CFM CFM Valuation Methods & DCF Modeling 2 — Questions and Answers
Question 1: In a precedent transactions analysis, what does the 'control premium' refer to?
- The discount applied to minority stake purchases
- The premium paid above the target's pre-deal market price to acquire control (Correct answer)
- The cost of management retention packages post-acquisition
- The regulatory filing fee paid to the SEC
Correct answer: The premium paid above the target's pre-deal market price to acquire control
A control premium reflects the extra amount an acquirer pays above market price to gain a controlling interest and its associated strategic benefits.
Question 2: Which sensitivity analysis tool in Excel allows a financial modeler to test two variables simultaneously and display results in a matrix?
- Goal Seek
- Solver
- Two-Variable Data Table (Correct answer)
- Scenario Manager
Correct answer: Two-Variable Data Table
A Two-Variable Data Table in Excel lets you vary two inputs simultaneously and see all output combinations displayed in a structured grid.
Question 3: When calculating the cost of equity using CAPM, which component measures the stock's sensitivity to market movements?
- Risk-free rate
- Equity risk premium
- Beta (Correct answer)
- Credit spread
Correct answer: Beta
Beta quantifies a stock's systematic risk relative to the broader market; a beta above 1 means the stock is more volatile than the market.
Question 4: A company's WACC is 10% and its projected free cash flows grow at 3% in perpetuity. What is the terminal value using the Gordon Growth Model if Year 5 FCF is $50M?
- $500M
- $714M (Correct answer)
- $833M
- $1,000M
Correct answer: $714M
TV = FCF × (1+g) / (WACC - g) = $50M × 1.03 / (0.10 - 0.03) = $51.5M / 0.07 ≈ $714M.
Question 5: In a sum-of-the-parts (SOTP) valuation, each business segment is valued separately primarily because:
- Consolidated financials do not include segment data
- Different segments may warrant different valuation multiples or methodologies (Correct answer)
- GAAP requires separate disclosure of divisional valuations
- Debt cannot be allocated across operating segments
Correct answer: Different segments may warrant different valuation multiples or methodologies
SOTP is used when a conglomerate's divisions operate in different industries with distinct risk profiles, growth rates, and appropriate peer multiples.
Question 6: Which financial metric is typically used as the denominator when applying an EV/Revenue multiple in early-stage company valuation?
- Trailing twelve months (TTM) EBITDA
- Next twelve months (NTM) projected revenue (Correct answer)
- Net income after taxes
- Operating cash flow
Correct answer: Next twelve months (NTM) projected revenue
EV/Revenue multiples for high-growth companies typically use forward (NTM) revenue because it better reflects near-term scale and growth trajectory.
CFM CFM Valuation Methods & DCF Modeling 2
In a precedent transactions analysis, what does the 'control premium' refer to?