Investment Banking Practice Exam Questions With Correct Answers 100% Verified.

©THESTAR 2024/2025 ALL RIGHTS RESERVED 11:09PM. A+ 1 Investment Banking Practice Exam Questions With Correct Answers 100% Verified. QUESTION: "How much would you pay for a company that generates $100 of cash flow every single year into eternity?" - AnswerANSWER: It depends on your Discount Rate, or "targeted yield." If your Discount Rate is 10%, meaning you could earn 10% per year in companies with similar risk/potential return profiles, you would pay $100 / 10% = $1,000. But if your Discount Rate is 20%, you would pay $100 / 20% = $500. QUESTION: "A company generates $200 of cash flow today, and its cash flow is expected to grow at 4% per year for the long term. You could earn 10% per year by investing in other, similar companies. How much would you pay for this company?" - AnswerANSWER: Company Value = Cash Flow / (Discount Rate - Cash Flow Growth Rate), where Cash Flow Growth Rate Discount Rate. So, this one becomes: $200 / (10% - 4%) = $3,333. QUESTION: "What might cause a company's Present Value (PV) to increase or decrease?" - AnswerANSWER: A company's PV might increase if its expected future cash flows increase, its expected future cash flows start to grow at a faster rate, or the Discount Rate decreases (e.g., because the expected returns of similar companies decrease). The PV might decrease if the opposite happens. ©THESTAR 2024/2025 ALL RIGHTS RESERVED 11:09PM. A+ 2 QUESTION: "What does the internal rate of return (IRR) mean?" - AnswerANSWER: The IRR is the Discount Rate at which the Net Present Value of an investment, i.e., Present Value of Cash Flows - Upfront Price, equals 0. You can also think of it as the "effective compounded interest rate on an investment" - so, if you invest $1,000 today, end up with $2,000 in 5 years, and contribute and earn nothing in between, the IRR is the interest rate you'd have to earn on that $1,000, compounded each year, to reach $2,000 in 5 years. QUESTION: "How do the 3 financial statements link together? Assume the Indirect Method for the Cash Flow Statement." - AnswerANSWER: To link the statements, make Net Income at the bottom of the Income Statement the top line of the Cash Flow Statement. Then, adjust this Net Income number for any non-cash items such as Depreciation & Amortization. Next, reflect changes to operational Balance Sheet items such as Accounts Receivable, which may increase or decrease the company's cash flow depending on how they've changed. That gets you to Cash Flow from Operations. Next, reflect investing and financing activities, which may increase or decrease cash flow, and sum up Cash Flow from Operations, Investing, and Financing to get the net change in cash at the bottom. Link Cash on the Balance Sheet to the ending Cash number on the CFS, and add Net Income to Retained Earnings within Equity on the Balance Sheet. Then, link each non-cash adjustment to the appropriate Asset or Liability SUBTRACT links on the Assets side and ADD links on the L&E side. Link each CFI and CFF item to the matching item on the Balance Sheet, using the same rule as above. ©THESTAR 2024/2025 ALL RIGHTS RESERVED 11:09PM. A+ 3 Check that Assets equals Liabilities + Equity at the end if this is not true, you did something wrong and need to re-check your work. QUESTION: "A company runs into financial distress and needs cash immediately. It sells a factory that's listed at $100 on its Balance Sheet for $80. What happens on the 3 statements, assuming a 40% tax rate?" - AnswerANSWER: Income Statement: Record a Loss of $20 on the Income Statement, which reduces Pre-Tax Income by $20 and Net Income by $12 at a 40% tax rate. Cash Flow Statement: Net Income is down by $12, but you add back the $20 Loss since it's non- cash. You also show the full proceeds, $80, in Cash Flow from Investing, so cash at the bottom is up by $88. Balance Sheet: Cash is up by $88, but PP&E is down by $100, so the Assets side is down by $12. The L&E side is also down by $12 because Retained Earnings fell by $12 due to the Net Income decrease, so both sides balance. QUESTION: "A company buys a factory using $100 of debt. A year passes, and the company pays 10% interest on the debt as it depreciates $10 of the factory. It repays $20 of the loan as well. Walk me through the statements from beginning to end, and assume a 40% tax rate." - AnswerANSWER: Initially, nothing changes on the IS. The $100 factory purchase shows up as CapEx on the CFS, and the $100 debt issuance shows up on the CFS as well, offsetting it, so Cash does not change at the bottom. On the Balance Sheet, PP&E is up by $100, and Debt is up by $100, so both sides balance. Then in the first year, you record $10 of interest and $10 of depreciation on the IS, reducing Pre-Tax Income by $20 and Net Income by $12 at a 40% tax rate. On the CFS, Net Income is down by $12, but you add back the $10 of depreciation since it is non-cash, and the $20 loan repayment is a ca