Series 86 Missed Q's Pt 3
The Hamptons Co. has earnings before interest and taxes of $125 MM and depreciation and amortization of $27 MM. The company has cash of $7 MM, debt of $290 MM, and 55 MM outstanding shares. If the sector analysis indicates that the price of this sector demands an enterprise value-to-EBITDA multiple of 7.5 times, what's the implied equity price per share? $12.61 $25.87 $20.72 $15.58
$15.58 1.) 125 + 27 = 152mm 2.) 152 * 7.5 = 1.140 bn 3.) 1.14 - .290 +.007 = .857 4.) 857 / 55 = $15.58
A company is required to make a payment in perpetuity of $200,000 per year. Assuming a 10% annual return, how much principal would the company need? $1,100,000 $2,200,000 $2,222,222 $2,000,000
$2,000,000 The company would need to deposit $2,000,000. To calculate the required principal, take the annual payment in perpetuity of $200,000 and divide it by the annual rate of return of 10% ($200,000 / .10 = $2,000,000). The phrase in perpetuity may also be referred to as a perpetual payment, meaning that payments will continue to be made forever.
MSD Pharmaceuticals has retained earnings at the end of 2017 of $39,095.1 MM and net income in 2017 of $3,325.5 MM. In 2018, the company's net income increased by 8% and at the end of the year it paid a cash dividend of $3,310.7 MM. What is the 2018 ending balance of the company's retained earnings if it has a 21% tax rate? $42,686.6 MM $42,405.8 MM $39,375.9 MM $39,109.9 MM
$39,375.9 MM 1.) 3.325 * 1.08 = 3,591.5 2.) 3,591.5 - 3310.7 3.) 39,094.1 + 280.8 = 39,375.9
A corporation is planning to issue $20,000,000 face value of corporate bonds with a 6.4% coupon. The bonds will have a ten-year maturity. There are underwriting fees of 3.5%, advertising costs of 1.2%, and legal and accounting costs of 0.5%, which is 5.2% of the issue. What is the cost of capital on this debt issue? 5.45% 6.24% 6.42% 6.75%
6.75% 1.) 0.064 * 20mm = 1.28mm 2.) 20mm * .052 = 1.04mm 3.) 20mm - 1.04mm = 18.96 mm 4.) 1.28mm / 18.96mm = 6.75%
A corporation is planning to issue $20,000,000 face value of corporate bonds with a 6.4% coupon. The bonds will have a ten-year maturity. There are underwriting fees of 3.5%, advertising costs of 1.2%, and legal and accounting costs of 0.5%, which is 5.2% of the issue. What is the cost of capital on this debt issue? 5.45% 6.24% 6.42% 6.75%
6.75% 1.) 20 mm * .064 = 1.28 mm 2.) 20 mm * .052 = 1.04 mm 3.) 20 - 1.04 = 18.96 mm 4.) 1.28 / 18.96 = 6.75%
Which TWO of the following statements are TRUE? Free cash flow is an important measurement for creditors of a company. EBIT is an important measurement for creditors of a company. Free cash flow is an important measurement for shareholders of a company. EBIT is an important measurement for shareholders of a company. I and III I and IV II and III II and IV
EBIT is an important measurement for creditors of a company. Free cash flow is an important measurement for shareholders of a company. EBIT is a measure of the cash available for creditors. Free cash flow is a measure of the cash available to shareholders.
A well-established property and casualty insurance company has agreed to be acquired. You are analyzing the fairness opinion in the seller's proxy. If you believe the company has reached its terminal growth rate, a multiple based on which of the following metrics is LEAST likely to be used? PEG EPS Book value Tangible book value
PEG The normal valuation metrics for insurance companies, banks, and financial service companies are book value, or net tangible book value. Another valuation metric used is earnings per share. PEG ratios are used for growth companies. This is not likely to be used if a company has reached its terminal growth rate (a growth rate that the company can maintain in perpetuity).
When finding shares for return on common equity... which types of shares are not used in the common equity calculation?
