Financial Modelling And Valuation MCQ With Solutions Part 5

Q1-It is considered a bad transaction if the pro forma EPS of two combined companies is lower than the standalone EPS of the company that is being acquired.

A. Accretive

B. Dilutive

C. Consensus

Correct Answer is B

Explanation: When the pro forma earnings per share (EPS) is lower than the standalone earnings per share, the transaction is said to be dilutive.


Q2-An accretion/(dilution) analysis is typically performed by ?

A. Public strategic buyers

B. Sponsor buyers

C. Non-public foreign buyers

Correct Answer Is A

Explanation: Public strategic buyers use accretion/(dilution) analysis in addition to the standard valuation methodologies (comparable companies, precedent transactions, DCF, and LBO analysis) to estimate the pro forma effects of a potential acquisition on earnings, assuming a given purchase price and financing structure, in order to establish a valuation range for a potential acquisition. It is frequently critical that a transaction be accretive in order for the acquirer to agree to the transaction in the first place.


Q3-Which of the following are common types of synergies realized in M&A transactions?

I. Merger

II. Revenue

III. Cost

IV. Stock

A. I and II

B. II and III

C. III and IV

Correct Answer is B

Explanation: Potential synergies can be divided into two categories: revenue and cost. Revenue synergies are new revenue streams (cross-selling, new distribution channels, and so on) that are made available to the combined company as a result of the merger. Cost synergies are cost-cutting initiatives (such as eliminating duplicate operations, eliminating employee redundancies, and so on) that can be achieved through the combination of two or more businesses.


Q4-The difference between the price paid for a target and its identifiable net asset value is referred to as

A. Tangible Value

B. Goodwill

C. Intangible value

Correct Answer Is B

Explanation: Goodwill, also known as the "excess purchase price," is calculated by subtracting the purchase price from the target's net identifiable assets after allocating them to the target's tangible and intangible assets, plus the deferred tax liability.


Q5-What is Debt financing fees in an M&A deal are

A. Expensed immediately

B. Capitalized

C. Written off

Correct Answer is B

Explanation: Payments for financing fees are capitalized on the buyer's balance sheet as an asset, and they are then amortized over the duration of the security's life. They are not expensed at the time of the transaction, such as M&A fees in a merger and acquisition.


Q6- What is a Greenfield?

A. Building a new factory from scratch

B. Modifying /upgrading a preexisting factory

C. Integrating a newly purchased company quickly and efficiently

Correct Answer is A

Explanation: The term "green field" refers to the construction of a new factory or facility from the ground up.


Q7-What is mean by conglomeration?

A. Corporation that is the largest amongst its competitors

B. Corporation that sells its products and services in several countries

C. Acquisition strategy whereby a company makes acquisitions in relatively unrelated business areas

Correct Answer Is C

Explanation: An acquisition strategy known as conglomeration refers to the process of bringing together companies that are generally unrelated in terms of the products and services they provide under one corporate umbrella. General Electric and Berkshire Hathaway are two of the largest and most well-known multinational corporations in the world.


Q8-Deferred tax liabilities are calculated as

A. Goodwill less PP&E

B. PP&E multiplied by the acquirer tax rate

C. Tangible and intangible asset write-ups multiplied by the tax rate applicable to the acquirer

Correct Answer Is C

Explanation: In the case of a stock sale, the depreciation and amortisation associated with the transaction are not deductible for tax purposes. The "gain" on the GAAP asset write-up is not taxed, and neither the buyer nor the seller is responsible for paying taxes on it. As a result, from the perspective of increasing IRS tax revenue generation, the buyer should not be permitted to benefit from future tax deductions as a result of this accounting convention. Accounting for this discrepancy between book and tax is accomplished through the creation of a deferred tax liability on the balance sheet, which is reflected on the income statement (where it often appears as deferred income taxes). The DTL is calculated by multiplying the amount of the write-up by the tax rate applicable to the company.


Q9-Why is a deferred tax liability created?

A.Tax depreciation of step-up assets is calculated on a tax basis rather than on a GAAP book basis.

B.In accordance with GAAP accounting principles, stepped-up assets are depreciated on a book basis, but are not depreciated for tax purposes.

C.On a GAAP book basis, stepped-up assets depreciate more quickly than they do for tax purposes.

Correct Answer Is B

Explanation: In this case, a deferred tax liability is created because the written-up assets of the target are depreciated on a GAAP book basis but not for tax purposes, leading to the creation of an unpaid tax liability. Consequently, while the depreciation expense is netted out from pre-tax income on the GAAP income statement, the company does not receive any cash benefits as a result of the tax exemption. In other words, the perceived tax benefit of book depreciation exists solely for the purpose of recording accounting transactions. In reality, the company must pay cash taxes on the amount of pre-tax income that remains after the deduction of transaction-related depreciation and amortization expense has been made.


Q10- Contribution analysis is most appropriate for ?

A. Merger-of-equals deals


C. Take-private deals

Correct Answer Is A

Explanation: When two companies merge, the financial "contributions" that each party makes to the pro forma entity in terms of sales, EBITDA, EBIT, net income, and equity value are represented in a contribution analysis. Contribution analysis is commonly used in mergers of equals transactions.


Q11- Which of the following factors contributes to the reduction of goodwill created during a merger and acquisition transaction?

A. Write-up of tangible assets

B. Equity control premium

C. Future synergies

Correct Answer is A

Explanation: Contribution analysis, which depicts the financial "contributions" that each party makes to the pro forma entity 370 in terms of sales, EBITDA, EBIT, net income, and equity value, is commonly used in merger-of-equals transactions to determine the financial "contributions" that each party makes.


Q12-What is a material adverse change

A. Allow competitive bidders to re-enter the process

B. It Could permit a buyer to avoid closing a transaction

C. Allow the government to block a transaction

Correct Answer is B

Explanation: An important part of the final agreement is called a "material adverse charge," or "material adverse effects." If a buyer doesn't close the deal because of a bad thing that happens after the deal is signed or because of a bad thing that happens after the deal is signed, the buyer can get out of the deal.


Q13-What is the typical projection period of an LBO model for a potential debt provider in terms of years?

A. 1-2 years

B. 3-4 years

C. 7-10 years

Correct Answer is C

Explanation: Typically, the projection period for an LBO model is set at seven to ten years in order to coincide with the maturity of the longest tenured debt instrument in the capital structure, which is typically the term loan.


Q14-Under normal market conditions, which of the following is a reasonable total leverage ratio for an LBO?

A. 3.0x EBITDA

B. 5.0x EBITDA

C. 5.0x net income

Correct Answer is B

Explanation: Over the last decade, there has been a significant fluctuation in the average credit statistics for LBO transactions. Beginning in 2002, the average LBO had a total debt-to-EBITDA multiple of 3.9x, which was higher than the industry average. By 2007, this multiple had reached a peak of 6.1x, indicating that borrowers and issuers were experiencing extremely favorable conditions. In 2008 and 2009, during the credit crisis, credit conditions tightened, resulting in stronger credit statistics for LBO transactions. These statistics were more favorable for lenders and debt investors, and less favorable for borrowers and issuers. By 2010/2011, credit statistics reflected more normalized levels compared to historical norms, with an average total debt-to-EBITDA ratio of 4.9 times in 2011.