CFM CFM Corporate Finance & Valuation 2

Question 1

In a leveraged buyout (LBO), the primary source of returns for the private equity buyer is:

Accepted Answer

Debt paydown, operational improvements, and multiple expansion

Answer

LBO returns come from three main drivers: paying down acquisition debt with operating cash flow, improving EBITDA through operational changes, and selling at a higher valuation multiple.

Question 2

What does the term 'beta' measure in the context of the Capital Asset Pricing Model (CAPM)?

Accepted Answer

A stock's sensitivity to market-wide movements

Answer

Beta measures systematic (market) risk, indicating how much a stock's returns move relative to the overall market; a beta of 1.5 means the stock is 50% more volatile than the market.

Question 3

Which of the following best describes a company's 'cost of equity' under CAPM?

Accepted Answer

Risk-free rate + beta × equity risk premium

Answer

CAPM: Cost of Equity = Rf + β × (Rm - Rf), where Rf is the risk-free rate and (Rm - Rf) is the equity risk premium, compensating investors for taking on equity risk.

Question 4

What is a 'terminal value' in discounted cash flow analysis?

Accepted Answer

The present value of all cash flows beyond the explicit forecast period, assuming perpetual growth

Answer

Terminal value captures the value of cash flows beyond the projection horizon, often calculated using the Gordon Growth Model (FCF × (1+g) / (WACC - g)).

Question 5

In a merger, what does the term 'accretion/dilution analysis' assess?

Accepted Answer

The impact of the transaction on the acquirer's earnings per share (EPS)

Answer

Accretion/dilution analysis determines if the acquisition increases (accretive) or decreases (dilutive) the acquirer's post-deal EPS, informing the deal's attractiveness.

CFM - Certified Finance Manager Practice Test

CFM - Certified Finance Manager Practice Test

CFM CFM Corporate Finance & Valuation 2