Preferred stock
repurchase shares of common stock from the marketplace. During the buyback period, the corporation's market price has risen from $10 per share to $15 per share. If the company's book value per share is currently $2, which TWO of the following will result if the share buybacks continue? The ROE will increase. The ROE will decline. The book value per share will increase. The book value per share will decrease. I and III I and IV II and III II and IV
The ROE will increase. The book value per share will decrease. When a company repurchases its own stock, its balance sheet will show a decrease in cash and a decrease in shareholders' equity (i.e., it spends cash to retire/get rid of issued stock). Notice that the change to book value per share is more subtle. Since the book value per share of the repurchased stock is less than market price per share, then book value per share will be lower after the buyback. If the book value per share was higher than the market price of the repurchased stock, book value per share would have been higher.
DEF 14A
The most comprehensive information regarding executive compensation and employee stock options can be found in a firm's proxy. A reporting companies proxies are filed on form DEF 14A and can be found in the SEC's EDGAR disclosure system.
Which of the following actions would cause a company's enterprise value to rise? It issues new debentures The price of its common stock increases It buys back its stock It retires outstanding debt I and II only II only II and III only III and IV only
The price of its common stock increases Enterprise Value = Market Capitalization + Long-term Debt - Cash and Cash Equivalents. When bonds (debentures) are issued, debt rises, but so do cash and cash equivalents; therefore, one offsets the other. When the company's common stock is repurchased, the total market capitalization falls since a smaller number of shares are outstanding. This decline is offset by a reduction in cash, since cash is used to repurchase the stock. Debt retirement provides a similar offset, since cash is used to retire debt. A rise in the stock price increases the market capitalization of the company. This event would cause enterprise value to rise.
Learn still (test #2): #61, #81, #88, #109
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Relevant information on the Trident Company to answer this question is found next. Enterprise value of $370 million Debt of $30 million Revenue of $300 million Profit margin of 10% Cash of $10 million Minority interest of $20 million If the market yield is equal to 6.7%, what is the Trident's relative P/E? .91 .70 .73 1.36
.73 1.) 1 / .067 = 15 2.) 370 + 10 - 30 - 20 = 330 3.) 300 * 0.1 = 30 4.) 330 / 30 = 11 5.) 11 / 15 = 0.73
How to find additional shares from convertible preferred stock?: Convertible Preferred $: $250,000,000 Conversion Price: $25 Market value of common: $32
1.) $250,000,000 /$25 = 10,000,000 additional shares
Find offer premium given: EPs: $2.62 P/E: 6.5 Offer Price: $29
1.) 2.62 * 6.5 = 17.03 2.) 29 - 17.03 = 11.97 3.) 11.97/17.03 = 70%
A research analyst has determined that an industry has an unlevered beta of 1.4. A company in this industry has a debt-to-equity ratio of 40% and a tax rate of 30%. What is the levered beta for this company? 0.84 1.09 1.79 2.33
1.79 The levered beta = 1.4 x (1 + [(1 - 30%) x (40%)])
The director of research has asked an analyst to produce a pro forma valuation of a company using leveraged buyout analysis. The company has $680 million of EBITDA and the transaction value is 11.5 times EBITDA. The company has existing debt of $2.45 billion and the equity contribution is 20%. If the transaction is completed, what's the resulting debt-to-EBITDA ratio? 11.5 times 12.8 times 15.1 times 5.9 times
12.8 times 1.) 680 * 11.5 = 7.82 2.) 7.82 * .8 = 6.256 3.) 2.45 + 6.256 = 8.706 4.) 8.706 / .680 = 12.8
The director of research has asked an analyst to produce a pro forma valuation of a company using leveraged buyout analysis. The company has $680 million of EBITDA and the transaction value is 11.5 times EBITDA. The company has existing debt of $2.45 billion and the equity contribution is 20%. If the transaction is completed, what's the resulting debt-to-EBITDA ratio? 11.5 times 15.1 times 5.9 times 12.8 times
12.8 times 1.) 680 * 11.5 = 7.82 bn 2.)7.82 * .8 = 6.256 bn 3.) 6.256 + 2.45 = 8.706 4.) 8.706 / .680 = 12.8
Use the following information to answer this question. Wall Industries Year 1: Rev: 600, Units sold: 240 Year 2: Rev: 630, Units sold: 194 Year 3: Rev: 620, Units sold: 260 Year 4: Rev: 535, Units sold: 282 What is the compounded annual growth rate in units sold from Year 1 to Year 4? 5.23% 5.52% 6.50% 7.70%
5.52% Trial and error
A research analyst has determined that an industry has an unlevered beta of 1.4. A company in this industry has a debt-to-equity ratio of 40% and a tax rate of 30%. What is the levered beta for this company? 0.84 1.09 1.79 2.33
