Back to Course | Exit to Learning Dashboard
Review: M&A Modeling Exam
Certificate Awarded View Certificate
Question 1
The intangible assets of a company getting acquired were written up for BOTH book and tax purposes from a pre-deal book
value of $50m to $60m as part of the acquisition accounting. The company’s definite-lived intangible assets are amortized on
a straight-line basis over 15 years for both book and tax purposes. Also assume the acquirer has a tax rate of 40%.
Assume the purchase price exceeds the fair value of net assets. What is the impact of the write-up on the goodwill recorded in
the acquisition?
A decline in goodwill of $10m
An increase in goodwill of $6m
A decline in goodwill of $6m
An increase in goodwill of $10m
No impact on goodwill
Question 2
The intangible assets of a company getting acquired were written up for book purposes from a pre-deal book value of $50m to
$60m but NOT for tax purposes, where the tax basis remained $50m. Assume that target’s definite lived intangible assets are
amortized on a straight-line basis over 15 years for both book and tax purposes. Also assume that the acquirer has a tax rate
of 40%.
What is value of created Deferred Tax Liabilities as a result of the book write-up and no tax step up?
No new Deferred Tax Liabilities
New Deferred Tax Liabilities of $4m
New Deferred Tax Liabilities of $6m
New Deferred Tax Liabilities of $10m
New Deferred Tax Liabilities of $50m
Question 3
The intangible assets of a company getting acquired were written up for book purposes from a pre-deal book value of $50m to
$60m but NOT for tax purposes, where the tax basis remained $50m. Assume that target’s definite lived intangible assets are
amortized on a straight-line basis over 15 years for both book and tax purposes. Also assume that the acquirer has a tax rate
of 40%.
What is the total cumulative impact on goodwill as a result of the book write-up and no tax basis step up, compared to no
write-up of intangibles at all?
No impact on goodwill
Goodwill is lower by $6m
Goodwill is higher by $6m
Goodwill is higher by $4m
Question 4
It is January 1, 2017. Glocabe Networks is contemplating the acquisition of competitor Jupiter Networks by issuing stock to
purchase target shares (stock purchase). The following details are available:
, January 1, 2017 Glocabe Jupiter
Current share price $30.00 $50.00
Offer price $60.00
Diluted shares outstanding (mm) 4.5 2.2
2017 GAAP earnings per share (EPS) forecast $3.12 $4.51
Glocabe and Jupiter’s diluted shares outstanding have not changed since January 1, 2016.
You may assume the companies have the same tax rate.
What is the 2017 accretion/dilution in Glocabe’s GAAP EPS assuming the acquisition took place on January 1, 2017?
$0.19
$0.96
-$0.43
-$1.54
-$0.24
Question 5
The following data will be used to answer Questions 5-8. It will be repeated in each question.
It is January 1, 2017 and Pegasus is contemplating the acquisition of competitor Chimera. The following details are available ($
in millions except per share data):
January 1, 2017 ($ in millions) Pegasus Chimera
GAAP revenue $150.40 $112.00
GAAP net income $14.04 $9.92
Tax rate 40% 35%
What is 2017 pro forma (combined) GAAP pre-tax income?
9.09
21.66
36.86
38.66
39.93
Question 6
Use the following data to answer this question.
It is January 1, 2017 and Pegasus is contemplating the acquisition of competitor Chimera. The following details are available ($
in millions except per share data):
January 1, 2017 ($ in millions) Pegasus Chimera
GAAP revenue $150.40 $112.00
GAAP net income $14.04 $9.92
Tax rate 40% 35%
Assume all activities below occur on January 1, 2017:
You also obtained the following transaction-related data:
Offer value $132.0 million in cash
50% of the offer value funded using Pegasus’s cash reserve, currently generating a 1% annual return.
Sources of funds
Remainder of the funds needed to complete the deal raised via a new 5-year debt issuance at 5% annual interest rate.
Refinanced debt Chimera has $5 million in debt outstanding at 4% annual interest which will be refinanced as part of the acquisition
Transaction fees $2 million pretax
Financing fees $1 million pretax
Cost synergies $2 million pretax. Apply the acquirer’s tax rate on the cost synergies.
