Practice

Using CAPM, what's the Cost of Equity for a company with a Risk-Free Rate of 4%, a Beta of 1.2, and an Equity Risk Premium of 6%?

A Combined Company has EBITDA of $180M and total annual Interest Expense of $40M after a deal closes. What's its EBITDA/Interest coverage ratio?

Why do you use market values, not book values, of Equity and Debt when calculating WACC's capital structure weights?

How do the Combined Equity Value and Combined Enterprise Value change based on the deal's financing method?

What is a Normalized Terminal Year, and when would you need one?

A company has EBIT of $360M and a 25% tax rate. What's its NOPAT?

True or false: counting Operating Leases as a form of capital in WACC always reduces WACC.

Company B has a Purchase Enterprise Value of $100M and EBITDA of $20M. What's its Purchase TEV/EBITDA multiple?

What makes an industry more or less appealing as an LBO target, beyond the target company itself?

Company A has an Enterprise Value of $1,000M and EBITDA of $100M. It acquires Company B, which has a Purchase Enterprise Value of $500M and EBITDA of $25M. What's the Combined TEV/EBITDA multiple?

A PE firm wants a 25% IRR (~3.0x multiple) over 5 years. It plans to sell the company for an Exit Enterprise Value of $1,800M, using a 50/50 Debt/Equity split with no Debt repaid and no extra Cash generated during the hold. What's the maximum Purchase Enterprise Value it could pay?

A Term Loan starts Year 1 with a $500M balance and a 6% interest rate. In Year 1, the company repays $80M of principal (interest is calculated on the beginning-of-period balance). In Year 2, strong cash flow lets the company repay another $100M of principal, still at 6% on the Year 2 beginning balance. Calculate the Interest Expense in both Year 1 and Year 2, and the ending Term Loan balance after Year 2.

How does a Value Creation Analysis work, and when is it actually a credible tool?

You're valuing a company partway through its fiscal year, and it has already reported some results for the current year. Why use a 'stub period' instead of a full first forecast year?

A company issues $150M in Debt and uses the full proceeds to purchase $150M of Financial Investments (a Non-Operating Asset). By how much does its Enterprise Value change?

Company A has 20 shares outstanding at a $40.00 share price and Net Income of $30M. It acquires Company B for a $200M Purchase Equity Value in a 100% Stock deal; Company B's Net Income is $15M. Assume the same tax rate for both. What's the Combined EPS?

A company issues a $200 Face Value bond with $10 in Issuance Fees (straight-line amortization over 5 years) and a 6% coupon rate. It repays the entire principal early, at the end of Year 2. Walk through the Year 2 impact on all three statements, assuming a 25% tax rate.

A company records a $150M Goodwill Impairment and simultaneously issues $60M of Debt to help fund future growth, at a 25% tax rate. Calculate the net change in Equity Value and Enterprise Value.

A company has an Equity Value of $500M, Cash of $80M, Debt of $220M, and Preferred Stock of $40M. What's its Enterprise Value?

Why does Purchase Price Allocation matter less in an LBO model than it does in a normal M&A deal?

Why is Stock never available as a Source of Funds in a leveraged buyout, unlike in a normal M&A deal?

An acquirer buys 65% of a company for $500 million. How do you use this to calculate the deal's valuation multiples?

Isn't the Foregone Interest on Cash just an abstract "opportunity cost"? Why do you actually deduct it in the model?

Debunk the myth that Debt "adds to" Enterprise Value and Cash "subtracts from" it.

A company buys $250 of inventory for cash, ahead of selling it. Walk through the three statements at the moment of purchase.

Why do you 'calendarize' companies with different fiscal year-ends before comparing their multiples?

Why would a PE firm use a Shareholder Loan instead of straightforward Common Equity?

How do Legal/Advisory Fees and Financing Fees get treated differently on an LBO's Balance Sheet?

How does Paid-in-Kind (PIK) interest differ from ordinary cash interest, mechanically?

How do you handle Net Operating Losses in a DCF's bridge from Enterprise Value to Equity Value?

You're valuing a company in a country whose government bonds aren't considered risk-free. How do you adjust the Risk-Free Rate?

A company's explicit-period FCF is $60M in Year 1, $65M in Year 2, and $70M in Year 3. Its WACC is 10%, and its Terminal Value at the end of Year 3 is $900M. Calculate its Enterprise Value.

A PE firm agrees to a $50M Earn-out payment to the original selling shareholders, payable in Year 2 if the company hits its EBITDA target (which it does). Its Investor Equity was $500M, and its Exit Equity Proceeds in Year 5, before considering the Earn-out, are $1,300M. What MoM multiple does the PE firm actually realize after the Earn-out payment?

A company buys equipment for $600K with a 6-year useful life, depreciated straight-line. What's the annual depreciation expense?

How do you determine the Purchase Price in an M&A deal for a public Seller versus a private Seller?

What happens if a Buyer pays an Equity Purchase Price that's actually below the Target's Common Shareholders' Equity?

Why look at both historical (LTM) and projected (forward) multiples in a Comps analysis, rather than just one?

An acquirer buys 85% of a company for $680M. The seller's most recent Balance Sheet shows $120M of Debt and $40M of Cash, and its LTM EBITDA is $95M. Calculate the implied TEV/EBITDA multiple.

What's the practical difference between a Revolver draw and issuing new Term Loan Debt when a company needs extra financing mid-year?

What's the single most important factor in determining whether a company is a good LBO candidate?

Your target's EBITDA is $140M, and the median Comps multiple is 7.5x. It has $200M of Debt, $60M of Cash, and 50M diluted shares. Walk from the multiple to an implied share price.

Why do you never project Equity Value or Enterprise Value forward when calculating forward multiples?

Why might two companies with identical net income have very different cash flow from operations?

Why do you exclude Stock-Based Compensation when calculating Unlevered FCF, even though it's a non-cash add-back on the Cash Flow Statement?

A company's diluted share count includes dilution from in-the-money options. Should you also account for its out-of-the-money options in a DCF?

A company has NOPAT of $75M and Average Invested Capital of $500M. What's its ROIC?

A company's final projected year of FCF is $70M, its WACC is 8%, and its Terminal Growth Rate is 2.5%. What's its Terminal Value under the Perpetuity Growth Method?

A company has two Debt tranches: a Term Loan with a $300M current balance amortizing 8% of its original $400M principal annually, and Subordinated Notes with a $200M balance and no amortization or early repayment allowed. After mandatory repayments, the company has $60M of Cash Flow Available for Debt Repayment, with a 100% cash flow sweep applied entirely to the Term Loan. Calculate the Term Loan's mandatory repayment, its optional repayment, and its ending balance.

A company that follows U.S. GAAP signs a 5-year operating lease with a Present Value of $400 and pays $80 in cash rent per year. The discount rate is 6%. Walk through the first year's impact on all three statements (including the initial signing), assuming a 25% tax rate.

What is a Liquidation Valuation, and why does it usually understate the value of a healthy, growing company?

A PE firm uses an $800M Shareholder Loan with 8% PIK interest. How much PIK Interest accrues to the loan's principal in Year 1?

If you chose to count Operating Leases as a form of capital in a DCF, what would actually change?

How should you treat Stock-Based Compensation (SBC) in a merger model?

A company grants $80 of SBC that isn't cash-tax deductible yet. At a 25% tax rate, what's the resulting Deferred Tax Asset?

A company collects $300 upfront for services it hasn't delivered yet, increasing Deferred Revenue. Walk through the three statements at the moment of collection.

Between an extra dollar of EBITDA and an extra dollar of Debt paydown, which is more valuable to a PE firm's returns, and why?

An Acquirer has $250M of Debt and $80M of EBITDA (3.1x Debt/EBITDA). Peer companies average 5.0x Debt/EBITDA. How much additional Debt could the Acquirer raise to reach that peer level?

A deal's stub period requires estimating December 31 Balance Sheet values by interpolating between the prior and next annual data points, using a stub fraction of 0.753. Inventory is $180M at the start of the window and $210M at the end; Accounts Payable is $90M at the start and $99M at the end. Calculate the interpolated December 31 balance for both line items, and the resulting net Working Capital impact versus using the start-of-window figures.

Using the approximation IRR ≈ (200% / Years) × 65% for a 3x multiple, estimate the IRR for a 3x multiple achieved over 4 years.

Why doesn't IFRS allow companies to use the LIFO inventory method?

A company has Net Income of $40M and average Total Assets of $800M. What's its ROA?

Why do many merger models tend to overstate the impact of Synergies?

SBC granted at $50 is later worth $170 when employees exercise their options. At a 25% tax rate, what's the Excess Tax Benefit?