= 1.4 * (1 + (.4 * .7) = 1.4 * (1 + .28) =1.79
Two large satellite radio companies that have been in operation for a few years, and are listed on the Nasdaq Global Select Market, agree to merge. Both companies have similar EBITDA, derive the majority of their revenue (more than 90%) from subscriber fees, and have less than 5% of their revenue from advertising. Their financials, size, and business models are similar and they have no competitors inasmuch as all other radio companies derive their revenue from advertising fees. The main reasons for the merger are cost synergies, greater programming choices for customers, combining their engineering departments for better advancements in technology, and enhanced shareholder value. If your firm has been hired to perform an analysis of the transaction, which TWO of the following types of analysis would you use? A DCF analysis A comparable company analysis using companies which have radio divisions Precedent merger of equals analysis using companies of similar size that have merged but are in different industries A sum-of-the-parts analysis I and III I and IV II and III II and IV
A DCF analysis Precedent merger of equals analysis using companies of similar size that have merged but are in different industries Based on the information in the question, only (I) and (III) are suitable. A discounted cash flow analysis, which is frequently used in valuing a company, could be one of the methods used. Although we are not told that the company has had positive cash flows, there is nothing in this question that would lead us to not use DCF analysis of the combined company. The term merger of equals refers to the merger of two companies of similar size, and there is no designated acquirer or target. The boards of the combined company are split relatively evenly, the combined ownership is as close to 50/50 as possible, and there may be a sharing arrangement among the senior management and CEOs. Most transactions are executed as an exchange of stock, and the new name would be a combination of the companies' names prior to the merger. Merger of equals analysis would examine the premiums paid (if any) of other mergers in which the industries and businesses may be different. For example, a comparison could be made using the merger of equals analysis in the banking, media, or telecommunications sector even though two satellite radio companies are merging. In some cases, one of the biggest concerns is whether the merger will pass an antitrust review. Using comparable companies that have radio divisions would not be a suitable method since their primary source of revenue (advertising) is different from the satellite radio companies (subscription fees). Since the two satellite companies operate only one main business, using a sum-of-the-parts analysis would not be recommended.
You have been tasked with calculating the equity valuation of a company by using the free cash flow to equity (FCFE) model. Which TWO of the following statements are TRUE? A free cash flow to equity projection is necessary for each year of the computation It is not necessary to consider the price multiple of the common stock at the end of the projection period An assumption must be made about the required rate of return Cash flows are not discounted to present values during the projection period I and II II and III I and III II and IV
A free cash flow to equity projection is necessary for each year of the computation An assumption must be made about the required rate of return A free cash flow to equity projection must be made for each period of the calculation and the required rate of return must be indicated for any calculations; therefore, it is necessary to project the price multiple of the common stock at the end of the projection period.
Which of the following events signals sales growth in a company? Accounts receivable increase; account receivable turnover increases. Account receivables decrease; account receivable turnover increases. Inventory turnover increases; accounts payable declines. Inventory turnover declines; accounts payable increases.
Accounts receivable increase; account receivable turnover increases. An increase in accounts receivable is a use of cash by the company. A greater amount of cash is receivable by the company. Growth of the company is indicated by an increase in accounts receivable turnover. If the accounts receivable turnover increases, the company is receiving its payments faster.
When accounting for an operating lease: Liabilities will not change Assets will increase Shareholders' equity will decrease An interest expense will appear on the income statement
Assets will increase Operating leases will increase both assets and liabilities. Unlike a finance lease, operating leases don't have a separate interest component recorded on the income statement. Operating leases don't directly impact shareholders' equity.
