Corporate Finance & Investment Flashcards
7 cards from real CA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Corporate Finance & Investment flashcards as text
In a leveraged buyout (LBO), the primary source of equity returns typically comes from:
Answer: Debt paydown, EBITDA growth, and multiple expansion
LBO returns are driven by three value levers: using operating cash flows to repay debt, growing EBITDA, and exiting at a higher valuation multiple.
The dividend discount model (DDM) values a stock as the present value of:
Answer: Future dividends discounted at the cost of equity
The DDM discounts expected future dividends at the required rate of return on equity to determine intrinsic stock value.
Which of the following best describes 'operating leverage'?
Answer: The degree to which fixed operating costs magnify changes in revenue into larger changes in EBIT
Operating leverage reflects how a firm's fixed cost base causes operating income to move proportionally more than revenue.
A company issues convertible bonds at a coupon rate below its straight-debt rate. The compensation to bondholders for accepting the lower coupon is:
Answer: The option to convert bonds into equity shares
The conversion feature grants bondholders an embedded call option on equity, which compensates them for accepting a below-market coupon.
In merger analysis, the 'accretion/dilution test' evaluates whether a deal:
Answer: Increases or decreases the acquirer's post-deal EPS
An accretive deal raises the acquirer's pro forma EPS above its standalone EPS; a dilutive deal lowers it.
Which risk measure captures only the systematic (non-diversifiable) component of a security's total risk?
Answer: Beta
Beta measures a security's sensitivity to market-wide movements, capturing only systematic risk that cannot be eliminated through diversification.
A zero-coupon bond is issued at $600 and matures at $1,000 in five years. What best describes its yield?
Answer: Its yield is the discount rate that equates $600 today to $1,000 in five years
A zero-coupon bond's yield (YTM) is the rate that makes the present value of the single maturity payment equal to the current price.