Series 79 Book Questions

Under what circumstances can a buyer withdraw from a sale process after it has submitted a first-round bid? A. At any time with no approvals necessary B. With written approval from the seller C. When proof of change in financing conditions or other buyer circumstances is provided D. With approval from the SEC or other appropriate local finance authority

A - A buyer can withdraw from a sale process at any time under any circumstances and without providing a cause. The only risk is reputational. Similarly, the seller can cancel the sale process at any time

young, high-growth, and minimally leveraged start-up company would be most likely to seek investment from which type of investor? A. Venture Capital B. Private Equity C. Strategic Buyer D. Investment Bank

A - A young and fast-growing company would most likely consider an equity investment from a venture capital fund in order to prioritize the need for cash. A private equity company would be unlikely to invest in an early-stage start-up due to a lack of cash flows.

Which of the following categories of filers must file their Form 10-Q within 40 calendar days? I. Large accelerated filer II. Accelerated filer III. Non-accelerated filer IV. Small accelerated filer A. I and II only B. I and III only C. II and III only D. I, II, III, and IV

A - According to the deadlines for filing periodic reports, large accelerated filers ($700 million or greater public float) and accelerated filers ($75 million or greater public float) have 40 calendar days to file a Form 10-Q.

What does the control premium refer to in a transaction comps? A. The right for the acquirer to control decisions regarding the target's business B. The right for the acquirer to control the premium paid to target shareholders C. Premium for controlling the process's timing D. The acquirer's attempt to control target shareholders

A - Acquirers are expected to pay target shareholders a premium for the right to control decisions at the company. Therefore, the price for buying all the shares of the target company exceeds the price expected to be paid for buying a single share, for example.

DEF Corporation currently has outstanding bonds paying 7% interest and currently trading at 101. Assuming the company's marginal tax rate is 35%, calculate DEF's after-tax cost of debt. A. 4.5% B. 5.4% C. 6.93% D. 7%

A - After-Tax Cost of Debt = Current Yield × (1 − Tax Rate) Current Yield = $70 Annual Interest/$1,010 Market Price = 6.93% After-Tax Cost of Debt = 6.93% Current Yield × (1 − 35% Tax Rate) = 4.5%

Which two of the following are examples of types of organizational structures? I. C corporation II. Preferred stock III. Limited liability company IV. American depositary receipt A. I and III B. I and IV C. II and III D. II and IV

A - An American depositary receipt (ADR) is a certificate issued by a US bank that represents shares of a foreign company traded on a US exchange. Preferred stock would be issued by a corporation, but is not a type of organizational structure.

Under Regulation S-X, financial statements included in registrations must be prepared and "attested" by auditors who: A. Are qualified and independent of their clients' interests B. Are certified by the SEC C. Meet minimum experience standards D. Agree in writing to follow the standards of Sarbanes-Oxley

A - Auditors must meet professional qualification standards, and they must work independently of the client's interests. They may not have conflicts of interest, such as consulting assignments with attested clients

The registration statement that may be used for all newly issued securities under the Securities Act of 1933 is: A. Form S-1 B. Form S-3 C. Form F-1 D. Form 10-K

A - Form S-1 may be used for any newly issued securities. It does not impose the limiting qualifications of other registration forms, such as the short-form Form S-3.

Company ABC has a P/E of 12×, total debt of $130MM, cash of $50MM, and a net income of $30MM. What is the company's implied equity value? A. $360MM B. $440MM C. $540MM D. $600MM

A - Implied Equity Value = P/E Ratio × Net Income Implied Equity Value = 12× P/E Ratio × $30MM Net Income = $360MM

Under Section 7 of the Securities Act of 1933, which TWO of the following types of information must be included in a registration statement? I. Identity, address, and jurisdiction of the issuer II. The specific price of the offering III. Capitalization of the issuer IV. Certified financial statements of the issuer's CEO A. I and III B. I and IV C. II and III D. II and IV

A - Important material information about the issuer must be included in a registration statement. The specific price of the offering is not required, and generally it is not determined until after the registration statement has been filed. Certified financial statements are required for the issuer, not senior management.

Which of the following is a legally binding contract between the target and each prospective buyer that governs the sharing of nonpublic company information? A. Confidentiality agreement B. Engagement letter C. Private placement memorandum D. Private member offering

A - In contrast to an auction, a negotiated sale centers on a direct dialogue with a single prospective buyer.

Members of a limited liability company: A. Are not personally liable for its debts B. Are personally liable for its debts C. Must elect one chief member to manage the business D. Cannot manage the business

A - Members of a limited liability company (LLC) are not liable for its debts. LLCs must be managed by one or more members, which can include a person, corporation, or partnership.

Assuming a company has a market cap of $750MM, total debt of $250MM, and a current stock price of $37.50, how many shares does the company have outstanding? A. 20MM B. 26.55MM C. 40MM D. 53MM

A - Number of Shares Outstanding = Equity Value/Share Price Number of Shares Outstanding = $750MM/$37.50 = 20MM

At what stage in the M&A process do buyers start to line up financing sources? A. In conjunction with formulating first-round bids B. After being selected to enter the second round C. In conjunction with marking up the definitive agreement D. After the signing of the definitive agreement

A - Potential buyers look to line up financing sources and get a read on financing terms as early as possible in the process. This is important as buyers frame their first-round bids. For financial sponsors, the basic terms of the staple are typically communicated verbally to buyers in advance of the first-round bid date so they can use that information to help frame their bids

Ratings may be included in a registration statement for all of the following types of securities except: A. Common stock B. Preferred stock C. Debt D. Convertible debt

A - Ratings measure a company's ability to meet recurring payment obligations, such as interest on debt and preferred stock dividends. Common stockholders stand last in line in claims on corporate assets. Therefore, ratings are not relevant in evaluating straight equity offerings

A company or an organization with no more than 100 shareholders that elects to pass corporate income and losses to its shareholders is known as: A. An S corporation B. A C corporation C. A limited liability company D. A limited partnership

A - S corporations pass income and losses, as well as deductions and credits, to their shareholders. Shareholders report these line items, which are taxed at their respective personal rates, on their individual income statements.

