Adventis Financial Modeling Certification (FMC) Level 2 Exam Review (Latest 2023/ 2024 Update) Questions and Verified Answers| 100% Correct

Adventis Financial Modeling Certification (FMC) Level 2 Exam Review (Latest 2023/ 2024 Update) Questions and Verified Answers| 100% Correct

Adventis Financial Modeling Certification
(FMC) Level 2 Exam Review (Latest 2023/
2024 Update) Questions and Verified
Answers| 100% Correct
Q: a company sold for $100M and the company being bought had $15M of debt and $2M of
cash, what happens and what is the transaction value and purchase price
Answer:

• the $2M would be used by shareholders of the acquired company to pay down existing $15M in
  debt to make $13M in debt now (15 – 2 = 13)
• the proceeds from the deal would then be used to pay down the remaining debt (EV = CS + PS
• Debt – Cash)
• Result is 100 – 13 = 87
• TV = $100M
• Purchase price = $87 (check to shareholders of acquired company)
  Q: 2 primary types of relative valuation
  Answer:

1. comparable company analysis
2. acquisition comparables analysis
   Q: comparable companies analyses (public trading comparables analyses)
   Answer:

• most common types of relative valuation
• these methods allow investors to compare valuation of similar companies by comparing similar
  ratios
  Q: most common public trading comparable ratios

Answer:

1. EV/EBITDA – compares the total value of a business to its operating profits
2. EV/Revenue – Generally good EV/Sales multiples are between 1x and 3x. Since EV/Sales is a
   valuation metric, from investor perspective higher value of EV/Sales can be indicative of the
   “expensiveness” of the valuation of the company.
3. P/E (share price/earnings per share) Difference between 1 and 3 is that P/E doesn’t account for
   Debt. EV/EBITDA may show a more accurate picture since it can determine if a company has a
   lot of debt that may hinder earnings. Some drawbacks for EV/EBITDA is that it doesn’t account
   for CAPEX

• Ex: P/E 20x ( another name is “Earnings Multiple” & “multiple”
• Ex: Bill Bike Shop – Price = $60, EPS = $3
  P/E = 60/3 = 20x
  Sam Scooter Shop – Price = $75, EPS = $5
  P/E = 75/5 = 15
  This is telling us that the market is currently valuing the shares of Bill’s bike shop at 20 times
  the amount of their yearly profit so if you were to buy shares in bill’s bike shop you would be
  paying 20 times the amount that they generate in profit
  Even though sam scooters have a higher price per share they are also generating more earnings
  for the shares outstanding. What we see is that when we compare the two companies and in
  apples to apple even though sam’s scooter shares are 15 more expensive they actually give you
  the right to more profits than bill’s bike shop does you have the right to five dollars per share
  with a profit instead of only the three dollars per
  share in profit the bills bike shop
  Q: assume a company has $5M of EBITDA and two public companies most similar to the
  company trade at 6.0x and 7.0x EBITDA, what might you conclude
  Answer:
• Ex: 7.0 = x/5 ; 6.0 = x/5
• can conclude that EV for the company should be between 30-35 million
  Q: what happens when a company trades at a multiple that is a premium or a discount to the
  industry average
  Answer:
  investors will dig in to understand the rationale

Q: assume that a company trades at 7.0x EBITDA but the average of comparable companies is
9.0x, what can we conclude
Answer:
the company is being undervalued and the investor will look to buy shares because he realizes
that the share price will increase Wall St. begins to value the company in-line with its peers
Q: acquisition comparables analysis (transaction comparables analysis)
Answer:
represent comparable acquisitions that have taken place and have been publicly announced
Q: are multiples for acquisition comparables higher or lower than mulitples for comparable
companies
Answer:
higher because acquirers need to pay a premium to the current share price to gain control of the
company
Q: most common type of intrinsic valuation
Answer:
DCF analysis
Q: what is DCF analysis
Answer:
it is the process of projecting future cash flows and discounting them to their PVs by using TVM
get pdf at ;https://learnexams.com/search/study?query=

what is value
what people are willing to pay for (what the buyer pays)

who said, “Value is what people are willing to pay for”
John Naisbitt

2 primary types of valuation

1. relative valuation
2. intrinsic valuation

relative valuation refers to what
methods that compare the price of a company to the market value of similar assets

intrinsic value refers to what
the value of a company through fundamental analysis without reference to its market value but instead around its ability to generate cash flow

in an M&A context, what is EV
transaction value

in an M&A context, what is equity value
purchase price

a company sold for $100M and the company being bought had $15M of debt and $2M of cash, what happens and what is the transaction value and purchase price