A company's Accounts Receivable balance is $80M at the start of an interpolation window and grows to $104M by the end of it. Using a stub-period fraction of 0.60, what's the interpolated balance at the stub close date?

How does an LBO valuation differ from a DCF valuation, even though both are based on projected cash flows?

A company issues $150M of Debt with $6M in financing fees. What's the initial book value of the Debt recorded on the Balance Sheet?

Why do the less risky, lower-yielding tranches of Debt, like Term Loans, tend to have amortization, while riskier tranches like Subordinated Notes don't?

A company announces it now expects 20% revenue growth instead of 10%. How does this affect its Current and Implied Equity Value and Enterprise Value?

Why is a Levered DCF generally not recommended, even though it directly produces Implied Equity Value?

How might the financial statements of a company based in the U.K. or Germany look different from a U.S. company's, even though the underlying business is similar?

Why aren't Preferred Dividends tax-deductible, even though they reduce the income available to common shareholders?

An acquirer buys 90% of a company for $810M (paid in a mix of cash and stock). The seller's LTM Revenue is $260M and LTM EBITDA is $78M. Its most recent Balance Sheet shows $95M of Debt and $30M of Cash. Calculate the implied TEV/Revenue and TEV/EBITDA multiples.

A company's Depreciation increases by $60. Walk through the three statements, assuming a 25% tax rate.

Are there rules about including deals for less than 100% of a company, or about stock vs. cash consideration, when building a set of Precedent Transactions?

Walk me through the three financial statements.

Why might one company want to buy another company?

A company has $400M in Equity Value and Net Income to Common of $40M. What's its P/E multiple?

An LBO's initial Investor Equity is $700M, and the Exit Equity Value before options is $1,400M, with a 5% options pool. Using the quick-and-dirty method, what's the PE firm's exit proceeds after the options pool?

An Acquirer purchases a Target for a $1.2 billion Equity Purchase Price. The Target has $700M in Common Shareholders' Equity and no existing Goodwill. The Acquirer writes up PP&E and Other Intangible Assets by $150M, at a 25% tax rate. How much Goodwill is created?

Why might a company issue debt at an Original Issue Discount (OID) instead of at par?

What's the one place Purchase Price Allocation still matters in an LBO, despite generally mattering less than in an M&A deal?

Why can a Combined Company's Debt/EBITDA ratio right after a deal closes be a misleading, "deceptive" number?

Why is a floating interest rate more common on Secured Debt than on Unsecured Debt in an LBO?

A single $100M cash flow arrives in Year 3 of a DCF with a 10% WACC. Calculate its Present Value using a standard (year-end) discount period, then again using the mid-year convention, and compare.

An Acquirer purchases a Target for a $900M Equity Purchase Price. The Target has $500M in Common Shareholders' Equity, $20M of existing Goodwill, and a $15M existing Deferred Tax Asset that gets written off in the deal. The Acquirer writes up the Target's PP&E by $80M, at a 25% tax rate. Calculate the Goodwill created.

Walk me through the four steps of a Public Comps analysis.

A company has 2 million shares outstanding at an $80.00 share price. It has $15 million of convertible bonds with a $60.00 conversion price. How many new shares would the bonds create if converted?

Using the same structure (MAX(2.0% floor, benchmark) + 4.0% spread), if the benchmark rate rises to 5.5%, what interest rate does the company pay?

How can an LBO analysis be used as a standalone valuation check, separate from its use as a private equity returns model?

An acquirer buys 70% of a company for $350M. What's the implied Purchase Equity Value for 100% of the company?

A PE firm buys a $150M EBITDA company for an 8.0x multiple, funded with 55% Debt. What's the Investor Equity?

A company has Net Income of $28M and average Shareholders' Equity of $350M. What's its ROE?

A company's Year 0 Revenue is $500M, from 10 million units sold at a $50 average price. In Year 1, it sells 11 million units at an average price of $53. Attribute the total Revenue growth between the Volume effect and the Pricing effect.

Why would a company's own management team view the same Football Field differently than a hostile acquirer would?

A company has Net Income of $45M and average Shareholders' Equity of $300M. What's its Return on Equity?

What are the advantages and disadvantages of each purchase method (Cash, Debt, and Stock) in M&A deals?

Why does using the mid-year convention increase a DCF's Implied Value?

A company has Days Sales Outstanding of 40, Days Inventory Outstanding of 55, and Days Payable Outstanding of 35. What's its Cash Conversion Cycle?

A company incurs $160 in operating expenses but doesn't pay cash yet, recorded as an increase in Accounts Payable. Walk through the three statements, assuming a 25% tax rate.

A Term Loan tranche amortizes at 15% of its original $400M principal each year, but only $45M of the loan remains outstanding. How much is repaid this year?

A waterfall structure gives management (Investor Group A) 10% of proceeds up to a 15% IRR, then 20% of proceeds above a 15% IRR (with the PE firm, Investor Group B, receiving the rest each tier). The deal generates $600M in Exit Equity Proceeds, corresponding to an 18% IRR. The proceeds level corresponding to exactly a 15% IRR is $500M. How much does each investor group receive?

A company's Working Capital increases from $120 to $200 over the year. What's the Change in Working Capital shown on its Cash Flow Statement?

How do you decide whether to pair a valuation metric with Equity Value or Enterprise Value?

A company has an Enterprise Value of $1,400M and EBITDA of $175M. What's its TEV/EBITDA multiple?

Why does a Management Rollover effectively reduce the amount the PE firm has to fund, even though the headline Purchase Enterprise Value doesn't change?

A company has NOPAT of $60M and average Invested Capital of $400M. What's its ROIC?

A company buys equipment for $840K with a 7-year useful life, depreciated straight-line. What's the annual depreciation expense?

Company A has a P/E of 12x, a Debt interest rate of 7%, a Cash interest rate of 3%, and a 25% tax rate. It wants to acquire Company B at a purchase P/E multiple of 14x using 1/3 Stock, 1/3 Debt, and 1/3 Cash. Determine whether the deal is accretive or dilutive.

What's a net operating loss carryforward, and how does it show up on the balance sheet?

Why do practitioners generally use the Unlevered DCF rather than the Levered DCF or APV Analysis?

What does a Noncontrolling Interest (NCI) on the balance sheet actually represent?

Why is stable, predictable cash flow more important than growth potential for a typical LBO candidate?

A company's agreed Purchase Enterprise Value is $1,000M, with a Working Capital target of $80M at deal close. At close, the company's actual Working Capital is only $55M. Calculate (a) the adjusted Purchase Enterprise Value line on the Uses side, (b) the separate Working Capital funding entry, and (c) confirm the PE firm's total payment is unchanged.

A company has Total Debt of $350M and EBITDA of $70M. What's its leverage ratio?

A company has 60 million shares outstanding at a $12.00 per-share purchase price. Existing management rolls over 9 million of those shares instead of cashing out. How much does the Rollover reduce the PE firm's required funding by?

A company issues $150 of Debt with $9 in Issuance Fees, amortized straight-line over 3 years. What's the annual Amortization of Issuance Fees?

A company's final projected year of FCF is $50M, its WACC is 10%, and its Terminal Growth Rate is 3%. What's its Terminal Value under the Perpetuity Growth Method?

What are the tradeoffs between TEV/EBITDA, TEV/EBIT, and P/E as valuation multiples?

Why does a company issuing a Convertible Bond split it into separate Liability and Equity components at issuance?

A company's most recent fiscal-year (annual) Revenue was $550M. Its most recent interim period this year was $310M, and the same interim period last year was $275M. What's its LTM Revenue?

Why do LBO models focus on EBITDA and TEV/EBITDA rather than Free Cash Flow-based or Equity Value-based multiples for the purchase and exit assumptions?

What's the difference between the equity method and consolidation accounting, and what determines which one applies?

How do you treat a convertible bond when calculating a company's Cost of Debt for WACC?

A company issues debt and uses the proceeds to buy back stock, which increases its EPS. Why should you be skeptical of that improvement?

What's the difference between IRR and MOIC?

What's the difference between Defined-Contribution and Defined-Benefit pension plans, and why is the accounting so much more complex for the latter?

Why can't you just take a simple average, or a weighted average, of the Buyer's and Seller's standalone multiples to determine the Combined Multiple?

A company has EBIT of $200M, a 28% tax rate, D&A of $40M, CapEx of $60M, and an increase in Net Working Capital of $10M. What's its Unlevered FCF?

A PE firm invests $400M and exits after 5 years with $1,000M in proceeds. What's the approximate IRR?

Why is the majority of a company's Pension Expense on the income statement non-cash?