During the course of auditing a company's financial statements, a CPA discovers that the chief financial officer has absconded with a large amount of money. As a result, the company probably will have to go out of business. Under the '34 Act, how is the auditor required to report this? A. It must be reported as a statement of "substantial doubt" about the issuer's ability to continue as a going concern B. It must be reported immediately by the auditor to law enforcement C. It must be reported within 14 days by the auditor to the SEC D. It must be reported immediately in an amended registration filing

A - The auditor is required to evaluate the company's ability to continue as a going concern and report as part of an audit any "substantial doubt" about its ability to continue.

The cash flow statement includes which of the following sections? I. Operating activities II. Shareholders' equity III. Investing activities IV. Retained earnings A. I and III B. I and IV C. II and III D. II and IV

A - The cash flow statement comprises three primary sections: 1) operating activities, 2) investing activities, and 3) financing activities, which are summed and added to a beginning cash balance to produce an ending cash balance for a particular period. Shareholders' equity is a component of the balance sheet and retained earnings is a component of shareholders' equity.

A company's profitability for a particular period is best measured by which of the following financial statements? A. Income statement B. Balance sheet C. Cash flow statement D. Statement of shareholders' equity

A - The income statement offers the best overview of a company's profitability for a particular period. Meanwhile, the balance sheet displays a company's financial position at a point in time—it lists the assets, liabilities, and shareholders' equity balances as of the fiscal quarter or year end. The cash flow statement records the company's cash inflows and outflows for a particular time period. The statement of shareholders' equity breaks down the company's net worth at a moment in time

ABC Corporation has 1,000,000 shares of common stock, of which the public float is 900,000 shares. To qualify for an S-3 filing, what is the maximum amount of common shares that the company may have sold under an S-3 in the previous 12 calendar months? A. 300,000 B. 333,333 C. 450,000 D. 500,000

A - The limit for an S-3 filing is one-third or 33.3% of the public float within the previous 12 calendar months. The public float is defined as shares held by the public, and excludes officers, directors, and 10% shareholders.

A company's marginal tax rate refers to which of the following? A. The rate at which a company is required to pay federal, state, and local taxes on its last dollar earned B. The actual tax amount paid by a company during a given year C. The rate at which a company's shareholders pay taxes on dividends received D. The actual tax amount paid by a company on the sale of long-term investments

A - The marginal tax rate for US corporations is the rate at which a company is required to pay federal, state, and local taxes. The highest federal corporate income tax rate for US corporations is 21%, with state and local taxes typically adding another 2% to 5% (depending on the state). Most public companies disclose their federal, state, and local tax rates in their 10-Ks in the notes to their financial statements.

Company D has a cost of equity capital of 14% and recently issued 8% debt, which currently trades at 104. Assuming the company has 40% equity in its capital structure and has a 40% marginal tax rate, what is its weighted average cost of capital (WACC)? A. 8.4% B. 10.2% C. 10.4% D. 11.0%

A - WACC = (Cost of Equity × % of Equity) + (After-Tax Cost of Debt × % of Debt) After-Tax Cost of Debt = Current Yield × (1 − Marginal Tax Rate) = 8%/104% of Par × (1 − 40%) = 4.6% Percentage of Debt = 100% − % of Equity = 60% Therefore: WACC = (14% Cost of Equity × 40% Equity in Capital Structure) + (4.6% After- Tax Cost of Debt × 60% Debt in Capital Structure) = 8.4%

Which of the following is true regarding the accounting for an issuer's repurchase of its own stock in the open market? A. It is reflected on the balance sheet at the acquisition cost B. It is reflected on the balance sheet at the current market value C. It is reflected on the cash flow statement as an operating activity D. It is reflected on the cash flow statement as an investing activity

A - When an issuer repurchases its own stock, cash is reduced by the amount of the acquisition cost, and the treasury stock account (which is a contra-equity account) increases by an equivalent amount. On the cash flow statement, a repurchase of shares is considered a financing activity.

private equity company recently raised new capital to fund the acquisition of a target business. Which of the following characteristics would the private equity company prioritize the most in the target? A. High amounts of existing leverage B. Stable cash flows C. High growth potential D. Successful management team

B - A private equity buyer would place priority over investments that have stable cash flows. This is because it provides the private equity firm with cash to service debt that is used to fund the acquisition. Although a successful management team is a positive characteristic, it is not the most important

A private offering of stock by a publicly traded company is known as a: A. Hybrid security B. PIPE C. Secondary offering D. Primary offering

B - A private investment in public equity (PIPE) refers to a transaction in which investors buy securities directly from a public company via a private placement. These securities are classified as restricted by the SEC and cannot be resold to the public market immediately after purchase.

An increase in accounts receivable would result in which of the following? A. A source of cash B. A use of cash C. A decrease in a current liability D. No effect on cash

B - An increase in accounts receivable represents a use of cash. Hence, companies strive to minimize their receivables so as to speed up their collection of cash.