• the $2M would be used by shareholders of the acquired company to pay down existing $15M in debt to make $13M in debt now (15 – 2 = 13)
• the proceeds from the deal would then be used to pay down the remaining debt (EV = CS + PS + Debt – Cash)
• Result is 100 – 13 = 87
• TV = $100M
• Purchase price = $87 (check to shareholders of acquired company)

2 primary types of relative valuation

1. comparable company analysis
2. acquisition comparables analysis

comparable companies analyses (public trading comparables analyses)

• most common types of relative valuation
• these methods allow investors to compare valuation of similar companies by comparing similar ratios

most common public trading comparable ratios

1. EV/EBITDA
2. EV/Revenue
3. Net income/Earnings (share price/earnings per share)

assume a company has $5M of EBITDA and two public companies most similar to the company trade at 6.0x and 7.0x EBITDA, what might you conclude

• Ex: 7.0 = x/5 ; 6.0 = x/5
• can conclude that EV for the company should be between 30-35 million

what happens when a company trades at a multiple that is a premium or a discount to the industry average
investors will dig in to understand the rationale

assume that a company trades at 7.0x EBITDA but the average of comparable companies is 9.0x, what can we conclude
the company is being undervalued and the investor will look to buy shares because he realizes that the share price will increase Wall St. begins to value the company in-line with its peers

acquisition comparables analysis (transaction comparables analysis)
represent comparable acquisitions that have taken place and have been publicly announced

are multiples for acquisition comparables higher or lower than mulitples for comparable companies
higher because acquirers need to pay a premium to the current share price to gain control of the company

most common type of intrinsic valuation
DCF analysis

what is DCF analysis
it is the process of projecting future cash flows and discounting them to their PVs by using TVM

steps for DCF

1. project future cash flows
2. discount future cash flows to their PV’s
3. Find the PV of all cash flows beyond the projection period (terminal value)

cash flow metric used for DCF analysis
unlevered FCF

unlevered FCF

• cash flow available to all stakeholders
• not affected by capital structure
• doesn’t include interest expense

why is tax-effected EBIT used rather than net income

• the valuation should not depend on capital structure
• applying the tax-rate directly to EBIT without subtracting interest expense eliminates the impact of capital structure to cash flow

cash flow is projected out in the projection period which is typically…
5 years but could be 10 years for startups

the analyst should end the model with a financial year representative of a…
steady state to ensure the analysis does not over or understate total valuation

first component of determining the present value of a company is
calculate each unlevered FCF’s PV by discounting them using the discount rate (cost of capital)

two methods for determining terminal value

1. perpetuity method
2. EBITDA exit multiple method

perpetuity method assumes that the
FCF in the last year of the projection period…
will grow into perpetuity at an annual rate of growth (2-3%)

in practice, you would typically expect to see perpetuity growth do what when a company matures
decline

to calculate the terminal value under the perpetuity growth method, what model is used
Gordon-Growth Model

the Gordon-Growth Model rests on the assumption that…
CF of the last period will stabilize and continue at the same rate of growth forever

perpetuity growth rate represents
an average growth rate

perpetuity growth rate can’t exceed what
local inflation rate because that would signify that the company would eventually grow to be larger than the entire domestic economy