Which economic indicator should be monitored to analyze the residential real estate market? Prime rate Manufacturers' new orders, nondefense capital goods Housing starts Building permits, new private housing units
Building permits, new private housing units Although manufacturers' new orders for nondefense capital goods is a leading economic indicator, building permits for new private housing units is a leading economic indicator that is directly related to residential real estate. Building permits must be obtained before housing starts can take place. The prime rate is a lagging economic indicator.
A representative is assisting in the preparation of an M&A transaction and is given the following information on one of the companies: Current stock price: $51.54 Outstanding shares: 47.46 MM EBITDA: $281.57 MM Revenue: $2.52 B Cash: $24.76 MM Debt: $125 MM If the appropriate transaction multiple is 8.75 times EBITDA and .95 times revenue, which TWO of the following statements are TRUE? By using enterprise value to EBITDA as the appropriate metric, the implied equity value per share is $54.02 By using enterprise value to EBITDA as the appropriate metric, the implied equity value per share is $49.80 By using enterprise value to revenue as the appropriate metric, the implied equity value per share is $48.33 By using enterprise value to revenue as the appropriate metric, the implied equity value per share is $52.55 I and III I and IV II and III II and IV
By using enterprise value to EBITDA as the appropriate metric, the implied equity value per share is $49.80 By using enterprise value to revenue as the appropriate metric, the implied equity value per share is $48.33 1.) 281.57 * 8.75 = 2463.73 2.) 2463.73 - 125 + 24.76 = 2363.49 3.) 2363.49 * 47.46 = $49.80 4.) 2.52 * 0.95 = 2.394 5.) 2.394 - 125 + 24.76 = 2.29376 6.) 2.29376 / 43.46 = $48.33
Which TWO of the following statements are TRUE regarding free cash flow to the firm (FCFF) and free cash flow to equity (FCFE)? Free cash flow to equity considers all suppliers of capital Free cash flow to the firm considers all suppliers of capital Free cash flow to equity excludes suppliers of debt capital Free cash flow to the firm excludes suppliers of equity capital I and II I and IV II and III III and IV
Free cash flow to the firm considers all suppliers of capital Free cash flow to equity excludes suppliers of debt capital Free cash flow to the firm includes the suppliers of both equity and debt capital while free cash flow to equity excludes suppliers of debt capital. Free cash flow to equity calculates a value for equity owners of the company.
Which of the following key drivers affects MOST industries? GDP Demographics CPI International currency
GDP Overall, gross domestic product (GDP) affects most industries and is a common driver within each industry. GDP is the production of goods and services by labor and property within the U.S. GDP is the most encompassing indicator of the vitality, or lack thereof, in the economy of the U.S. Generally, the condition of GDP dictates supply and demand.
U.S. corporate issuers would expect the cost of securing financing to increase for all of the following reasons, EXCEPT: Unemployment falling to new lows GDP declining Inflation rising sharply Interest rates rising
GDP declining Corporate issuers will pay more for financing (money) when interest rates increase. The only choice that will normally lead to falling interest rates is where the economy is showing negative growth. In that case, the Fed is much more likely to lower rates to spur investment and borrowing. Rapidly falling unemployment is a sign of growth, which could be inflationary.
Which TWO of the following choices will help achieve growth in the real estate industry? Higher rents Acquisition of new properties Lowering rents Renovation of existing properties I and II I and IV II and III II and IV
Higher rents Acquisition of new properties Growth is realized in this industry through higher rents and the acquisition of new properties. The lowering of rent will not create additional income nor will the renovation of existing properties, which demands the use of more funds.
In calculating a company's market capitalization, the treasury stock of a corporation is: Subtracted from the market value of outstanding shares at cost Subtracted from market value at market value Ignored Added to market value at purchase cost
Ignored In order to calculate the market capitalization of a company, multiply the number of outstanding shares of common stock by the current market price. The number of outstanding shares does not include treasury shares, so the latter may be ignored. A company's outstanding shares are found by subtracting the number of treasury shares from the number of shares the company has issued.