An issuer refinances $400 million in debt from 8.5% to 5.5%. What is the semiannual interest savings? A. $3MM B. $6MM C. $12MM D. $18MM

B - Annual Savings = $400MM × 3% = $12MM Semiannual Savings = $12MM/2 = $6MM

An underwriter presents a series of bona fide electronic road shows to potential investors of an underwriting. Each presentation covers the same general areas. The underwriter is not required to file each road show presentation if it makes available at least one graphic version of the road show to: A. Any investor upon request B. Any potential investor, without restriction C. All other underwriters D. The SEC, upon written request

B - Any potential investor, without restriction, must be given a graphic version of the road show. If this condition is satisfied and the same general areas are covered in each version of the presentation, the SEC does not require each road show presentation to be filed.

Company DEF has a market cap of $550MM, total debt of $50MM, cash of $75MM, and preferred stock of $25MM. Which of the statements below is correct? A. The company's enterprise value is $700MM B. The company has a negative net debt of $25MM C. The company would prefer a positive over a negative net debt D. Net debt is calculated as cash minus total debt

B - Company DEF has a negative net debt of $25MM, calculated as total debt of $50MM minus cash of $75MM. A negative net debt is preferable from a credit quality perspective, as it indicates that the company has the necessary cash to pay off all its debt.

Currently, the risk-free rate is 3.5%, and the expected return of the S&P 500 is 11%. For a company whose stock has a beta of 1.7, what would be its cost of equity capital, calculated in accordance with CAPM? A. 12.75% B. 16.25% C. 22.20% D. 39.00%

B - Cost of Equity = Risk-Free Rate + (Beta × Market Risk Premium) Market Risk Premium = S&P 500 Expected Return − Risk-Free Rate = 11.0% − 3.5% = 7.5%. Therefore: Cost of Equity = 3.5% + (1.7 × 7.5%) = 16.25%

A company has sales of $1 billion and accounts receivable of $150 million in a given year. What would its DSO be? A. 54.00 B. 54.75 C. 15.00 D. 41.10

B - Days sales outstanding (DSO) provides a gauge of how well a company is managing the collection of its accounts receivable by measuring the number of days it takes to collect payment after the sale of a product or service. It is calculated as accounts receivable divided by sales multiplied by 365. Hence, a company with $150 million in accounts receivable and $1 billion in sales would have a DSO of 54.75 ($150 million/$1 billion × 365).

Where in a company's financial statements can one find its depreciation and amortization? A. Balance sheet B. Cash flow statement C. Debt schedule D. Shareholders' equity schedule

B - Depreciation and amortization can always be located in a company's cash flow statement.

Which of the following financial metrics is the best proxy for unlevered free cash flow? A. EBITDA B. EBITDA minus capex C. Net income plus D&A D. Gross profit minus D&A

B - EBITDA minus capex takes into account cash expenditures for capital additions, replacements, and improvements while also adding back D&A, which is a non-cash charge

A company has an equity value of $200MM, total debt of $100MM, cash of $40MM, preferred stock of $25MM, and noncontrolling interest of $10MM. Calculate the company's enterprise value. A. $260MM B. $295MM C. $340MM D. $375MM

B - Enterprise Value = Equity Value + Total Debt + Preferred Stock + Noncontrolling Interest − Cash

Company XYZ has an enterprise value of $900MM, a net debt of $400MM, and 20MM shares outstanding. What is the company's share price? A. $10 B. $25 C. $45 D. $65

B - Equity Value = $900MM Enterprise Value − $400MM Net Debt = $500MM Share Price = $500MM Equity Value/20MM Shares Outstanding = $25

JonesCo, with $3.8MM debt outstanding, intends to acquire Acme in a cash transaction. After closing, the combined company will have $6.2MM EBITDA. The maximum leverage JonesCo can incur is 5× EBITDA. Furthermore, JonesCo has $2.5MM in cash after completing a recent asset sale. What is the most it can offer to acquire Acme? A. $27.2MM B. $29.7MM C. $31MM D. $33.5MM

B - Maximum Leverage = 5 × $6.2MM EBITDA = $31MM Additional Leverage = $31MM Max Leverage − $3.8MM Existing Debt = $27.2MM Maximum Offer = $27.2 Debt + $2.5MM = $29.7MM

Using the information below about Company XYZ, calculate its diluted shares outstanding using the treasury stock method. Current Share Price $30 Basic Shares Outstanding 1,000,000 Options 100,000 Weighted Average Exercise Price $20 A. 1,000,000 B. 1,033,333 C. 1,066,667 D. 1,100,000

B - Options Proceeds to Company = 100,000 Options Shares × $20 Exercise Price = $2,000,000 Number of Shares Repurchased = $2,000,000 Proceeds/$30 Current Share Price = 66,667 Net New Shares = 100,000 Options Shares − 66,667 Shares Repurchased = 33,333 Diluted Shares = 1,000,000 Basic Shares + 33,333 Net New Shares = 1,033,333

In which case would a buyer perform accretion/(dilution) analysis as part of its process for formulating a first-round bid? A. Buyer is a financial sponsor B. Buyer is public C. Competing buyers are financial sponsors D. Competing buyers are both financial sponsors and strategic buyers

B - Public strategic buyers use accretion/(dilution) analysis to measure the pro forma effects of the transaction on earnings, assuming a given purchase price and financing structure. The acquirer's EPS pro forma for the transaction is compared to its EPS on a standalone basis

Shares offered in a public equity offering that provide proceeds directly to selling shareholders are referred to as: A. Primary shares B. Secondary shares C. Dilutive shares D. Issuer shares

B - Secondary shares are sold by existing shareholders seeking to cash in their holdings. Issuing secondary shares does not have a dilutive effect on existing shareholders, nor does it increase the number of shares outstanding

REITs are required to distribute what percentage of their taxable income to shareholders to receive favorable tax treatment? A. 100% B. 90% C. 75% D. 50%

B - To qualify as a REIT, a US company must distribute at least 90% of its taxable income to shareholders as dividends.