What are the main mechanical differences between a Levered DCF and a standard Unlevered DCF?

Beginning Cash is $40M, Mandatory Debt Repayments are $90M, Free Cash Flow is $60M, and Minimum Cash required is $80M. How much must the company draw on its Revolver?

Why is TEV/EBITDA considered a somewhat flawed multiple for estimating Terminal Value, even though it's the most commonly used one?

Company A: Enterprise Value $180M, Equity Value $150M, EBITDA $18M, Net Income $7.5M, 50% tax rate. Company B: Enterprise Value $70M, Equity Value $70M, EBITDA $14M, Net Income $3.5M, same tax rate. Company A acquires Company B using 100% Cash, paying no premium, with a 4% Foregone Interest Rate on Cash. Calculate the Combined TEV/EBITDA and P/E multiples.

Why is it problematic to run a DCF on an early-stage biotech with no approved products and no reliable cash flow forecast?

A company's final projected year of EBITDA is $120M, and you're assuming an 8.0x exit multiple. What's its Terminal Value under the Multiples Method?

Where does the Cost of Preferred Stock rank between Cost of Debt and Cost of Equity, and why?

Why is it not arbitrary to pair Net Assets with Common Shareholders (Equity Value), but Net Operating Assets with All Investors (Enterprise Value)?

A company has $600M of Equity and $400M of Debt in its capital structure (at market value). Its Cost of Equity is 12%, its Cost of Debt is 6%, and its tax rate is 25%. What's its WACC?

Walk me through the 5 basic steps of building an LBO model.

How does a merger differ from an acquisition?

When reviewing a CIM on a potential LBO candidate, what's the efficient order to work through it, and why?

What IRR and MoM multiple do PE firms typically target, and how does a longer average holding period change the targeted multiple?

A Term Loan's rate is set at MAX(2.0% floor, benchmark rate) + 4.0% spread. If the benchmark rate is currently 1.2%, what interest rate does the company pay?

A company has EBIT of $80M, a 25% tax rate, D&A of $15M, CapEx of $20M, and an increase in Net Working Capital of $5M. What's its Unlevered FCF?

How does a higher corporate tax rate affect WACC, and does it make a DCF's Implied Value go up or down overall?

A company has Pension Liabilities of $300M and Pension Assets of $220M. Contributions are tax-deductible at a 25% tax rate. How much should be added to Enterprise Value for this pension?

A sponsor buys a company for $500M (10x EBITDA of $50M), funded with 60% debt / 40% equity. In year 5, EBITDA has grown to $65M, debt has been paid down to $150M, and the exit multiple is still 10x. What's the IRR and MOIC?

How does a Management Rollover affect the Sources & Uses schedule in an LBO?

A company has Days Sales Outstanding of 50, Days Inventory Outstanding of 30, and Days Payable Outstanding of 20. What's its Cash Conversion Cycle?

Why do companies focus so much on EPS in M&A deals, even though it's not the same thing as cash flow?

A company has Total Debt of $90M and EBITDA of $60M. What's its leverage ratio?

A company buys Inventory throughout the year; prices rose from $8/unit to $18/unit. It sells 25 units. Under LIFO, what's the COGS?

How do you determine how much Debt a PE firm might use in an LBO, and how many tranches to include?

A company has EBITDA of $150M and Interest Expense of $25M. What's its interest coverage ratio?

What is the "true price" in an M&A deal, the Purchase Equity Value or the Purchase Enterprise Value? Why?

Two companies produce identical total Free Cash Flow over 10 years. Company A earns 90% of it in Year 1; Company B earns it evenly across all 10 years. Which has the higher DCF valuation, and why is this a trick question?

A company's Enterprise Value is $1,500M. It has $80M of Cash, $250M of Debt, $40M of Preferred Stock, and 60M diluted shares outstanding. What's its Implied Share Price?

How does an Earn-Out affect a PE firm's IRR in an LBO?

A company has NOPAT of $45M and average Invested Capital of $900M. What's its ROIC?

A company has accumulated $600M in net operating losses. At a 25% tax rate, what's the value of the resulting deferred tax asset?

What's the difference between levered and unlevered free cash flow?

A company has EBIT of $200M and a 25% tax rate. What's its NOPAT?

A company has Enterprise Value of $600M and net debt of $80M. What's equity value?

Parent Co. already owns a 25% stake in Sub Co. (equity method). This year, Sub Co. earns $160 in Net Income and pays $60 in Dividends. Walk through the impact on Parent Co.'s three statements.

Why might an Acquirer choose to use Stock or Debt even if it could technically pay for the Target with 100% Cash?

An Acquirer purchases a Target for a $700M Equity Purchase Price. The Target's Common Shareholders' Equity is $900M, with no write-ups or other adjustments. Since negative Goodwill isn't allowed, what Extraordinary Gain gets recorded?

Why do we add back stock-based compensation on the cash flow statement, but still treat it as a real cost to the company in valuation?

Would a PE firm rather achieve a high IRR or a high MoM multiple in a leveraged buyout?

Is there a shortcut for guesstimating accretion/dilution in a 100% Stock deal?

What does an Adjusted Present Value (APV) analysis add on top of a standard Unlevered DCF?

Why might a PE firm choose more expensive Subordinated Notes over cheaper Term Loans?

What do the Debt/EBITDA, EBITDA/Interest, and FCF Conversion ratios tell you about how an LBO is performing?

A company's Cash Flow Statement starts with Operating Income instead of Net Income. What should you do before using it in a model?

A company buys $300K of equipment entirely with a new bank loan on January 1. Over the year, it pays 8% interest on the loan, repays 10% of the principal, and depreciates the equipment straight-line over 5 years. Assume a 25% tax rate. Walk through the year's impact on the income statement, cash flow statement, and balance sheet.

Comp A has a Levered Beta of 1.3, Debt/Equity of 0.5, and a 25% tax rate. Comp B has a Levered Beta of 1.1, Debt/Equity of 0.2, and the same 25% tax rate. Your target company has a Debt/Equity ratio of 0.4 and the same 25% tax rate. Unlever both comps, average them, and relever for the target.

For a 10-year explicit forecast period, why do you discount the Terminal Value using a discount period of 10, not 11, even though Terminal Value represents cash flows starting in Year 11?

Should you add back Stock-Based Compensation when calculating Free Cash Flow in an LBO model?

A company's NTM TEV/EBITDA multiple is 10.0x, and its projected EBITDA for the 12-24 month period from now is $180M. What's its Future Enterprise Value in a Future Share Price Analysis?

A company can grow by selling more units, raising prices, or cutting costs, all by the same percentage. Which improves EBITDA the most, and why?

Why might a PE firm use Preferred Stock to fund part of a deal, even though it's more expensive than any form of Debt?

If the exit multiple is lower than the entry multiple, can an LBO still generate strong returns? How?

A private company has $180M of EBITDA and is being acquired at a 9.0x EBITDA multiple in a cash-free, debt-free deal. New Debt will be $700M. Minimum Cash required is $30M. Transaction and financing fees total $25M. Calculate the required Investor Equity.

A company has a Days Sales Outstanding of 5 and a Days Payable Outstanding of 60. What does that combination tell you about the company?

What could trigger Multiple Expansion in an LBO, and is it a defensible assumption to underwrite a deal to?

A PE firm acquires a company for a $1,500M Purchase Enterprise Value. The company's identifiable net tangible and intangible assets, after write-ups, are valued at $900M. How much Goodwill is created?

Should you generally include expected synergies from a deal when calculating Precedent Transaction multiples?

Company A has an Equity Value of $100M, Net Income of $5M, and a 50% tax rate. It acquires Company B for a $50M Purchase Equity Value (no premium) using 100% Debt at a 10% interest rate. Company B's Net Income is $2.5M, at the same tax rate. What's the Combined P/E multiple?

Continuing the same companies (Company A: Enterprise Value $180M, Equity Value $150M, EBITDA $18M, Net Income $7.5M; Company B: Enterprise Value $70M, Equity Value $70M, EBITDA $14M, Net Income $3.5M; 50% tax rate for both), if Company A instead uses 100% Debt at an 8% interest rate to fund the deal with no premium, what are the new Combined TEV/EBITDA and P/E multiples?

A company's Enterprise Value is $1,200M. It has $150M of Cash, $300M of Total Debt, $50M of Preferred Stock, $20M of Noncontrolling Interests, and 80M diluted shares. Bridge from Enterprise Value to Implied Share Price.

A company's Working Capital increases from $80 to $150 over the year. What's the Change in Working Capital shown on its Cash Flow Statement?

