and Evaluation of Data

In an LBO model, a circular reference typically arises because which item depends on interest expense?

  1. The exit multiple
  2. Cash flow available for debt paydown Correct answer.
  3. The tax rate applied to EBITDA
  4. The purchase price

Explanation

Interest expense reduces cash flow available for debt paydown; the paydown lowers the debt balance, which changes interest expense. This loop creates the circular reference.

Question 42Collection, Analysis, and Evaluation of Data

An acquirer finances an all-cash acquisition with new debt. The deal will be accretive to EPS if which condition holds?

  1. The target's earnings yield exceeds the after-tax cost of debt Correct answer.
  2. The target's P/E ratio exceeds the acquirer's P/E ratio
  3. The acquirer's cost of equity exceeds the target's earnings yield on the purchase price
  4. The after-tax cost of debt exceeds the target's earnings yield

Explanation

In a debt-financed cash deal, accretion occurs when the earnings acquired relative to the price paid (the earnings yield) exceeds the after-tax interest cost on the new debt. If the cost of debt is higher, the deal is dilutive.

Question 43Collection, Analysis, and Evaluation of Data

A Section 338(h)(10) election in the stock acquisition of a target subsidiary primarily accomplishes which of the following?

  1. Treats the stock deal as an asset purchase for tax Correct answer.
  2. Converts the transaction into a tax-free reorganization
  3. Defers the acquirer's tax deductions to future years
  4. Eliminates the need for purchase accounting

Explanation

The election deems the stock sale to be an asset sale for tax purposes, giving the acquirer a stepped-up basis and future tax deductions. Legal title still transfers as stock.

Question 44Collection, Analysis, and Evaluation of Data

Which adjustment is most commonly permitted in the EBITDA definition used in a credit agreement?

  1. Add-back of cash interest expense
  2. Deduction of cash taxes
  3. Deduction of capital expenditures
  4. Add-back of documented non-recurring charges Correct answer.

Explanation

Credit agreement EBITDA typically permits add-backs for documented non-recurring or extraordinary charges to reflect sustainable earnings. Capex, taxes, and interest are not components of EBITDA.

Question 45Collection, Analysis, and Evaluation of Data

A company has EBITDA of $120 million, capital expenditures of $20 million, cash taxes of $10 million, and cash interest of $30 million. What is its fixed charge coverage ratio?

  1. 2.0x
  2. 4.0x
  3. 3.0x Correct answer.
  4. 6.0x

Explanation

Fixed charge coverage equals (EBITDA − capex − cash taxes) ÷ cash interest: ($120 − $20 − $10) ÷ $30 = 3.0x. It measures the cushion available to cover fixed financing obligations.

Question 46Collection, Analysis, and Evaluation of Data

A DCF produces an enterprise value in which terminal value represents 85% of total value. Which conclusion is most appropriate?

  1. Value is highly sensitive to terminal assumptions Correct answer.
  2. The discount rate must be too high
  3. Terminal value should be excluded from enterprise value
  4. The analysis is invalid and should be discarded

Explanation

When terminal value dominates, small changes in the perpetuity growth rate or exit multiple can swing the valuation materially. Analysts should test a range of terminal assumptions.

Question 47Collection, Analysis, and Evaluation of Data

After a change of control, a target's pre-acquisition net operating losses are subject to an annual limitation under Section 382. What is the primary effect?

  1. It permits unlimited use of the NOLs against future income
  2. It eliminates the NOLs entirely at closing
  3. It converts the NOLs into refundable tax credits
  4. It limits annual NOL usage, reducing their value Correct answer.

Explanation

Section 382 limits annual use of pre-change NOLs to a prescribed rate times the company's value, which can meaningfully reduce their realized tax benefit. The NOLs survive but are used more slowly.

Question 48Collection, Analysis, and Evaluation of Data

An acquirer has net income of $300 million and 100 million shares. It pays $1,200 million cash for a target with net income of $20 million, financed with debt at an 8% pre-tax rate and a 25% tax rate. What after-tax synergies are needed for the deal to be EPS-neutral?

  1. $69 million
  2. $72 million
  3. $20 million
  4. $52 million Correct answer.

Explanation

Standalone EPS is $3.00, so combined net income must be $300 million. After-tax interest is $1,200 × 8% × (1 − 25%) = $72 million, so pre-synergy combined income is $300 + $20 − $72 = $248 million. The $52 million shortfall must come from after-tax synergies.

Question 49Collection, Analysis, and Evaluation of Data

A sponsor buys a company at 8.0x EBITDA and exits five years later at 8.0x EBITDA. EBITDA grows 5% annually and all free cash flow pays down debt. The sponsor's return is primarily driven by which factor?

  1. A reduction in the corporate tax rate
  2. EBITDA growth and debt paydown Correct answer.
  3. A dividend recapitalization at exit
  4. Multiple expansion between entry and exit

Explanation

With identical entry and exit multiples, there is no multiple expansion; returns come from growing EBITDA, which raises enterprise value, and from debt reduction that increases equity value. This is the classic LBO value-creation equation.

Question 50Collection, Analysis, and Evaluation of Data

When calculating diluted shares outstanding in a merger model, convertible bonds are typically treated under which method?

  1. Excluded entirely because they are debt
  2. If-converted: add the shares issuable and add back after-tax interest Correct answer.
  3. Treasury stock method: repurchase shares with the conversion proceeds
  4. Included at face value divided by the conversion price only when out of the money

Explanation

The if-converted method assumes the bonds convert at the beginning of the period, adding the underlying shares and adding back the after-tax interest that would no longer be paid. It is applied when the result is dilutive.