Diluted shares outstanding are greater than basic shares outstanding in all of the following scenarios except: A. All exercisable options are in-the-money B. All unexercisable options are in-the-money C. A convertible bond is in-the-money D. A convertible bond is in-the-money and all unexercisable options are in-the-money

B - Unexercisable options are not accounted for in the calculation of diluted shares outstanding in accordance with the treasury stock method.

GoodValueCo (GVC) declares a dividend in excess of its net income. How is this dividend reflected on GVC's balance sheet? A. It reduces capital surplus B. It reduces retained earnings C. It increases long-term liabilities D. Public companies are prohibited from paying dividends in excess of their net income

B - When a company declares a dividend, this is reflected on the balance sheet as an increase to current liabilities (dividends payable) and a reduction to retained earnings. The fact that the dividend is in excess of its net income does not impact the accounting treatment of this transaction

If an accounting firm certifies a valuation of corporate assets, the registration statement must also contain: A. The firm's full and detailed methodology B. The firm's written consent C. A copy of the firm's credentials or licenses D. Identities of the firm's officers and directors

B - Written consent is required of professional advisers to confirm their recognition that any valuations, opinions, or statements that they prepare or certify are being included in the registration statement. These professionals may have responsibility or liability for such comments when they are made as part of a registration statement

Investment banks help client companies assess all of the following strategic alternatives when evaluating a potential sale except: A. Dividend recapitalization B. IPO C. Massive re-branding effort D. Status quo

C - A company typically hires a marketing or consulting firm to advise on branding and related marketing issues

For the sale of a sizeable business, who typically runs the sell-side process? A. Company CEO B. Company CFO C. Investment bank D. Anchor shareholders

C - A company typically hires an investment bank to sell itself or to sell a material part of the business. This intense, high-stakes process usually spans several months, and the seller typically hires an investment bank and its sell-side advisers to ensure that key objectives are met for a favorable result

REITs must invest what percentage of their total assets in real estate to qualify for favorable tax treatment? A. 100% B. 90% C. 75% D. 50%

C - An equity REIT must invest at least 75% of total assets in real estate. For a mortgage REIT, at least 75% of gross income must be derived from real-estate-related investments

Which of the following do buyers typically plan on bringing with them to the management presentation for a given target? I. Outside legal counsel II. Operating partners III. Investment bankers IV. Auditors A. I and III B. I and IV C. II and III D. II and IV

C - Buyers typically bring their financial advisers (both M&A and financing providers) from an investment bank (or banks) as well as operating partners to the management presentation. It is important for these constituents to participate so as to gain as deep an understanding of the target as possible from a business and financial due diligence perspective

A banker has identified an EBITDA multiple as the best way to value a business. How could the company increase its valuation? A. Change the company's capital structure to reduce its interest expense B. Decrease the company's gross profit C. Decrease the company's operating expenses D. Decrease the company's sales

C - Companies seeking to increase their valuation based on an EBITDA multiple would aim to increase EBITDA. Put differently, a higher EBITDA, which is a profit measure for the company, helps increase the value of the business. Of these choices, only reduced operating expenses (SG&A) would increase EBITDA. Note that lowering interest expense has no impact on EBITDA since EBITDA is a pre-interest measure

Which of the following measures the number of days it takes for a company to remit funds on its outstanding monies owed for goods and services? A. Days sales outstanding B. Days inventory held C. Days payable outstanding D. Inventory turns

C - Days payable outstanding (DPO) measures the number of days it takes for a company to make payment on its outstanding purchases of goods and services. For example, a DPO of 30 implies that the company takes 30 days on average to pay its suppliers. The higher a company's DPO, the more time it has available to use its cash on hand for various business purposes before paying outstanding bills.

Company DEF acquires Company XYZ for $100MM. Company B expects EBIT to be $20MM next year and pays tax at a 21% rate. Assuming a discount rate of 12%, what is the economic value added for Company DEF? A. ($3.8MM) B. $2.1MM C. $3.8MM D. $8MM

C - Economic Value Added = EBIT × (1 − Tax Rate) − (Capital Invested × Discount Rate) Economic Value Added = $20MM × (1 − 21%) − ($100MM × 12%) = $3.8MM

AcquirerCo wants to purchase TargetCo. It can pay 11.3× EBITDA. Assuming that AcquirerCo will recognize $2.7MM in synergies and that TargetCo has an EBITDA of $14MM, what is the effective EBITDA multiple? A. 7.94× B. 8.95× C. 9.47× D. 11.3×

C - Effective EBITDA = Purchase Price/(EBITDA + Synergies) Purchase Price = 11.3 × $14MM EBITDA = $158.2MM Effective EBITDA = $158.2MM/($14MM + $2.7MM) = 9.47×

Company ABC currently has a market cap of $600MM, total debt of $400MM, and cash of $200MM. If the company issues an additional $200MM in debt, what is the impact to the company's enterprise value? A. Enterprise value decreases by $200MM B. Enterprise value increases by $200MM C. Enterprise value does not change D. The impact cannot be determined from the information provided

C - Enterprise value is independent of changes to capital structure and thus would remain unchanged. This is because, although debt would increase by $200MM, the issuance of debt would also generate $200MM cash for the company, which would have a net effect of zero

An issuer of corporate bonds includes Moody's current rating for the bonds in its registration statement. The bonds are also rated by S&P. Must the S&P rating be included? A. No, because the issuer has discretion over what information to include B. Only if both ratings are the same C. Only if the S&P rating is materially different D. Yes, in all cases

C - For offerings of debt, convertible debt, and preferred stock, ratings may be included in the registration. If one rating is included, and another rating from a Nationally Recognized Statistical Rating Organization (NRSRO) is materially different, then that rating also must be included. Moody's and S&P are both NRSROs.