Company A's standalone EPS is $1.50. After an acquisition, its Combined EPS is $1.80. What's the percentage accretion?

Could you construct a company's Income Statement using only its Balance Sheet and Cash Flow Statement? Why or why not?

Are there cases where EPS accretion/dilution isn't that important? What else could you look at instead?

Using the approximation IRR ≈ (100% / Years) × 75% for a 2x multiple, estimate the IRR for a 2x multiple achieved over 4 years.

Exit Enterprise Value is $2,000M and Net Debt at exit is $350M. What are the Exit Equity Proceeds?

A target company has $800M of Equity Value and $200M of Debt. The unlevered Beta from its comps is 0.85, its tax rate is 25%, the Risk-Free Rate is 4%, the Equity Risk Premium is 5.5%, and its pre-tax Cost of Debt is 6%. Build its WACC from scratch.

Are cash-free, debt-free deals really economically different from standard M&A deals?

A company has 200 million shares outstanding at a $15.00 share price. It has 20 million options outstanding at a $9.00 exercise price. What's its Diluted Equity Value, using the Treasury Stock Method?

What does it mean if your target company's growth rates and margins are in line with its Comps, but it trades at noticeably lower multiples?

What's the difference between Return on Equity and Return on Invested Capital, and when would you prefer one over the other?

A PE firm acquires a $150M EBITDA company using 50% Debt at an 8.0x purchase multiple. By Year 3, EBITDA has grown to $225M and the exit multiple stays the same. Assuming the company generates no extra Cash and repays no Debt beyond what's already required, what's the minimum MoM multiple the PE firm could realize?

Why must every line item in Unlevered FCF be available to all investor groups, not just equity holders?

Why should you never screen Comparable Companies using both a financial metric (like Revenue) and a valuation metric (like Enterprise Value) at the same time?

Beginning Cash is $30M, Free Cash Flow is $50M, Mandatory Debt Repayments are $70M, and Minimum Cash required is $40M. How much must the company draw on its Revolver?

Why do Deferred Tax Liabilities get created in most M&A deals?

A company sells equipment listed at $180 on its balance sheet for $140 in cash. Walk through the three statements, assuming a 25% tax rate.

If a PE firm splits its investment 1/3 Preferred Stock (with a 12% coupon) and 2/3 Common Equity, and the Common Equity achieves a 25% IRR, does the blended return end up above or below 25%? Why?

Two companies have the same amount of Debt, the same Operating Income, the same tax rate, and the same Equity Value, but one has Convertible Debt and the other has traditional Debt. Which company has the higher P/E multiple, and why?

A company's EBITDA has grown 20% a year for three years, but it just filed for bankruptcy. How is that possible?

A company has Net Income of $60M and average Shareholders' Equity of $400M. What's its ROE?

A PE firm buys a company for $200M EBITDA at an 8.0x purchase multiple, using $800M of Debt and $800M of Investor Equity. By Year 5, EBITDA has grown to $280M and the exit multiple is 9.0x. The company has repaid $300M of Debt and generated no extra Cash. Calculate the Returns Attribution: how much of the total return comes from EBITDA Growth, Multiple Expansion, and Debt Paydown.

A PE firm invests $900M total in a deal: $300M in Preferred Stock with a fixed 12% coupon (accrued as PIK, paid at exit) and $600M in Common Equity. At exit in Year 5, the Common Equity portion is worth $2,100M (a 3.5x multiple on the Common investment). Calculate the Preferred Stock's exit value using simple, non-compounded accrual, and the total blended MoM multiple on the full $900M investment.

What is the 'Football Field' chart used for in a valuation, and why use a range instead of a single number?

Why can a company's reported Net Income sometimes exceed its Pre-Tax Income?

What is a comparable companies analysis?

A company has 150 million shares outstanding at a $12.00 share price. It has 30 million options outstanding at a $20.00 exercise price. What's its Diluted Equity Value?

How can you estimate the interest rate on a company's Debt in an LBO if there's no comparable Debt data available?

A company has 20,000 shares outstanding at a $25.00 share price. It has 200 options outstanding at a $15.00 exercise price, 150 RSUs outstanding, and 300 convertible bonds outstanding, each with a $150 par value and a $20.00 conversion price. It also has Cash of $50,000, Debt of $180,000, and Noncontrolling Interests of $60,000. Calculate its Diluted Equity Value and its Enterprise Value.

An Acquirer has an Equity Value of $600M and Enterprise Value of $720M, with 120 million shares outstanding at $5.00 per share. It acquires a Target with an Equity Value of $120M and Enterprise Value of $180M, paying a 25% premium in a 100% Stock deal. A few months later, the market decides this 25% premium wasn't justified. Calculate the Combined Equity Value and Enterprise Value immediately after announcement and again after the market's reaction, and find the Acquirer's new share price.

An LBO has $500M of Investor Equity and a 10% options pool. At exit, the Exit Equity Value (before accounting for the options) is $1,000M. Using the precise method that grosses up the share count, calculate the Cash from Management Options, the Equity to Management Options, and the PE firm's final Exit Equity Proceeds.

Why do you subtract Cash when moving from Equity Value to Enterprise Value? Is it because Cash is "the opposite" of Debt?

How do you pick comparable companies for a comps analysis?

A company has Net Income of $18M and average Total Assets of $600M. What's its ROA?

Company A has 10 million shares at $20.00 (a $200M Equity Value) and Net Income of $20M (a $2.00 standalone EPS, a 10x P/E). It acquires Company B for a $60M Purchase Equity Value in a 100% Stock deal; Company B's Net Income is $8M (a 7.5x Purchase P/E), same tax rate. Calculate the accretion. Then, suppose Company A were instead twice as big, with an Equity Value of $400M and Net Income of $40M (same $20.00 share price, so 20 million shares), acquiring the SAME Company B on the same terms. Calculate the new accretion, and compare the two results.

Walk me through how a $10 increase in depreciation flows through all three financial statements, assuming a 30% tax rate.

A company has EBITDA of $40M and Debt/EBITDA of 3.0x. What's total debt?

Why might a PE firm recommend a deal even when the numbers look underwhelming across the board?

A company issues $150M of Preferred Stock to fund a $150M Common Stock repurchase. How do Equity Value and Enterprise Value change, and why is this a useful counter-example to the "Net Assets" shortcut?

Parent Co. owns 65% of Sub Co., which has a Market Cap of $300M. What's the value of the Noncontrolling Interest based on Market Cap?

A company has Net Income of $99M and average Shareholders' Equity of $450M. What's its ROE?

What does the 'tax shield' from Debt mean in an LBO, and how big of an impact does it actually make?

A company has $900M of Equity and $300M of Debt. Its Cost of Equity is 11%, its Cost of Debt is 7%, and its tax rate is 24%. What's its WACC (rounded to one decimal)?

A company has 400,000 basic shares outstanding. Its Treasury Stock Method calculation for options yields 15,000 net new shares, and it also has 25,000 RSUs outstanding. What's its Diluted Share Count?

A company has 2,000K shares outstanding at $2.00 per share and Net Income of $500K (EPS of $0.25). It raises $300K of Debt at 5% interest and uses the full amount to repurchase shares at $2.00 each. Walk through the immediate impact of the buyback, then the impact after one year of interest expense, including the effect on EPS. Assume a 25% tax rate.

Using Company A (Enterprise Value $200M, EBITDA $20M) and Company B (Purchase Enterprise Value $100M, EBITDA $20M) from before, what's the Combined TEV/EBITDA multiple after the deal?

A company has a $400 Face Value bond with 3% cash interest and 5% PIK interest. What's the total Interest Expense in Year 1?

If you use the Multiples Method to calculate Terminal Value, should you use multiples from Public Comps or Precedent Transactions?

Why do smaller companies generally have a higher WACC than larger companies, all else equal?

A company holds $250 in Trading/FVPL Equity Securities and records an Unrealized Loss of $60 on them this year. Walk through the impact on all three statements, assuming a 25% tax rate.

Your company acquires a target for $400, split 50/50 between new Debt and new Common Stock. The target has $240 in Assets, no Liabilities, and $240 in Common Shareholders' Equity. The purchase premium is split evenly between Goodwill and Other Intangible Assets. In Year 1, the acquired business contributes $150 in Revenue and $82 in OpEx, the Other Intangibles amortize over 5 years, and the new Debt carries a 6% interest rate. Walk through (1) the balance sheet immediately after the deal closes, and (2) the first year's impact on all three statements. Assume a 25% tax rate.

A company decides to prepay an entire year of rent upfront in exchange for a discount, rather than paying month to month. Does this improve its cash flow?

