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SECURITIES REGULATION AND CORPORATE VALUATION
CONCEPTS; EARNINGS MULTIPLES, SOX 404, EVA AND EBIT
ANALYSIS TESTS
In a declining environment, earnings are expected to
decrease. Therefore, multiples of future earnings are
expected to be higher than trailing earnings.
A Section 404 approval means
an issuer is SEC registered
the company's internal controls have been certified
the company is in compliance with SEC filing requirements
the company is being sold in a bankruptcy transaction. -
answer-the company's internal controls have been
certifiedCorrect AnswerSarbanes-Oxley Section 404
requires that, on an annual basis, the company's CEO
certifies the firm's internal controls for financial
reporting.Reference: Textbook Section: 8.2
XCV Corp. purchased ABC Corp for $1,000,000. ABC
recently earned $200,000 of EBIT, including $40,000 of
depreciation. The investment has a 10% discount rate and
XCV has a 40% marginal tax rate.From the above
information please determine the Economic Value Added
(EVA), created by this acquisition. - answer-0k2
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Company ABC has sales growth of 9% per year. In year
one it had $100MM of sales. ABC's gross profit margin is a
constant 18%. Year over year ABC projects fixed
operating expenses, excluding D&A, of $9MM while D&A
is $2MM. Calculate year 3 EBIT. - answer-10.39
To calculate year 3 EBIT we need to determine the year 3
projected income statement. Start by projecting the sales
for the next three years. Year 1 sales is $100MM, year 2 is
$109MM (100 * 1.09%), and year 3 is $118.81 ($109 *
1.09%).Next, calculate the projected gross profit using the
fixed 18% gross profit margin. Year three gross profit is
$118.81 x 18% = $21.39MM. Lastly, subtract the operating
expenses and D&A (which are broken out in this
question): $21.39MM - $9MM - $2.00 = $10.39MM.
All of the following are common leverage ratios EXCEPT
Enterprise Value / Debt
Debt / Total Capitalization
Debt / EBITDA
Debt / Equity - answer-Enterprise Value / Debt
Great Job!While Enterprise Value / Debt may be perceived
as the inverse of the commonly used Debt / Total
Capitalization, it is not used in financial circles or as the
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basis for calculating covenants.Reference: Textbook
Section: 4.2.3
In an all-cash transaction, a sell-side adviser would likely
execute due diligence regarding all of the following
EXCEPT
the buyer's ability to pay.
the likelihood of significant layoffs of the target company's
employees.
the strength of the buyer's management team
the buyer's history of closing deals in a timely fashion. -
answer-the strength of the buyer's management team
.Correct AnswerIn an all-cash transaction, the target
company's shareholders will have zero ownership of the
combined company after closing. Therefore, the sell-side
adviser and target company would have no interest in the
quality of the buyer's management team. The quality of
management would be an important factor if any portion of
the consideration were made in stock. Ability to pay and
timeliness of closing are important factors in any merger.
Also, the sell-side adviser and target company would be
interested in protecting as many jobs as possible to rally
target company support for the deal.Reference: Textbook
Section: 6.4
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All of the following have input in crafting the press release
announcing an acquisition EXCEPT
Public relations firm
Financial advisers
Legal advisers
SEC officials - answer-SEC officials
Great Job!The SEC does NOT have input in crafting the
press release announcing the transaction. Rather, the
company's legal and financial advisers make sure the text
and information provided are in compliance with regulatory
standards. A public relations firm is also typically hired by
public firms to help craft and disseminate the press
release.Reference: Textbook Section: 6.5
In a declining economic environment, one would expect a
company to trade at aI. Higher multiple of FY1 (Forward
Year 1) earnings than LTM earningsII. Higher multiple of
LTM earnings than FY1 (Forward Year 1)
earningsIII.Lower multiple of LTM earnings than FY1
(Forward Year 1) earningsIV. Lower multiple of FY1
earnings than LTM earnings - answer-1 and 3
Company A and Company B agree to merge. Both are
U.S. public companies. After the merger, the combined
companies will have a new name but continue to trade
under A's stock symbol. Company A is a well-known
seasoned issuer and Company B is not. Which company
SECURITIES REGULATION AND CORPORATE VALUATION
CONCEPTS; EARNINGS MULTIPLES, SOX 404, EVA AND EBIT
ANALYSIS TESTS
In a declining environment, earnings are expected to
decrease. Therefore, multiples of future earnings are
expected to be higher than trailing earnings.