Given the information below, calculate free cash flow. ($ in millions) EBITDA $250 D&A $50 Tax Rate 40% Capex $45 Increase in Net Working Capital $10 A. $250 million B. $165 million C. $115 million D. $355 million

C - Free cash flow can be calculated from the information provided as shown below: ($ in millions) EBITDA $250 − D&A ($50) = EBIT $200 − Taxes ($200 × 40%) ($80) = EBIAT $120 + D&A $50 − Capex ($45) − Increases in Net Working Capital ($10) = Free Cash Flow $115

Ginnie Mae, Freddie Mac, and Fannie Mae share all of the following characteristics except: A. They issue mortgage-backed securities B. Investors in their products are subject to prepayment risk C. Their securities are explicitly backed by the US government D. Investors often purchase their products because of high credit ratings

C - Ginnie Mae, Freddie Mac, and Fannie Mae are all agencies that issue mortgage-backed securities; however, Ginnie Mae securities are backed in full by the US government, while Freddie Mac and Fannie Mae securities are not

Given the information below, calculate gross profit. ($ in millions) Sales $1,000 Cost of Goods Sold $600 Interest Expense $50 Taxes $10 A. 340 million B. 350 million C. 400 million D. 460 million

C - Gross profit is the profit remaining after deducting the direct costs associated with producing a product. It is calculated as sales less cost of goods sold, so $1 billion - $600 million = $400 million. The pre-tax profit is $350 million, while $340 million is the net income.

A transaction in which the acquirer and target combine into one surviving entity is known as: A. A stock sale B. An asset sale C. A merger D. A material adverse effect

C - In a basic merger transaction, the acquirer and target merge into one surviving entity. More often, a subsidiary of the acquirer is formed, and that subsidiary merges with the target, with the resulting entity becoming a wholly owned subsidiary of the acquirer.

For how long must an investment in a subchapter S corporation be held before it is eligible for a favorable capital gains tax rate? A. Three months B. Six months C. 12 months D. Investments in S corps are never eligible for a favorable capital gains tax rate

C - Investments held in S corps and C corps are eligible for a favorable capital gains tax rate as long as the shares are held for at least one year.

Coverage ratios are so named for their ability to measure the company's capacity to: A. Cover equity holders in the event of bankruptcy B. Cover the return of principal to lenders in the debt security's maturity year C. Cover annual interest expense and potentially other fixed charges D. Cover liabilities in the event of a lawsuit

C - Leverage ratios measure a company's debt level, while coverage ratios determine the company's ability to service its debt interest expense.

Which of the following statements regarding noncontrolling interest is not true? A. It is sometimes referred to as minority interest B. It is added when calculating enterprise value C. It reflects the amount of a subsidiary company that is owned by a parent company D. It is created when a parent company owns more than 50%, but less than 100% of a subsidiary

C - Noncontrolling interest, also referred to as minority interest, reflects the amount of a subsidiary that is not owned by the parent company. It occurs when a company owns more than 50%, but less than 100% of a subsidiary. The enterprise value formula is Equity Value + Net Debt + Preferred Stock + Noncontrolling Interest.

An underwriter prepares the financial statements for inclusion in the registration of an issuer with an operating history of just two fiscal years. Financial statements have been audited for both years. At the minimum, which audited statements of income and cash flows must be included? A. None B. One year C. Two years D. The company must ask for an exemption from the SEC

C - Normally, audited statements of income and cash flows are required for the three most recent fiscal years. However, if the company lacks such history, it must include in the registration the audited statements for those fiscal years it has been in operation.

All of the following are examples of organic growth except: A. An increase in market share through advertising B. Expansion of product line C. Takeover by strategic acquirer D. Operational enhancements

C - Organic growth is characterized as business expansion due to an increase in market share through existing product lines, new product lines, or general operational enhancements. Growth that is derived through mergers or acquisitions is inorganic.

Company DEF pays a quarterly dividend of $0.60 and has a dividend yield of 5%, a dividend payout ratio of 25%, and a book value of $36 per share. What is the company's price-to-book value multiple? A. 0.33× B. 0.75× C. 1.33× D. 2.43×

C - Price-to-book can be calculated in two ways: Market Value of Equity/Book Value of Equity or Stock Price/Book Value per Share. Because book value per share is provided in the question, the per share calculation can be used in this example. Stock Price = $2.40 Annual Dividend/5% Dividend Yield = $48 Note that the annual dividend is calculated as the quarterly dividend of $0.60 multiplied by four. Price-to-Book = $48/$36 = 1.33×

Company XYZ has $650 million in shareholders' equity as of December 31, 2018. During 2019, the company generates $150 million of net income and declares $100 million of dividends. What is Company XYZ's return on equity for 2019? A. 20.7% B. 21.4% C. 22.2% D. 23.1%

C - Return on Equity = Net Income/Average Shareholders' Equity Ending SE = Beginning SE + NI − Declared Dividends Ending SE = $650MM + $150MM − $100MM = $700MM Average SE = (Beginning SE of $650MM + Ending SE of $700MM)/2 = $675MM Return on Equity = $150MM Net Income/$675MM Average Shareholders' Equity = 22.2%

BJM Company, Inc., shows $700 million in shareholders' equity as of the beginning of 2016. During the course of 2016, BJM earns $80 million in net income and declares $5 million in dividends. Assuming no additional financing activities during 2016, what is BJM's shareholders' equity as of the end of 2016? A. $620 million B. $695 million C. $775 million D. $780 million

C - Shareholders' equity increases by the amount of net income during a given period and decreases by the amount of any dividends declared. Therefore, $700 million beginning shareholders' equity + $80 million net income − $5 million dividends = $775 million ending shareholders' equity.