EBITDA exit multiple assumes…
that the company is sold in the last year of the projection period at a multiple of EBITDA

what will investors do with these two methods
use one method and back into an implied value for the other method as a check

if a 12.0x EBITDA exit multiple implies a 5% perpetuity growth rate, what can be said
the exit multiple could be considered unrealistic

formula for PV of projection period
PV = FV/(1+r)^N

formula for PV of terminal value
PV = TV/(1+r)^N

formula for terminal value using perpetuity method
TV = Terminal year FCF (1 + g) / (r – g)

formula for terminal value using EBITDA exit multiple method
Terminal year EBITDA X EBITDA multiple

the discount rate used in a DCF analysis should be…
the cost of capital for the business being valued

Weighted average cost of capital (WACC) is used to…
determine the discount rate or a range of discount rates to be used in a DCF analysis

often companies add a premium to the WACC to determine…
a hurdle rate which will then be used as the discount rate

what is the WACC
minimum return that a company must earn on an existing asset base to satisfy all capital providers

WACC represents…
the blended cost to debt holders and equity holders based on the cost of debt and cost of equity

WACC formula
WACC = (%equity X cost of equity) + (%debt X cost of debt) X (1-T)

1. E
2. D
3. V
4. E/V
5. D/V
6. Re
7. Rd
8. T
9. market value of equity
10. market value of debt
11. total enterprise value (E+D)
12. % of financing that is equity
13. % of financing that is debt
14. cost of equity
15. cost of debt
16. corporate tax rate

Capital assets pricing model (CAPM)

• used to calculate cost of equity
• rate of return equity owners expect

CAPM formula
Re = Rf + B (Rm – Rf)

Rf
risk free rate (10 year bond)

B
Beta (how volatile the stock is in comparison to the market)

Rm-Rf
market risk premium (expected return on the market – risk free rate)

what does a leveraged buyout analysis tell you
how much a private equity firm could afford to pay for a business

private equity firms target a higher or lower return?
higher which means they use higher leverage

for publicly traded companies, the purchase price assumes what?
a premium to the stock price to incent a change in ownership

premium typically ranges between…
20-40%

transaction value determined by…
adding net debt to the purchase price

transaction value represents…
total value that must be financed to acquire the company

sources and uses reflect what
sources and uses of capital to finance the acquisition

sources include

1. debt
2. equity

debt sources

1. bank debt
2. high yield debt

bank debt
amortized over a period of time

high yield debt
interest only with the ability to pay down principal based on cash flow

uses include

1. transaction value
2. beginning balance of cash
3. deal fees

how are sources and uses related to each other
they are always equal

amount and types of debt are determined by…
lenders with any remaining capital necessary to finance the acquisition coming from the financial sponsor as their initial equity investment

amount of debt varies due to

1. industry the company operates in
2. predictability of cash flow

debt typically split across which tranches

1. senior debt
2. subordinated debt

senior debt

• has first claim in bankruptcy
• amortized (paid back) over the life of the loan causing it to have lower interest rates

subordinated debt

• requires interest payments only with the ability to voluntarily pay down principal with any excess cash flow
• higher interest rates due to additional default risk

typical debt/EBITDA
2.0x-4.0x

typical total debt/EBITDA
4.0x-6.0x

the financial sponsor’s equity investment makes up

• any remaining capital needed to finance the transaction value
• 20-40% of total sources

most commonly used measures of return

1. cash-on-cash return
2. internal rate of return (IRR)

both measures take into account
the relationship of capital invested by the financial sponsor vs. capital returned over the life of the investment

the IRR unlike the cash-on-cash take into account

• TVM
• produces annualized rate or return

target IRR’s range from
20-30%

IRR
annualized effective compounded return rate that makes NPV = 0

IRR formula
IRR = (cash returned to sponsor/initial equity invested)^1/N – 1

if an investor receives a 15% IRR over the life of an investment…
investment increased on avg 15% per year

cash-on-cash multiple
how much an investor receives in proceeds upon exiting the investment compared to its initial investment (doesn’t matter when the exit actually occurs)

cash-on-cash formula
cash returned to sponsor/initial equity invested

if an investor gets a cash-on-cash multiple of 2.5x…
they received $2.50 for every $1 invested