When calculating WACC, should you use Total Debt or Net Debt, and does the choice matter?

Why might a sponsor prefer more debt tranches (e.g., a term loan plus high-yield bonds) instead of a single loan?

An Acquirer has a P/E multiple of 18x. The Seller has a Purchase P/E multiple of 22x. In a 100% Stock deal, is this accretive or dilutive?

Company A has an Enterprise Value of $150M, an Equity Value of $120M, EBITDA of $15M, and Net Income of $6M. Company B has a Purchase Enterprise Value of $60M, a Purchase Equity Value of $54M (implying $6M of Net Debt), EBITDA of $10M, and Net Income of $3M. Both have the same tax rate. Calculate the Combined TEV/EBITDA and P/E multiples in a 100% Stock deal.

What are the main problems or limitations of merger models?

The median premium across a set of Precedent Transactions is 30%. Your target company's current share price is $14.00. What's its implied share price using the M&A Premiums method?

How does an Acquirer typically determine the mix of Cash, Debt, and Stock to use in a deal?

A company has $750M of Equity and $250M of Debt. Its Cost of Equity is 10%, its Cost of Debt is 5%, and its tax rate is 30%. What's its WACC (rounded to one decimal)?

A company's Working Capital decreases from $300 to $180 over the year. What's the Change in Working Capital shown on its Cash Flow Statement?

What does the Change in Working Capital tell you about a company's business model, and why might it be positive for one company and negative for another?

Why do you typically look at both a sales-based multiple and one or two profitability-based multiples in Comps and Precedent Transactions, rather than just one?

An Acquirer has a Current Enterprise Value of $1,800M and a Current Equity Value of $1,500M (implying $300M of Net Debt). It contributes 72% of the Combined Company's EBITDA in a proposed 100% Stock deal. The Target has 40 million shares outstanding and, for simplicity, no Net Debt of its own. Calculate the Combined Pro-Forma Enterprise Value, the Target's Implied Enterprise Value, its Implied Equity Value, and its Implied Offer Price per Share.

A company has EBITDA of $60M and Interest Expense of $12M. What's its interest coverage ratio?

A company issues $80M in Common Stock and uses the full proceeds to acquire a factory (an Operating Asset) for $80M. By how much does its Enterprise Value change?

A private company has $220M of EBITDA and is acquired at a 9.5x multiple in a cash-free, debt-free deal. New Debt is $950M at face value, with $15M in financing fees. Minimum Cash required is $40M, and legal and advisory fees total $20M. Calculate the required Investor Equity and the Debt's initial book value on the Balance Sheet.

Where does an increase in inventory show up across the three financial statements?

How do you select the Purchase Multiple and Exit Multiple differently for a public LBO target versus a private one?

An acquirer buys 60% of a company for $420M. What's the implied Purchase Equity Value for 100% of the company?

A company issues $100M of Debt and does nothing with the proceeds. How do Equity Value and Enterprise Value change?

A company's Pension Liability (Projected Benefit Obligation) is $600M and its Pension Plan Assets are $450M. What's its Unfunded Pension?

An Acquirer has an Equity Value of $700M. It acquires a Target for a $220M Purchase Equity Value in a 100% Stock deal. What's the Combined Equity Value?

An Acquirer has an Enterprise Value of $700M. It acquires a Target with a Purchase Enterprise Value of $200M in a 100% Stock deal. What's the Combined Enterprise Value?

A company has accumulated $150M in net operating losses. At a 30% tax rate, what's the value of the resulting deferred tax asset?

The 2019 accounting rule change put Operating Leases on the balance sheet for the first time. Did this meaningfully change how you build a DCF?

A comparable company has a Levered Beta of 1.5, a Debt/Equity ratio of 0.6, and a 25% tax rate. What's its Unlevered Beta (rounded to two decimals)?

Continuing the same deal: instead of holding steady at 9.0x, the company's EBITDA multiple declines by roughly 10% per year in Years 4 and 5 (from 9.0x to about 8.0x to about 7.0x). Estimate the new average exit multiple and the resulting IRR.

What's the difference between goodwill and other intangible assets created in an acquisition?

Expected Synergies are $50M per year, valued as a simple growing perpetuity at a 10% Discount Rate with 2% long-term growth. What's the approximate Present Value of these Synergies?

What is a precedent transactions analysis and how does it differ from a comparable companies analysis?

Why doesn't using leverage in an LBO actually 'increase' returns?

A company grants $200 in stock-based compensation to employees. Walk through the three statements, assuming a 25% tax rate and using the simplified treatment where SBC results in cash-tax savings (the more precise treatment would show the Deferred Tax Asset increasing instead of cash, since SBC usually isn't cash-tax deductible when granted).

An Acquirer's Equity Value falls by $40M after the market decides its acquisition premium wasn't justified. It has 50 million shares outstanding. By how much does its share price fall?

What's the "true price" of a public company LBO, and why bother building a Sources & Uses schedule at all?

Walk through how a Contribution Analysis works for a 100% Stock M&A deal.

How do you calculate WACC?

What is a deferred tax liability, and when does it increase vs. decrease?

A company has EBIT of $120M, a 21% tax rate, D&A of $30M, CapEx of $45M, and a decrease in Net Working Capital of $8M. What's its Unlevered FCF?

A company's fiscal year ends June 30th. Its full fiscal-year Revenue was $300M. The June 30th-December 31st period this year was $170M, and the same period last year was $150M. What's its calendarized (December 31st) Revenue?

The APV method explicitly captures the tax benefit of debt that a standard Unlevered DCF only captures indirectly through WACC. Why do we still generally recommend against using it?

Continuing the same scenario (Acquirer Equity Value $600M, Enterprise Value $720M; Target Purchase Equity Value $150M, Purchase Enterprise Value $210M; $30M premium later deemed unjustified), how would the Combined Equity Value and Enterprise Value differ if the deal had instead been funded with 100% Debt or Cash rather than Stock?

A company has $300M of Subordinated Notes with a declining call premium schedule: 105% of principal in Year 3, and 100% (no premium) from Year 8 onward. If a PE firm exits in Year 3 with an Exit Enterprise Value of $1,000M, versus waiting until Year 8 when the Exit Enterprise Value has grown to $1,150M, calculate the Exit Equity Proceeds in each scenario. Assume no other Debt besides the $300M Notes and no Cash generated in either case.

An Acquirer has a Cash balance of $180M and requires $60M of Minimum Cash. How much Cash is available to fund an acquisition?

A common misconception is that recent accounting rule changes eliminated the Available-for-Sale and Held-to-Maturity categories entirely. What actually changed?

Why does a Stub Period require using XIRR instead of the standard IRR function?

How is Free Cash Flow in an LBO model different from Free Cash Flow in a DCF?

What is terminal value and how do you calculate it?

Could a company's Current Equity Value ever be negative? Could its Current Enterprise Value?

What's the fundamental idea behind a DCF, and how does it differ from a relative valuation method?

If the Purchase Enterprise Value is the "true price," why are most M&A models built around the Purchase Equity Value instead?

Why might a PE firm reject a deal even when the IRR and MoM multiples look favorable in every case?

A company's post-deal leverage implies a BB credit rating, corresponding to a 4.5% default spread. The 10-year government bond yield is 3.5%. What interest rate should you assume on this company's Debt?

A company sells equipment listed at $150 on its balance sheet for $210 in cash. Walk through the three statements, assuming a 25% tax rate.

A company grants $60 of SBC that's not initially cash-tax deductible. By the time employees exercise their options, it's worth $180. Walk through the tax impact at grant and at exercise, assuming a 25% tax rate and U.S. GAAP treatment.

Company A has $300M of projected Operating Income and $15M of projected Interest Income. Company B has $120M of projected Pre-Tax Income. Company A acquires Company B using $150M of Cash (4% Foregone Interest Rate) and $200M of new Debt (6% Interest Rate). Company A's tax rate is 25%. Calculate the Combined Pre-Tax Income, Combined Net Income, and Combined EPS, given Company A has 40M shares outstanding.

A PE firm wants a 15% IRR over 5 years (~2.0x multiple) and expects Exit Equity Proceeds of $900M. What's the most Investor Equity it can contribute?

A company's fiscal year ends March 31st, with full fiscal-year EBITDA of $108M. Its March-December results this year were $91M of EBITDA, and the same March-December period last year was $73M. Calendarize its EBITDA to a December 31st basis, then apply a 7.0x multiple to estimate Enterprise Value.

A company issues $250 of Debt on January 1 at 8% interest and repays 12% of the principal by year-end. Walk through the full year's impact on all three statements, assuming a 25% tax rate and ignoring what the debt proceeds were used for.