Which of the following statements is TRUE regarding free cash flow to the firm? It represents cash flow before operating expenses have been covered It is the amount available to the equity providers of capital only It represents cash flow before the payment of taxes It represents cash flow after operating expenses have been covered
It represents cash flow after operating expenses have been covered Free cash flow to the firm represents cash flow available to the providers of capital, both bondholders and stockholders, after operating expenses have been covered. Operating expenses include working capital (investments in inventory), fixed capital (investment in new equipment), and the payment of taxes.
Which of the following statements is TRUE regarding free cash flow to the firm? It represents cash flow before operating expenses have been covered It is the amount available to the equity providers of capital only It represents cash flow before the payment of taxes It represents cash flow after operating expenses have been covered
It represents cash flow after operating expenses have been covered Free cash flow to the firm represents cash flow available to the providers of capital, both bondholders and stockholders, after operating expenses have been covered. Operating expenses include working capital (investments in inventory), fixed capital (investment in new equipment), and the payment of taxes.
Which of the following statements is TRUE regarding free cash flow to the firm? It represents cash flow before the payment of taxes It represents cash flow before operating expenses have been covered It is the amount available to the equity providers of capital only It represents cash flow after operating expenses have been covered
It represents cash flow after operating expenses have been covered Free cash flow to the firm represents cash flow available to the providers of capital, both bondholders and stockholders, after operating expenses have been covered. Operating expenses include working capital (investments in inventory), fixed capital (investment in new equipment), and the payment of taxes.
A research analyst is comparing two companies that are similar in all respects, except for their lease arrangements. Which of the following is a characteristic of a company that has a finance lease rather than an operating lease? Lower income in earlier years, due to higher interest costs Higher income in earlier years, due to lower interest costs Lower income in earlier years, due to higher amortization costs Higher income in earlier years, due to lower amortization costs
Lower income in earlier years, due to higher interest costs Finance lease expenses typically decline over the lease term since interest expense will fall and amortization will remain constant. Operating lease expenses will typically remain constant over the life of the lease. As a result, companies with finance leases will have lower income in the earlier years.
Which of the following is likely to be inversely correlated with same store sales growth in the fast food industry? Wage rate growth Unemployment rate Consumer confidence Longer average workweek
Unemployment rate A higher unemployment rate means less disposable income, which translates to lower same store sales. The other choices would correlate positively with same store sales, providing consumers with the income and the outlook to spend more on dining.
The Diminutive Company is a small company with 2 business segments. It produces metal ferrules for pencil erasers and shoelace stays. The ferrule component generates 90% of the company's revenue, but has only been profitable in two periods. The shoelace stay component is profitable. The EPS of the Diminutive Company was $1.25 in the most recent period. Use the following companies' data for comparison. The Redundant Company only produced metal ferrules. It had positive cash flow, but was unprofitable during its last 18 months of operations. The business was sold for 6 times cash flow per share. The Miniscule Company produces only shoelace stays, and has 1/2 the earnings of Diminutive in this business segment. Miniscule was recently purchased at a price of 18 times earnings. How should an analyst value the Diminutive Company? Use The Redundant Company's multiple for the entire Diminutive Company valuation Use The Redundant Company's multiple for the metal ferrule segment and the Miniscule Company buyout multiple for the shoelace stay segment Use The Redundant Company's multiple for the metal ferrule segment and times the Miniscule Company buyout multiple for the shoelace stay segment Use Miniscule Company's EPS and multiple to value the entire Diminutive Company
Use The Redundant Company's multiple for the metal ferrule segment and the Miniscule Company buyout multiple for the shoelace stay segment
In an M&A transaction, which of the following factors is MOST important in determining the long-term value created by a potential acquisition to the acquiring company? A positive change in operating margin of the combined companies Whether the acquisition is accretive to EPS The growth rate of the combined companies Whether the acquisition will increase its return on invested capital
Whether the acquisition will increase its return on invested capital This question is asking for the most important factor. The acquiring company should look to the return on invested capital, and whether the acquisition will provide returns that cover the cost of invested capital. If this is accomplished, the expectation would be reflected in improvements such as earnings per share and operating margins. The acquisition being accretive to EPS is important in the short term but, in the long term, it is return on invested capital (ROIC).