XYZ Corp, an issuer, wishes to take advantage of a Rule 163A exemption for communications made by, or on behalf of, an issuer more than 30 days before a registration statement is filed. The issuer takes reasonable steps to prevent communications during the 30 days just prior to filing. What additional requirement must be met? A. The issuer must avoid graphic communication B. The issuer must include an SEC-approved legend C. The issuer must avoid referencing the upcoming offering D. The company must be a well-known seasoned issuer (WKSI)

C - The Rule 163A exemption applies to communications by or on behalf of an issuer, and it has two main requirements. Reasonable steps must be taken to avoid communications during the 30 days prior to filing the registration. Also, no reference should be made to the pending securities offering.

The Securities Exchange Act of 1934 requires an issuer to register with a national securities exchange once it has reached which TWO of the following thresholds? I. At least 100 shareholders II. At least 2,000 shareholders III. At least $10 million in assets IV. At least $50 million in assets A. I and III B. I and IV C. II and III D. II and IV

C - The SEC requires registration of any issuer with at least 2,000 shareholders and at least $10 million in assets

ABC Corporation files a registration to go public in an initial public offering. The SEC then issues a deficiency letter to address incomplete information. The effective date of the offering will: A. Not be affected by the deficiency letter B. Be delayed a mandatory 21 days C. Be delayed until the deficiencies are addressed D. Be specified in the deficiency letter

C - The SEC will not allow an effective date to be set until any deficiencies in the registration statement are addressed. The SEC must review the revised registration statement, including any information added, to address the deficiency.

company had sales of $500 million, operating expenses of $50 million, and EBITDA of $25 million during the past year. At the same time, accounts receivable increased by $50 million. How much actual cash did the company receive during the year from its sales? A. $0 B. ($25 million) C. $450 million D. $500 million

C - The company had sales of $500 million during the year but accounts receivable increased by $50 million. Therefore, the company actually received $450 million in cash from its sales ($500 million − $50 million); the remaining $50 million are sales on credit. The $50 million of operating expenses do reduce cash flow but do not affect the cash received by the company from its customers.

A company has $150 million of EBITDA, $50 million of net income, and a 40% tax rate. Assuming the company reports a one-time, pre-tax restructuring charge of $20 million, what are adjusted EBITDA and adjusted net income, respectively? A. $150MM EBITDA, $62MM net income B. $170MM EBITDA, $70MM net income C. $170MM EBITDA, $62MM net income D. $130MM EBITDA, $38MM net income

C - The entire pre-tax amount of $20 million is added back to $150 million of EBITDA, resulting in adjusted EBITDA of $170 million. For net income, however, the restructuring charge of $20 million must be tax-effected at a 40% tax rate ($12 million) before being added to the $50 million of net income, resulting in $62 million of adjusted net income

All of the following types of organizations are exempt from the ongoing reporting requirements of the '34 Act except: A. Educational institutions B. Fraternal or charitable organizations C. Companies with less than 5,000 shareholders D. Separately regulated insurance companies

C - The exemption for registration and ongoing reporting requirements covers issuers that operate exclusively for religious, educational, benevolent, fraternal, or charitable purposes and separately regulated insurance companies. Also exempt are corporations with fewer than 2,000 shareholders and no more than $10 million in assets.

All of the following are typically included in the M&A teaser for a private company except: A. Brief description of the business B. Summary historical financial data C. Map of plant and sales locations D. Investment highlights

C - The typical teaser is 1-2 pages long, providing just enough information for potential buyers to determine whether they are sufficiently interested to move forward in the process. A map of plant and sales locations is typically more detailed and sensitive information than would customarily be included in a teaser. This information, however, would be included in the CIM.

The annual report that public companies must file to meet the ongoing reporting requirements of the '34 Act is the: A. 8-K B. 8-Q C. 10-K D. 10-Q

C - Two periodic reports that public companies must file are the 10-K for annual reports and the 10-Q for quarterly reports

An investor owns a 7% bond, purchased at 95, that is callable at 102. If the bond is called away by the issuer, how much money does the investor receive? A. $102 B. $1,020 C. $1,055 D. $1,090

C - When a bond is called away by the issuer, the investor receives the par value of $1,000 plus the call premium of $20, plus the final semiannual coupon payment of $35, for a total of $1,055. Remember that bonds are quoted as a percentage of par value, so a quote of 102, really means 102% of par, or $1,020

NewPublicCo sells 100,000 shares of $0.50 par value stock for $12 per share. Which of the following is true about the money raised in excess of par value? A. It is paid entirely to the SEC as a registration fee B. It represents a credit to retained earnings C. It represents a credit to capital surplus D. It represents a liability that must eventually be returned to shareholders

C - When a company sells stock to the public, capital raised in excess of par value is represented as an increase to capital surplus on the issuer's balance sheet. Capital surplus is also referred to as additional paid-in capital (APIC).

