CFM Private Equity & Venture Capital 2

Question 1

In a leveraged buyout (LBO), which financial metric is most critical to assess a target company's ability to service acquisition debt?

Accepted Answer

EBITDA margin

Answer

EBITDA margin reflects operating cash flow generation, which determines the company's capacity to service LBO debt obligations.

Question 2

A venture capital firm uses a '10x return' target for individual investments. If the portfolio has a 90% failure rate, the fund can still achieve positive returns primarily because of:

Accepted Answer

The power law distribution where a few winners generate outsized returns

Answer

VC portfolios follow a power law where one or two breakout investments can return multiples of the entire fund, compensating for the many failures.

Question 3

What is a 'drag-along' provision in a private equity shareholder agreement?

Accepted Answer

A clause requiring minority shareholders to sell their shares if majority shareholders approve a sale

Answer

Drag-along rights allow majority shareholders to compel minority shareholders to join a sale transaction on the same terms.

Question 4

Which stage of private equity investment typically carries the highest risk but also the highest potential return?

Accepted Answer

Seed/angel stage

Answer

Seed/angel stage investments carry the highest risk due to unproven business models, but offer the greatest upside if the company succeeds.

Question 5

In private equity fund accounting, the 'J-curve effect' refers to:

Accepted Answer

Initial negative returns due to fees and early losses before investments mature

Answer

The J-curve describes how PE funds typically show negative returns in early years due to fees and write-downs before generating positive returns as investments mature.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Private Equity & Venture Capital 2