A company has $200M of Subordinated Notes outstanding at exit, and the applicable call premium at this point in the schedule is 103% of principal. How much cash does the company need to fully retire this Debt?

A Combined Company has $500M of Debt and $100M of EBITDA immediately after a deal closes (5.0x Debt/EBITDA). It generates $80M of annual Free Cash Flow available for Debt repayment, and its EBITDA grows 5% per year. Calculate its Debt/EBITDA ratio at the end of Year 1 and Year 2, assuming all Free Cash Flow each year goes toward Debt repayment.

A company prepays $120 in insurance for future coverage. Walk through the three statements at the moment of prepayment.

A company buys equipment for $450K with a 9-year useful life, depreciated straight-line. What's the annual depreciation expense?

A company has $200M of accumulated Net Operating Losses (NOLs) it can use to shelter future taxable income, but tax rules cap usage at $40M per year. In Year 1 post-deal, the company's Pre-Tax Income is $70M, and the tax rate is 25%. Calculate the company's cash taxes paid in Year 1, with and without the NOL shield, and the resulting cash tax savings.

A company's Working Capital increases from $50 to $95 over the year. What's the Change in Working Capital shown on its Cash Flow Statement?

You're valuing a company on April 30th (245 days remain in the 365-day year) and using both a stub period and the mid-year convention. What's the discount period for the first year's cash flow?

Why might a company's Free Cash Flow in a given year differ from its Cash Flow Available for Debt Repayment in that same year?

An acquirer buys a target for $600M in cash. The target's Common Shareholders' Equity is $350M. The deal allocates $100M to identifiable intangible assets, with the rest going to goodwill. Walk through what happens to the acquirer's balance sheet.

Why do cash flow sweeps typically apply only to certain Debt tranches, like Term Loans, and not others, like Subordinated Notes?

What's the difference between an operating lease and a capital (finance) lease?

A 10-year DCF has a stub-adjusted discount period of 9.334 for the last explicit forecast year. Under the Perpetuity Growth Method with the mid-year convention applied, what discount period should you use for the Terminal Value?

Why do you need both Equity Value and Enterprise Value instead of just one?

Why is the Perpetuity Growth Method generally considered more theoretically sound than the Multiples Method for calculating Terminal Value?

Why would you use EV/EBITDA instead of P/E as a valuation multiple?

Why isn't the private equity firm itself on the hook for the Debt used to fund an LBO?

How does a Dividend Discount Model (DDM) differ from a DCF, and when is it most useful?

Why does an increase in a company's Working Capital reduce its cash flow, even though "more working capital" sounds like a good thing?

Why does Goodwill never get subtracted in the Equity Value to Enterprise Value bridge?

In a cash-free, debt-free LBO of a private company, what happens to the target's existing Cash and Debt?

A 10-year DCF values a company on August 31st, giving a stub-adjusted discount period of 9.334 for the final explicit forecast year. Calculate the Terminal Value discount period under both the Multiples Method and the Perpetuity Growth Method (with the mid-year convention), and explain why they differ.

A company trades at 12x TEV/EBITDA, with total EBITDA of $150M (Enterprise Value = $1,800M). It sells an Operating Asset contributing $30M of that EBITDA for 3.0x the Asset's own EBITDA. What's the company's new TEV/EBITDA multiple after the sale?

Why does every LBO model need a Minimum Cash assumption?

A PE firm invests $500M and receives $1,250M in Exit Equity Proceeds after 5 years, with no interim Dividends. Using the quick rules of thumb, what's the approximate IRR?

A company has EBIT of $80M and a 30% tax rate. What's its NOPAT?

An LBO's Investor Equity is $600M, and without any Dividend Recap, the Exit Equity Proceeds in Year 5 would be $1,500M. Instead, the PE firm executes a $500M Dividend Recap in Year 3, reducing the Year 5 Exit Equity Proceeds to $1,000M. Estimate the approximate IRR using the average exit year method, and compare it to the no-recap baseline.

What is working capital and why does it matter?

A company has $1,000 of NOLs at a 25% tax rate. The NOLs expire in Year 3, and the company expects $200 of Pre-Tax Income each year in Years 1 through 3. What Valuation Allowance should it record against the NOL Deferred Tax Asset?

A company's final projected year of FCF is $100M, its WACC is 9%, and its Terminal Growth Rate is 2%. What's its Terminal Value under the Perpetuity Growth Method?

Five comparable companies: A ($900M EV, $120M EBITDA), B ($750M EV, $100M EBITDA), C ($1,200M EV, $140M EBITDA), D ($600M EV, $90M EBITDA), E ($1,050M EV, $115M EBITDA). Your target has $105M of EBITDA, $150M of Debt, $45M of Cash, and 40M diluted shares. Calculate the median multiple and walk to an implied share price.

Why do Precedent Transaction multiples tend to be higher than Public Comps multiples for similar companies?

Why does an interest rate floor matter for a floating-rate Term Loan, and how is it typically structured?

After Mandatory Repayments, a company has $140M of Cash Flow Available for Debt Repayment. With a 40% cash flow sweep, how much of the remaining Debt is optionally repaid?

What's the difference between a company's Current Enterprise Value and the Implied Enterprise Value from a DCF, and why does the comparison matter?

A company signs a 10-year finance lease with a Present Value of $180 (already calculated from the future lease payments) and pays $25 in cash rent per year. The discount rate is 5%. Ignoring taxes, walk through the first year's impact on the income statement, cash flow statement, and balance sheet.

A company's Equity Value is $900M. It has Cash of $60M, Debt of $150M, a 25% Equity Investment stake carried at $40M on its Balance Sheet, and Noncontrolling Interests of $70M. What's its Enterprise Value?

If you were valuing a company's equity directly using free cash flow to equity (FCFE), what discount rate would you use, and why is that different from a standard DCF?

How does an increase in purchase price multiple affect LBO returns, all else equal?

A PE firm buys a $100M EBITDA company at a 10.0x multiple, using 5.0x Debt/EBITDA. It plans to exit in 5 years at the same 10.0x multiple, with no Debt repaid and no extra Cash generated. What EBITDA is needed to achieve a 25% IRR (~3.0x multiple)?

A PE firm wants to use 4.5x Debt/EBITDA to fund the acquisition of a $90M EBITDA company. How much Debt will it use?

How does increasing leverage (debt) in an LBO affect equity returns?

Could a company's Implied Equity Value or Implied Enterprise Value ever be negative?

A company's share price was $35.00 before a deal was announced, and the acquirer offered $42.00 per share. What premium did the acquirer pay?

An Acquirer has a Current Enterprise Value of $2,400M and contributes 80% of the Combined Company's Revenue in a proposed 100% Stock deal. Calculate the Combined Pro-Forma Enterprise Value based on Revenue, and the Target's Implied Enterprise Value.

An airline has Enterprise Value (excluding Operating Leases) of $2,000M, on-Balance Sheet Operating Leases of $500M, EBITDA (under U.S. GAAP, deducting the full Lease Expense) of $300M, and Rent Expense of $80M. Calculate EBITDAR and both the TEV/EBITDA and (TEV Including Operating Leases)/EBITDAR multiples.

How does a Working Capital target at deal close affect what the PE firm pays versus what selling shareholders receive?

A DCF's Terminal Value is $1,000M, the Discount Rate is 10%, and the Terminal Value falls at the end of Year 5. What's the Present Value of the Terminal Value?

How does depreciation affect free cash flow in a DCF?

Four comparable companies have the following Enterprise Values and EBITDA: Comp A ($800M EV, $100M EBITDA), Comp B ($650M EV, $95M EBITDA), Comp C ($1,100M EV, $130M EBITDA), Comp D ($500M EV, $70M EBITDA). Your target has $110M of EBITDA. Calculate the median multiple and the target's implied Enterprise Value.

Why should the Terminal Growth Rate never exceed the long-term GDP growth rate of the company's economy?

A company has Net Income of $75M and average Total Assets of $500M. What's its ROA?

Beginning Cash is $40M, Free Cash Flow for the year is $90M, Minimum Cash required is $60M, and there are no mandatory repayments this year. How much is available to repay Debt?

What do Equity Value and Enterprise Value actually mean? Don't explain how to calculate them, explain what they mean.

If an Acquirer is much bigger than a Target it's acquiring, is a 100% Stock deal more or less accretive than if the two companies were closer in size, holding both companies' P/E multiples fixed?

How can a PE firm reduce its downside risk in an LBO, beyond simply using less Debt?

A company has NOPAT of $84M and average Invested Capital of $700M. What's its ROIC?