A Section 404 approval means
an issuer is SEC registered
the company's internal controls have been certified
the company is in compliance with SEC filing requirements
the company is being sold in a bankruptcy transaction. -
answer-the company's internal controls have been
certifiedCorrect AnswerSarbanes-Oxley Section 404
requires that, on an annual basis, the company's CEO
certifies the firm's internal controls for financial
reporting.Reference: Textbook Section: 8.2
XCV Corp. purchased ABC Corp for $1,000,000. ABC
recently earned $200,000 of EBIT, including $40,000 of
depreciation. The investment has a 10% discount rate and
XCV has a 40% marginal tax rate.From the above
information please determine the Economic Value Added
(EVA), created by this acquisition. - answer-0k2
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Company ABC has sales growth of 9% per year. In year
one it had $100MM of sales. ABC's gross profit margin is a
constant 18%. Year over year ABC projects fixed
operating expenses, excluding D&A, of $9MM while D&A
is $2MM. Calculate year 3 EBIT. - answer-10.39
To calculate year 3 EBIT we need to determine the year 3
projected income statement. Start by projecting the sales
for the next three years. Year 1 sales is $100MM, year 2 is
$109MM (100 * 1.09%), and year 3 is $118.81 ($109 *
1.09%).Next, calculate the projected gross profit using the
fixed 18% gross profit margin. Year three gross profit is
$118.81 x 18% = $21.39MM. Lastly, subtract the operating
expenses and D&A (which are broken out in this
question): $21.39MM - $9MM - $2.00 = $10.39MM.
All of the following are common leverage ratios EXCEPT
Enterprise Value / Debt
Debt / Total Capitalization
Debt / EBITDA
Debt / Equity - answer-Enterprise Value / Debt
Great Job!While Enterprise Value / Debt may be perceived
as the inverse of the commonly used Debt / Total
Capitalization, it is not used in financial circles or as the
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basis for calculating covenants.Reference: Textbook
Section: 4.2.3
In an all-cash transaction, a sell-side adviser would likely
execute due diligence regarding all of the following
EXCEPT
the buyer's ability to pay.
the likelihood of significant layoffs of the target company's
employees.
the strength of the buyer's management team
the buyer's history of closing deals in a timely fashion. -
answer-the strength of the buyer's management team
.Correct AnswerIn an all-cash transaction, the target
company's shareholders will have zero ownership of the
combined company after closing. Therefore, the sell-side
adviser and target company would have no interest in the
quality of the buyer's management team. The quality of
management would be an important factor if any portion of
the consideration were made in stock. Ability to pay and
timeliness of closing are important factors in any merger.
Also, the sell-side adviser and target company would be
interested in protecting as many jobs as possible to rally
target company support for the deal.Reference: Textbook
Section: 6.4
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All of the following have input in crafting the press release
announcing an acquisition EXCEPT
Public relations firm
Financial advisers
Legal advisers
SEC officials - answer-SEC officials
Great Job!The SEC does NOT have input in crafting the
press release announcing the transaction. Rather, the
company's legal and financial advisers make sure the text
and information provided are in compliance with regulatory
standards. A public relations firm is also typically hired by
public firms to help craft and disseminate the press
release.Reference: Textbook Section: 6.5
In a declining economic environment, one would expect a
company to trade at aI. Higher multiple of FY1 (Forward
Year 1) earnings than LTM earningsII. Higher multiple of
LTM earnings than FY1 (Forward Year 1)
earningsIII.Lower multiple of LTM earnings than FY1
(Forward Year 1) earningsIV. Lower multiple of FY1
earnings than LTM earnings - answer-1 and 3
Company A and Company B agree to merge. Both are
U.S. public companies. After the merger, the combined
companies will have a new name but continue to trade
under A's stock symbol. Company A is a well-known
seasoned issuer and Company B is not. Which company