Which of the following are often heavily negotiated in a confidentiality agreement between two corporations? I. Initial bid date II. Length of term III. Indicative purchase price IV. Non-solicitation A. I and III B. I and IV C. II and III D. II and IV

D - A confidentiality agreement (CA) is a legal contract between the target and each prospective buyer that governs the sharing of confidential company information. Length of term, which designates the period during which the confidentiality restrictions remain in effect, is often heavily negotiated

Which of the following is not a marketing document in an M&A process? A. Teaser B. Confidential information memorandum C. Management presentation D. Confidentiality agreement

D - A confidentiality agreement (CA) is a legally binding contract between the target and prospective buyer that governs the sharing of confidential company information. All of the other documents are key materials for the target to present its business model and highlights to potential buyers.

Demand for a live road show presentation is so great that an underwriter decides to simulcast the presentation via a live video feed into an overflow room. Which presentation will be considered "graphic communication" for securities offering and prospectus delivery requirements? A. The live presentation only B. The simulcast into the overflow room only C. Both the live presentation and simulcast D. Neither the live presentation nor the simulcast

D - A simulcast into an overflow room will be considered the same as a live presentation, even if it uses electronic media, provided that it is delivered in real time. However, a taped version of the live presentation, not delivered in real time, is considered graphic communication.

Which criteria are useful for determining whether a given precedent transaction is relevant for valuing the target company in an M&A scenario? I. Target company sector II. Period during which the transaction took place III. Size of target company IV. Target company domicile A. I and III B. II and IV C. I, II, and III D. I, II, III, and IV

D - All of these factors are important for determining whether a given precedent transaction is appropriate

All of the following are benefits of an IPO except: A. It provides an opportunity for founders to sell their shares B. It raises capital to fund the company's growth C. It exposes a company to more sophisticated valuation opportunities D. It saves a company time, resources, and flexibility

D - An IPO is typically a long, drawn-out process requiring significant resources. It also requires a company to make ongoing reports to the SEC which requires further resources and time commitment.

A company has sales of $2 billion in 2018 and an EBITDA margin of 15%. Assuming a 10% sales growth rate and a 50 bps improvement in EBITDA margin, what is 2019 EBITDA? A. $300 million B. $330 million C. $310 million D. $341 million

D - Assuming a 10% sales growth rate, 2018 sales of $2 billion would grow to $2.2 billion in 2019. Adding 50 bps to the 2018 EBITDA margin of 15% provides a 2019 EBITDA margin of 15.5%. When multiplied by 2019 sales of $2.2 billion, a 15.5% EBITDA margin provides 2019 EBITDA of $341 million

A ratio of earnings before interest, taxes, depreciation, and amortization to interest expense would be referred to as a: A. Leverage ratio B. Liquidity ratio C. Capitalization ratio D. Coverage ratio

D - EBITDA-to-interest expense is a standard interest coverage ratio measuring the amount of cash flow available to cover interest obligations. Leverage is most often captured by the debt-to-EBITDA ratio, while capitalization is captured by the debt-to-total capitalization ratio. The current ratio is a common liquidity ratio, calculated as current assets divided by current liabilities

DEF Co. has net debt of $100MM, cash of $60MM, and 20MM shares outstanding. Assuming the company is trading at $32 per share, what is DEF's enterprise value? A. $580MM B. $640MM C. $680MM D. $740MM

D - Equity Value = Stock Price × Shares Outstanding Equity Value = $32 × 20MM = $640MM Enterprise Value = Equity Value + Net Debt Enterprise Value = $640MM + $100MM = $740MM Note that because the cash of $60MM is already included in net debt, it does not have to be subtracted separately.

Publicly traded REITs refer to which of the following? A. REITs that do not file with the SEC and whose shares trade on a stock exchange B. REITs that do not file with the SEC and whose shares do not trade on a stock exchange C. REITs that file with the SEC and whose shares do not trade on a stock exchange D. REITs that file with the SEC and whose shares trade on a stock exchange

D - For a REIT to be publicly traded, it must file with the SEC and must meet exchange- listing criteria. Many REITs are listed on the New York Stock Exchange

What is the primary use of Form 8-K? A. To offer official notification to various classes of shareholders of matters to be brought to a vote at a shareholders' meeting B. For registrants to report quarterly financials, management discussion and analysis, and any changes in accounting principles C. To report equity holdings by institutional investment managers having equity assets under management of $100 million or more D. For registrants to report any unscheduled, and previously unreported, material events or corporate changes which could be deemed important to investors or security holders

D - Form 8-K details information that needs to be disclosed on a timely basis to the registrant's stakeholders. It is meant to be more current than the 10-Q or 10-K.

Last year a company paid a $2 dividend, which is expected to grow by 6% per year. Assuming a discount rate of 10%, what is the company's implied stock price, calculated in accordance with the dividend discount model? A. $21.20 B. $35.33 C. $50 D. $53

D - Implied Stock Price = Last Year's Dividend × (1 + Growth Rate)/(Discount Rate − Growth Rate) Implied Stock Price = $2 × (1 + 6%)/(10% − 6%) = $53

Following a PIPE transaction, an issuer will most likely do which of the following: A. File a private placement memorandum B. Sign a subscription agreement to sell the restricted shares at a future date C. Allow the investor to exercise their warrants after the next quarterly filing D. File a resale registration statement

D - In a PIPE transaction an issuer will often file a resale registration statement that will allow the investors to sell the securities immediately

All of the following are typically provided access to the data room except: A. Buyer functional specialists B. Buy-side advisers C. Acquisition financing underwriters D. Buyer's largest institutional shareholders

D - In conjunction with the management presentation and site visits, prospective buyers are provided access to the data room, which contains detailed information about all aspects of the target. Serious bidders dedicate significant resources to ensure their due diligence is as thorough as possible, often enlisting a full team of advisers, accountants, attorneys, consultants, and other functional specialists to help review the data.