A tranche of Debt amortizes at 20% of its original $150M principal each year, but only $18M remains outstanding. How much is repaid this year?

A company keeps recording "Loss on Debt Extinguishment" whenever it repays debt early. Why does this happen?

Would increasing revenue growth by 1 percentage point or increasing the Discount Rate by 1 percentage point make a bigger impact on a DCF's value?

A Seller has Net Income of $40M and a Purchase Equity Value of $500M. What's the Seller's Yield?

What is a dividend recapitalization (dividend recap)?

Company A has 15 shares outstanding at a $30.00 share price and Net Income of $22.5M (a $1.50 standalone EPS). It acquires Company B for a $180M Purchase Equity Value using 100% Debt at a 6% interest rate. Company B's Net Income is $12M. Both companies have a 25% tax rate. Calculate the Combined EPS and the accretion/dilution percentage.

What does "Unfunded Pension" mean, and why does it get added to Enterprise Value?

A company's EBITDA has grown to $250M by Year 5 and it's sold at a 9.0x exit multiple. What's the Exit Enterprise Value?

What are the main drawbacks of using an IRR vs. Discount Rate analysis to evaluate an M&A deal?

A company's capital structure is $700M of Equity, $200M of Debt, and $100M of Preferred Stock (at market value). Its Cost of Equity is 10%, its pre-tax Cost of Debt is 6%, its Cost of Preferred is 8%, and its tax rate is 25%. Build its WACC.

Why do you always use a company's Current Equity Value or Current Enterprise Value in Comps multiples, never a 'projected' future value?

Using CAPM, what's the Cost of Equity for a company with a Risk-Free Rate of 3.5%, a Beta of 0.9, and an Equity Risk Premium of 5.5% (rounded to one decimal)?

A company has an Enterprise Value of $1,200M, Revenue of $600M, EBITDA of $200M, EBIT of $150M, and Net Income to Common of $80M. Its Equity Value is $900M. Calculate TEV/Revenue, TEV/EBITDA, TEV/EBIT, and P/E.

A company issues a $300 Face Value bond with 4% cash interest and 6% PIK interest (ignore Issuance Fees). Walk through Year 1's impact on all three statements, assuming a 25% tax rate.

A company executes a $150M Dividend Recap with $4M in financing fees. By how much does its Cash balance decrease?

In a sources & uses table, what typically goes on each side?

Why might you use an M&A Premiums analysis to value a company, and what's a key limitation?

Parent Co. owns 70% of Sub Co. (consolidated) and this stays unchanged all year. Parent's standalone Net Income is $150 with $30 in Dividends; Sub Co.'s Net Income is $50 with $10 in Dividends. Walk through the year's impact on Parent's consolidated statements.

Why do you subtract Equity Investments but add Noncontrolling Interests when moving from Equity Value to Enterprise Value? Why do the two adjustments point in opposite directions?

A company's Term Loan has a $500M starting balance and amortizes 10% of its original principal annually. Beginning Cash is $40M, Free Cash Flow for the year is $150M, Minimum Cash required is $50M, and the cash flow sweep is 50%. Calculate the mandatory repayment, the optional (swept) repayment, and the Term Loan's ending balance.

A private Target has a Purchase Enterprise Value of $800M, Cash of $60M, Debt of $180M, and a Minimum Cash requirement of $40M. Calculate (a) the Purchase Equity Value the selling shareholders receive, and (b) the total deal funding required on the Uses side in a cash-free, debt-free structure, including $15M of Transaction/Financing Fees.

Walk me through how you'd build a DCF.

Why do you typically use median multiples rather than average multiples when summarizing a set of Comps?

How can a company artificially boost its Return on Equity by using leverage, and what would you check to catch it?

A company's Current Enterprise Value is $2,000M. Its Year 1 forward EBITDA estimate is $250M. What's its Year 1 forward TEV/EBITDA multiple?

Using CAPM, what's the Cost of Equity for a company with a Risk-Free Rate of 4.5%, a Beta of 1.4, and an Equity Risk Premium of 5%?

A company collects $300M upfront from a customer for a service not yet delivered (recorded as Deferred Revenue). One year later, it delivers the service, recognizing the full $300M as Revenue along with $180M of Operating Expenses, at a 25% tax rate. Walk through the entire process and calculate the net change in Equity Value and Enterprise Value from start to finish.

Name two ways a company's cash flow statement might look different if it reports under IFRS instead of U.S. GAAP.

A PE firm invests $300M and exits after 3 years with $900M in proceeds, with no interim cash flows. What's the approximate IRR?

Debunk the myth that Enterprise Value represents the "true cost to acquire a company."

How are Unrealized Gains and Losses treated differently for Trading (FVPL) securities versus Available-for-Sale (AFS) securities?

Initial Debt used in an LBO is $600M. Over the holding period, the company repays $200M of principal and generates no extra Cash. What's the Net Debt at exit?

A PE firm acquires a $100M EBITDA company at a 10.0x purchase multiple, using 50% Debt. In Year 5, EBITDA has grown to $160M and the company is sold at a 9.0x exit multiple. The company repaid $300M of the initial Debt over the holding period and generated no additional Cash. Estimate the approximate IRR.

What's the difference between equity value and enterprise value?

A company has EBIT of $120M and a 25% tax rate. What's its NOPAT (Net Operating Profit After Tax)?

A company issues a $150 Face Value Convertible Bond with a Liability Component of $110 (so an Equity Component of $40), $5 in Issuance Fees (straight-line amortization over 5 years), and a 2% coupon rate. Walk through (1) the initial issuance and (2) Year 1's impact on all three statements, assuming a 25% tax rate.

What's the core difference between an intrinsic valuation method like a DCF and a relative valuation method like Public Comps?

A PE firm invests $900M total: 1/3 in Preferred Stock earning a fixed 12% return, and 2/3 in Common Equity earning a 28% IRR. Approximately what's the blended IRR on the total investment?

Why do you use unlevered free cash flow instead of levered free cash flow in a standard DCF?

Walk me through a basic LBO model.

What are the advantages and disadvantages of a Sum-of-the-Parts valuation?

Why doesn't goodwill amortize the way other intangible assets do?

Using the same scenario (prices rose from $8/unit to $18/unit, 25 units sold), what's the COGS under FIFO?

A company buys equipment for $1,000K with a 10-year useful life, depreciated straight-line. What's the annual depreciation expense?

A company has EBITDA of $80M and Interest Expense of $10M. What's its interest coverage ratio?

A company has $80M of EBITDA and is acquired at a 9.5x EBITDA multiple. What's the Purchase Enterprise Value?

What's the issue with the "Pro-Forma EPS" figure many companies publish when announcing a deal?

An Acquirer's after-tax Cost of Debt is 6%, and it uses 60% Debt and 40% Cash (2% after-tax cost) to fund a deal. What's the Weighted Cost of Acquisition?

Why do you subtract only the Net Operating Losses within a company's Deferred Tax Asset, not the whole DTA, when calculating Enterprise Value?

If a company's Free Cash Flow is growing 15% in the final year of your explicit forecast but you've assumed a 2% Terminal Growth Rate, what's wrong, and how would you fix it?

A company projects $500M of Revenue with a 20% EBIT margin, a 25% tax rate, $25M of D&A, $35M of CapEx, and an $8M increase in Net Working Capital. Build its Unlevered FCF.

A company's most recent fiscal-year (annual) Revenue was $400M. Its most recent interim period this year was $220M, and the same interim period last year was $190M. What's its LTM Revenue?

A company's Unlevered Beta (from comps) is 0.9. Its own target Debt/Equity ratio is 0.8 and its tax rate is 21%. What's its relevered (Levered) Beta, rounded to two decimals?

What are the main ways Precedent Transactions differ from Public Comps in how you screen and calculate them?

What happens to a Convertible Bond's Liability and Equity components if it actually converts into shares before maturity?

What does a negative Beta mean, and is it realistic for most companies?

A company's share price was $20.00 before a deal was announced, and the acquirer offered $27.00 per share. What premium did the acquirer pay?

An LBO's initial Investor Equity is $600M, and the Exit Equity Value is $1,100M, before accounting for a 10% options pool. Using the quick-and-dirty method, what are the PE firm's exit proceeds after the options pool?

Company A has an Enterprise Value of $200M and EBITDA of $20M. What's its TEV/EBITDA multiple?

Why might a company choose to issue a Convertible Bond instead of a traditional bond?

What's the difference between accounts receivable and deferred revenue?

What's the difference between Basic Equity Value and Diluted Equity Value?

How do you attribute EBITDA growth between Volume and Pricing effects in an LBO model, and why does the distinction matter?

