FA Financial Modeling and Valuation 2

Question 1

Which approach is used to value a company by adding up the values of its individual business segments?

Accepted Answer

Sum-of-the-Parts (SOTP) Valuation

Answer

Sum-of-the-parts valuation independently values each business unit or segment using appropriate multiples or DCF, then adds them together to derive total enterprise value.

Question 2

In a merger model, accretion occurs when:

Accepted Answer

The combined company's EPS is higher than the acquirer's standalone EPS

Answer

An accretive acquisition increases the acquirer's earnings per share (EPS), meaning the transaction is financially beneficial to the acquirer's shareholders.

Question 3

What does a football field chart display in investment banking and valuation?

Accepted Answer

A range of values from multiple valuation methodologies side by side

Answer

A football field chart presents the value ranges from each valuation method (DCF, comps, precedents) in horizontal bars, showing the implied valuation range and overlap.

Question 4

When building a DCF model, which rate is typically used as the discount rate for an unlevered free cash flow projection?

Accepted Answer

Weighted Average Cost of Capital (WACC)

Answer

Unlevered (firm-level) free cash flows are discounted at WACC, which blends the cost of equity and after-tax cost of debt reflecting all providers of capital.

Question 5

What is the purpose of normalizing earnings in a valuation?

Accepted Answer

To remove one-time, non-recurring items so recurring earnings power is reflected

Answer

Normalizing earnings strips out extraordinary or non-recurring items (restructuring charges, one-time gains) to present a clearer picture of sustainable earning power.

FA - Finance Analyst Practice Test

FA - Finance Analyst Practice Test

FA Financial Modeling and Valuation 2