FAC Corporate Finance & Investment 3

Question 1

In a leveraged buyout (LBO), the primary driver of equity returns is typically:

Accepted Answer

Multiple expansion, debt paydown, and EBITDA growth

Answer

LBO returns stem from three value drivers: buying at a lower multiple than exit, reducing debt with operating cash flows, and growing EBITDA.

Question 2

A company's stock price is $50, dividends per share are $2, and the expected growth rate is 5%. What is the cost of equity using the Gordon Growth Model?

Accepted Answer

9%

Answer

Cost of equity = D1/P0 + g = (2 × 1.05)/50 + 0.05 = 4.2% + 5% ≈ 9%.

Question 3

Which of the following transactions would most likely trigger Section 382 limitations on a company's net operating loss (NOL) carryforwards in the United States?

Accepted Answer

An ownership change of more than 50 percentage points within three years

Answer

IRC Section 382 limits NOL usage after an 'ownership change,' defined as more than a 50-percentage-point shift in ownership within a three-year period.

Question 4

The enterprise value (EV) of a firm is best described as:

Accepted Answer

Market cap plus total debt minus cash

Answer

EV = Market Cap + Debt + Preferred Stock + Minority Interest − Cash; the simplified version is Market Cap + Net Debt.

Question 5

A company has free cash flow to equity (FCFE) of $4 million, capital expenditures of $3 million, and net borrowing of $1 million. What is free cash flow to the firm (FCFF) if net income is $6 million and depreciation is $2 million?

Accepted Answer

$6 million

Answer

FCFF = Net Income + Depreciation − CapEx − Change in Working Capital + After-tax interest; alternatively FCFF = FCFE + Interest(1−t) − Net Borrowing; given the data FCFF = 4 + 0 + 1 + 1 (interest net) = $6 million is consistent.

(FAC) Finance and Accounting Certification Practice Test

(FAC) Finance and Accounting Certification Practice Test

FAC Corporate Finance & Investment 3