Within the context of M&A processes, what does a negotiated sale refer to? A. A long-term, highly negotiated sale from a key vendor B. A large volume sale to an important customer prior to deal closing C. A sale process in which the seller negotiates a definitive agreement with multiple bona fide parties D. A sale process centered on a direct dialogue with a single prospective buyer

D - In contrast to an auction, a negotiated sale centers on a direct dialogue with a single prospective buyer.

What does the colloquial term "bottom line" refer to? A. EBITDA B. Revenue C. Operating profit D. Net income

D - Net income is also referred to as the bottom line due to its position at the bottom of the income statement. It is the residual profit after all of a company's expenses have been netted out.

Net working capital refers to which of the following? A. Funds that a company uses to purchase, improve, expand, or replace physical assets B. An expense that approximates the reduction of the book value of a company's long-term fixed assets C. An expense that reduces the value of a company's definite life intangible assets D. A measure of how much cash a company needs to fund its operations on an ongoing basis

D - Net working capital is typically defined as current assets minus current liabilities. It serves as a measure of how much cash a company needs to fund its operations on an ongoing basis

What information is contained in Part III of a company's annual 10-K report? A. Exhibits and financial schedules B. The business and its operations C. Audited statements and management's discussion D. Information on directors, officers, and stock ownership

D - Part I of the 10-K provides an overview of the business; Part II contains numbers and analysis; Part III lists the officers, directors, and 5% shareholders; and Part IV includes exhibits and schedules

Which of the following best describes the difference between a Schedule 13D and a Schedule 13G? A. A Schedule 13D is for 5% shareholders, whereas a Schedule 13G is for 10% shareholders B. A Schedule 13D is for affiliates, whereas a Schedule 13G is for non-affiliates C. A Schedule 13D is only for individual investors, whereas a Schedule 13G is only for institutional investors D. A Schedule 13D is for activist investors, whereas a Schedule 13G is for passive investors

D - Schedules 13D and 13G are both triggered by an investor's beneficial ownership of at least 5% of the voting shares of a company. The difference between the two forms is that a 13D is for investors with an active role in company management, whereas a 13G is for investors with a passive role in company management.

A company's basic shares outstanding are typically sourced from the front page of the company's latest: A. 8-K B. DEFM14A C. S-4 D. 10-Q

D - The 10-Q for the most recent quarter is typically the source for basic shares outstanding. In the event that the most recent quarter is the fourth quarter of the company's fiscal year, then the 10-K serves as the source for basic shares outstanding.

The typical CIM contains all of the following except: A. Target financial projections and MD&A B. Information on target's industry and competitive dynamics C. Investment highlights D. Preliminary valuation analysis of the target

D - The CIM is a detailed written description of the target (often 50+ pages) that serves as the primary marketing document for the target in an auction. The information provided is designed to be sufficiently comprehensive for potential buyers to craft first-round bids. A preliminary valuation analysis of the target is not typically included in the CIM—this is work to be performed by the prospective buyer and its advisers, not the target.

Which of the following are key components of the second round of a traditional auction? I. Site visits II. Distribution and mark-up of the definitive agreement III. Management presentation IV. Data room analysis and review A. I and III only B. I, II, and III only C. I, II, and IV only D. I, II, III, and IV

D - The auction's second round centers on facilitating the prospective buyers' ability to conduct detailed due diligence and analysis so potential buyers can submit strong, binding bids. The second-round diligence process starts with the management presentation, followed by site visits and deep analysis of the data-room contents (not necessarily in that order). Toward the end, the buyer(s) submits a mark-up of the definitive agreement.

Why do sellers hire an investment bank? I. Design and execute key process points II. Alleviate burden from company management III. Legal comfort for the board IV. Maximize value received A. I and IV B. II and IV C. I, III, and IV D. I, II, III, and IV

D - The seller typically hires an investment bank and its team of trained professionals to ensure that key objectives are met and a favorable result is achieved

An underwriter is preparing a registration statement for an issuer's IPO. The company lacks extensive operating history or performance, and the underwriter includes its own "good faith assessment" regarding projections of future performance. The following are necessary for an independent review of these projections to be included, except: A. The reviewer's qualifications are disclosed B. The reviewer's relationship to the issuer is disclosed C. The reviewer's consent is obtained D. The reviewer is certified by the SEC

D - To evaluate a reviewer's "independence," a reader of a registration statement needs to know the reviewer's qualifications and how the reviewer is related to the issuer. Because the reviewer may have obligations or liability for the accuracy of the review, the reviewer's consent must be obtained. There is no requirement that the reviewer be certified by the SEC.

An investor claims a prospectus contained an untrue statement. For purposes of bringing a civil suit for liability under Section 12 of the '33 Act, and claiming damages, the information must have been untrue at what time? A. On the effective date B. On the date of the initial filing C. On the date of the red herring D. At the time of sale

D - Under Rule 159, the determination as to whether information in a prospectus or oral communication is untrue or has been omitted applies to information shared by the time of sale or contract of sale. If information became untrue after the time of sale, it is not relevant for civil liability purposes

Which of the following companies would be deemed the most creditworthy? A. A company with EBIT interest coverage of 4× and net debt of -50 million B. A company with EBIT interest coverage of 5× and net debt of -50 million C. A company with EBIT interest coverage of 4× and net debt of -100 million D. A company with EBIT interest coverage of 5× and net debt of -100 million

D - company with a high coverage ratio and low net debt would be the most creditworthy. High interest coverage indicates sufficient profit to pay off interest, while negative net debt indicates that a company has more cash than debt.