CFM CFM Valuation Methods & DCF Modeling 3

Question 1

Which approach calculates equity value by subtracting net debt from enterprise value?

Accepted Answer

Bridge from EV to equity value

Answer

The EV-to-equity bridge adjusts enterprise value by subtracting debt and adding cash to arrive at the value attributable to equity holders.

Question 2

In a leveraged buyout (LBO) context, what does the 'entry multiple' refer to?

Accepted Answer

The EV/EBITDA multiple paid by the sponsor to acquire the target

Answer

The entry multiple is the EV/EBITDA paid at acquisition and is a key driver of LBO returns along with exit multiple and leverage.

Question 3

When building a three-statement model, which statement is completed last because it depends on both the income statement and balance sheet?

Accepted Answer

Cash Flow Statement

Answer

The cash flow statement is derived from changes in balance sheet accounts and net income, so it is built after the income statement and balance sheet are complete.

Question 4

A company trades at a P/E of 15x and has EPS of $4.00. If EPS grows to $5.00 and the multiple remains constant, what is the new implied share price?

Accepted Answer

$75

Answer

New share price = P/E × new EPS = 15 × $5.00 = $75.

Question 5

What is the primary purpose of normalizing EBITDA before applying a valuation multiple?

Accepted Answer

To remove one-time, non-recurring items so EBITDA reflects ongoing earning power

Answer

Normalizing EBITDA strips out non-recurring charges (restructuring, litigation) so the multiple is applied to a sustainable earnings base.

CFM - Certified Financial Modeler Practice Test

CFM - Certified Financial Modeler Practice Test

CFM CFM Valuation Methods & DCF Modeling 3