A company sells equipment listed at $200 on its balance sheet for $160 in cash. At a 25% tax rate, what's the resulting change in Net Income (state it as a positive or negative number)?

A PE firm is buying a $180M EBITDA company and plans to use 5.0x Debt/EBITDA split evenly between a Term Loan at 7% interest and Subordinated Notes at 10% interest. Assuming EBITDA stays flat in Year 1, calculate the company's EBITDA/Interest coverage ratio.

A comparable company has a Levered Beta of 1.8, a Debt/Equity ratio of 1.0, and a 28% tax rate. What's its Unlevered Beta (rounded to two decimals)?

Your target company has $65M of EBITDA, and the median TEV/EBITDA multiple across its Comps is 9.2x. What's the target's implied Enterprise Value?

What's the difference between EBIT and EBITDA, and why is EBITDA often used as a cash flow proxy?

A company has accumulated $200M in net operating losses. At a 25% tax rate, what's the value of the resulting deferred tax asset?

It's currently November 2026. A company's full-year 2025 Revenue was $800M. Its Q1-Q3 2026 Revenue was $650M, and its Q1-Q3 2025 Revenue was $580M. Its Current Enterprise Value is $3,000M, and consensus estimates project full-year 2026 Revenue of $900M and full-year 2027 Revenue of $990M. Calculate the company's LTM Revenue, LTM TEV/Revenue multiple, and both forward TEV/Revenue multiples.

A company has Total Debt of $180M and EBITDA of $45M. What's its leverage ratio?

What do the leverage ratio and interest coverage ratio each tell you about a company?

What's the practical difference between cash accounting and accrual accounting, using a sale made on credit as an example?

A company writes down a factory by $120 due to storm damage. Walk through the three statements, assuming a 25% tax rate (write-downs are not cash-tax deductible).

Company A has an Equity Value of $800M and Net Income of $80M (a 10x P/E). It acquires Company B for a $1,600M Purchase Equity Value in a 100% Stock deal; Company B's Net Income is $40M, at a 25% tax rate. How much in pre-tax Synergies are needed for the deal to be exactly neutral?

A company has Days Sales Outstanding of 20, Days Inventory Outstanding of 45, and Days Payable Outstanding of 50. What's its Cash Conversion Cycle?

Why do call premiums on Subordinated Notes push a PE firm toward a longer holding period?

A company's Enterprise Value is $2,000M. It has $100M of Cash, $300M of Debt, no Preferred Stock, and 100M diluted shares outstanding. What's its Implied Share Price?

It's currently August 2026. A company's full-year 2025 EBITDA was $400M. Its Q1+Q2 2026 EBITDA was $230M, and its Q1+Q2 2025 EBITDA was $190M. What's its LTM EBITDA?

Using the same deal as above ($150M EBITDA, 8.0x purchase multiple, 50% Debt, $600M Investor Equity, $1,800M Exit Enterprise Value), if the company instead repays its entire $600M of Debt by Year 3 and nothing else changes, what MoM multiple does the PE firm realize?

How does Stock-Based Compensation's tax treatment change once employees actually exercise their options or receive their shares?

What are the different ways you can estimate the Equity Risk Premium?

After mandatory repayments, a company has $120M of Cash Flow Available for Debt Repayment, and its cash flow sweep is 60%. How much optional Debt repayment is made (assuming enough Debt remains)?

Walk me through how you'd calculate enterprise value from equity value.

Why do Noncontrolling Interests and Equity Investments in associate companies get excluded from Unlevered FCF projections?

Why does Cost of Equity tend to be higher than Cost of Debt for the same company?

How can you tell whether an M&A deal will be accretive or dilutive?

A company's final projected year of FCF is $80M and EBITDA is $150M. Its WACC is 9%, and you're assuming a 2.5% Terminal Growth Rate. Calculate the Terminal Value via the Perpetuity Growth Method, then cross-check it by calculating the implied exit multiple.

Without doing any math, what range would you expect a Combined P/E multiple to fall in after an M&A deal, and what determines where in that range it lands?

Why doesn't Enterprise Value actually hold up as fully "capital-structure-neutral" in real life?

Immediately after announcing a deal, an Acquirer's Combined Enterprise Value is $780M. A few months later, the market decides the Acquirer overpaid by $30M. What's the new Combined Enterprise Value?

Why is it invalid to pair plain Net Income with (Equity Value + Preferred Stock), even though the numerator and denominator technically "match" mathematically?

An Acquirer funds a deal with 40% Cash at a 3% after-tax cost, 35% Debt at a 5% after-tax cost, and 25% Stock at an 8% after-tax cost. What's the Weighted Cost of Acquisition?

A company's Deferred Tax Asset includes $80M of Net Operating Losses. It has recorded a Valuation Allowance equal to 25% of that NOL balance. How much of the NOLs should you subtract in the Enterprise Value bridge?

A company collects $480 upfront for a 12-month service contract (Deferred Revenue). By year-end, it has delivered 3 months of the contract. Walk through the full year's combined impact on all three statements, assuming a 25% tax rate.

A PE firm acquires a $150M EBITDA company at a 7.0x purchase multiple, using 50% Debt. It can't find a buyer after 3 years, so it takes the company public instead and sells off its stake evenly across Years 3, 4, and 5. By the end, EBITDA has grown to $175M, all the initial Debt has been repaid, and the average sale multiple across those years is 9.0x. Estimate the approximate IRR.

How does a Net Operating Loss (NOL) affect an LBO's cash flow?

A company starts offering customers a 12-month installment plan instead of requiring full payment upfront. How does this affect its cash flow in the short term versus the long term?

A company has accumulated $320M in net operating losses. At a 25% tax rate, what's the value of the resulting deferred tax asset?

A company has Total Debt of $240M and EBITDA of $60M. What's its leverage ratio?

What's the difference between the Face Value, Book Value, and Market Value of a company's Debt?

A company's NTM TEV/EBITDA multiple is 10.0x, and its projected EBITDA 12-24 months from now is $180M. At that future date it's expected to have $200M of Net Debt and 40M diluted shares. Its Cost of Equity is 9%, and that future point is 2 years away. Calculate the Implied Future Share Price and its Present Value today.

The Investor Equity in an LBO is $450M, and the Exit Equity Proceeds in Year 5 would normally be $1,080M. Instead, the PE firm executes a $360M Dividend Recap in Year 3, so the remaining Year 5 proceeds fall to $720M. Estimate the new IRR using the average exit year method, and compare it to the no-recap baseline.

Why is it harder to draw clean conclusions from Precedent Transaction multiples than from Public Comps multiples?

Using the same deal (Acquirer Equity Value $700M, Target Purchase Equity Value $220M), what's the Combined Equity Value if the deal is instead 100% Cash?

What are some of the key flaws or limitations of a DCF?

In a 100% Cash or Debt deal, the Seller's Equity Value doesn't show up anywhere in the Combined Equity Value. Did it just disappear?

Which purchase method does a Seller typically prefer in an M&A deal, and why?

A company generates $120M of Free Cash Flow in a year. Beginning Cash is $60M and Minimum Cash required is $90M. How much can go toward repaying Debt?

A company has excess Cash. How do Equity Value and Enterprise Value change if it uses the cash to repay Debt versus repurchase Common Stock?

A company delivers $200 of services to a customer but doesn't collect cash yet, increasing Accounts Receivable by $200. Walk through the three statements, assuming a 25% tax rate.

A CEO finds $200M of cash on the street and deposits it in the company's bank account (ignore taxes for simplicity). How do Equity Value and Enterprise Value change?

What makes a company a good LBO candidate?

A company has Days Sales Outstanding of 35, Days Inventory Outstanding of 60, and Days Payable Outstanding of 40. What's its Cash Conversion Cycle?

A bond with a $1,000 Face Value is issued at 94% of face to boost its yield to investors. What's the Original Issue Discount (OID) in dollars?

If inventory costs are rising, how do LIFO and FIFO differently affect a company's reported Net Income and Cash Flow?

Why do you use the company's beginning-of-period Debt balance, not the average balance, to calculate Interest Expense in an LBO model?

An Acquirer has a Current Equity Value of $600M, Cash of $150M (Minimum Cash of $40M), Debt of $120M, and EBITDA of $40M (3.0x Debt/EBITDA). Peer companies average 5.0x Debt/EBITDA. Estimate the maximum deal size this Acquirer could realistically fund, assuming it limits its Stock issuance to half its Current Equity Value.

Rank the assumptions that impact an LBO's returns the most, and explain why.

Your target company has $90M of EBITDA, and the median TEV/EBITDA multiple across its Comps is 7.5x. What's the target's implied Enterprise Value?