CA Corporate Finance & Investment 3

Question 1

In a leveraged buyout (LBO), the primary source of equity returns typically comes from:

Accepted Answer

Debt paydown, EBITDA growth, and multiple expansion

Answer

LBO returns are driven by three value levers: using operating cash flows to repay debt, growing EBITDA, and exiting at a higher valuation multiple.

Question 2

The dividend discount model (DDM) values a stock as the present value of:

Accepted Answer

Future dividends discounted at the cost of equity

Answer

The DDM discounts expected future dividends at the required rate of return on equity to determine intrinsic stock value.

Question 3

Which of the following best describes 'operating leverage'?

Accepted Answer

The degree to which fixed operating costs magnify changes in revenue into larger changes in EBIT

Answer

Operating leverage reflects how a firm's fixed cost base causes operating income to move proportionally more than revenue.

Question 4

A company issues convertible bonds at a coupon rate below its straight-debt rate. The compensation to bondholders for accepting the lower coupon is:

Accepted Answer

The option to convert bonds into equity shares

Answer

The conversion feature grants bondholders an embedded call option on equity, which compensates them for accepting a below-market coupon.

Question 5

In merger analysis, the 'accretion/dilution test' evaluates whether a deal:

Accepted Answer

Increases or decreases the acquirer's post-deal EPS

Answer

An accretive deal raises the acquirer's pro forma EPS above its standalone EPS; a dilutive deal lowers it.

(CA) Chartered Certified Accountant Practice Test