Review: M&A Modeling Exam
Certificate Awarded View Certificate
Question 1
The intangible assets of a company getting acquired were written up for BOTH book and tax purposes from a pre-deal book
value of $50m to $60m as part of the acquisition accounting. The company’s definite-lived intangible assets are amortized on
a straight-line basis over 15 years for both book and tax purposes. Also assume the acquirer has a tax rate of 40%.
Assume the purchase price exceeds the fair value of net assets. What is the impact of the write-up on the goodwill recorded in
the acquisition?
A decline in goodwill of $10m
An increase in goodwill of $6m
A decline in goodwill of $6m
An increase in goodwill of $10m
No impact on goodwill
Question 2
The intangible assets of a company getting acquired were written up for book purposes from a pre-deal book value of $50m to
$60m but NOT for tax purposes, where the tax basis remained $50m. Assume that target’s definite lived intangible assets are
amortized on a straight-line basis over 15 years for both book and tax purposes. Also assume that the acquirer has a tax rate
of 40%.
What is value of created Deferred Tax Liabilities as a result of the book write-up and no tax step up?
No new Deferred Tax Liabilities
New Deferred Tax Liabilities of $4m
New Deferred Tax Liabilities of $6m
New Deferred Tax Liabilities of $10m
New Deferred Tax Liabilities of $50m
Question 3
The intangible assets of a company getting acquired were written up for book purposes from a pre-deal book value of $50m to
$60m but NOT for tax purposes, where the tax basis remained $50m. Assume that target’s definite lived intangible assets are
amortized on a straight-line basis over 15 years for both book and tax purposes. Also assume that the acquirer has a tax rate
of 40%.
What is the total cumulative impact on goodwill as a result of the book write-up and no tax basis step up, compared to no
write-up of intangibles at all?
No impact on goodwill
Goodwill is lower by $6m
Goodwill is higher by $6m
Goodwill is higher by $4m
Question 4
It is January 1, 2017. Glocabe Networks is contemplating the acquisition of competitor Jupiter Networks by issuing stock to
purchase target shares (stock purchase). The following details are available:
, January 1, 2017 Glocabe Jupiter
Current share price $30.00 $50.00
Offer price $60.00
Diluted shares outstanding (mm) 4.5 2.2
2017 GAAP earnings per share (EPS) forecast $3.12 $4.51
Glocabe and Jupiter’s diluted shares outstanding have not changed since January 1, 2016.
You may assume the companies have the same tax rate.
What is the 2017 accretion/dilution in Glocabe’s GAAP EPS assuming the acquisition took place on January 1, 2017?
$0.19
$0.96
-$0.43
-$1.54
-$0.24
Question 5
The following data will be used to answer Questions 5-8. It will be repeated in each question.
It is January 1, 2017 and Pegasus is contemplating the acquisition of competitor Chimera. The following details are available ($
in millions except per share data):
January 1, 2017 ($ in millions) Pegasus Chimera
GAAP revenue $150.40 $112.00
GAAP net income $14.04 $9.92
Tax rate 40% 35%
What is 2017 pro forma (combined) GAAP pre-tax income?
9.09
21.66
36.86
38.66
39.93
Question 6
Use the following data to answer this question.
It is January 1, 2017 and Pegasus is contemplating the acquisition of competitor Chimera. The following details are available ($
in millions except per share data):
January 1, 2017 ($ in millions) Pegasus Chimera
GAAP revenue $150.40 $112.00
GAAP net income $14.04 $9.92
Tax rate 40% 35%
Assume all activities below occur on January 1, 2017:
You also obtained the following transaction-related data:
Offer value $132.0 million in cash
50% of the offer value funded using Pegasus’s cash reserve, currently generating a 1% annual return.
Sources of funds
Remainder of the funds needed to complete the deal raised via a new 5-year debt issuance at 5% annual interest rate.
Refinanced debt Chimera has $5 million in debt outstanding at 4% annual interest which will be refinanced as part of the acquisition
Transaction fees $2 million pretax
Financing fees $1 million pretax
Cost synergies $2 million pretax. Apply the acquirer’s tax rate on the cost synergies.
