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Free Questions › CFA › Specialized Pathway - Private Markets
Free CFA Specialized Pathway - Private Markets Practice Questions & Answers
500 exam-style Specialized Pathway - Private Markets questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 211
A venture capital fund invests in a startup at a $10 million pre-money valuation by contributing $4 million. What is the post-money valuation?
Select an option first.
Correct answer: D — $14 million
Explanation: D is correct: Post-money valuation = Pre-money valuation + New investment = $10M + $4M = $14M. The VC owns $4M / $14M ≈ 28.6% of the company immediately after the investment. Pre-money is the value before new capital; post-money includes it. A is just the new capital. B is pre-money minus investment. C is just pre-money.
Question 212
In venture capital, a 'down round' occurs when:
Select an option first.
Correct answer: B — The startup raises a new funding round at a lower valuation than the previous round, diluting existing investors
Explanation: B is correct: A down round is when a startup must raise new capital at a lower price per share than previous investors paid, meaning the company's value has declined. This dilutes earlier shareholders and can trigger anti-dilution protections. A is an 'up round'. C is a distribution. D is a revenue miss, not necessarily a down round.
Question 213
Anti-dilution protection in venture capital protects early investors by:
Select an option first.
Correct answer: B — Adjusting the conversion price of preferred shares downward if later rounds are priced lower, preserving more of the early investor's ownership percentage
Explanation: B is correct: Anti-dilution provisions adjust the price at which preferred shares convert to common shares in a down round, effectively granting more common shares to preferred investors than they would otherwise receive. This partially offsets dilution. Full ratchet and weighted-average are the two main types. A, C, and D are not anti-dilution mechanisms.
Question 214
In venture capital deal terms, a 'liquidation preference' most commonly protects investors by:
Select an option first.
Correct answer: B — Ensuring the VC investor receives its invested capital back (often with a multiple) before common shareholders (founders, employees) receive any proceeds in an exit
Explanation: B is correct: A 1× non-participating liquidation preference means the VC gets its $X back first; then anything remaining goes to common shareholders. A 2× preference returns 2× invested capital before commons participate. This is critical in low-outcome exits — founders and employees may receive nothing while preferred investors recover capital.
Question 215
The term 'Series A', 'Series B', and 'Series C' in venture capital financing refers to:
Select an option first.
Correct answer: B — Sequential rounds of equity funding raised as the company grows, with each series typically at a higher valuation than the last
Explanation: B is correct: Startup financing rounds are named alphabetically. Seed is the earliest stage. Series A is usually the first institutional round. Each subsequent round (B, C, D...) typically reflects growing company maturity, higher valuation, and larger round size. Different investors may lead different rounds.
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Question 216
A company's 'runway' in venture capital parlance refers to:
Select an option first.
Correct answer: B — How many months the company can continue operating with its current cash balance at its current burn rate before running out of money
Explanation: B is correct: Runway = Cash Balance ÷ Monthly Cash Burn Rate. It answers 'How long until we run out of money?' A company with $1.2M cash burning $200K/month has 6 months of runway. This is a critical metric for VCs evaluating whether a portfolio company needs to raise more capital.
Question 217
In venture capital, a 'unicorn' is a startup that:
Select an option first.
Correct answer: B — Has reached a private valuation of $1 billion or more
Explanation: B is correct: A unicorn is a private startup valued at $1 billion or more in its last funding round. The term reflects rarity (though the number of unicorns has grown substantially). A 'decacorn' reaches $10 billion. These valuations are private market estimates, not public market prices.
Question 218
The 'burn rate' for a startup refers to:
Select an option first.
Correct answer: B — The monthly rate at which the company spends cash before it becomes cash flow positive
Explanation: B is correct: Burn rate = monthly cash outflows net of revenues. A 'gross burn' includes all expenses; 'net burn' subtracts any revenue. Understanding burn rate is critical because it determines runway and when the company needs to raise its next round of financing.
Question 219
In venture capital, 'term sheets' serve the primary purpose of:
Select an option first.
Correct answer: B — Outlining the key terms of a proposed investment before definitive legal agreements are drafted, serving as the basis for negotiation
Explanation: B is correct: A term sheet is a non-binding (except for certain clauses like exclusivity) document that summarises the key economic and governance terms of an investment — valuation, ownership percentage, liquidation preference, anti-dilution, board seats, voting rights, and information rights. Definitive documents (share purchase agreements, articles of association) come later.
Question 220
Growth equity investing differs from early-stage venture capital primarily in that:
Select an option first.
Correct answer: B — Growth equity targets more mature companies with established revenue and business models that need capital to scale rather than to prove viability, involving less binary success/failure risk
Explanation: B is correct: Growth equity sits between venture capital and buyout. Target companies have proven business models (often profitable or near-profitable) and are seeking capital to expand internationally, add product lines, or make acquisitions. Failure risk is lower than seed/Series A venture, but valuations are higher. A, C, and D are incorrect.
Question 221
In a leveraged buyout (LBO), the acquiring private equity firm uses a combination of:
Select an option first.
Correct answer: B — Primarily debt financing (leveraged) along with equity from the PE fund, using the target company's cash flows and assets to service and repay the debt
Explanation: B is correct: An LBO uses high leverage (often 50–80% debt at entry) to amplify equity returns. The acquired company's own cash flows service the debt. If the business performs well, the equity investors earn outsized returns because the debt-financed portion of the purchase is repaid by the company, not the equity holders. A would eliminate leverage benefits. C would have no equity cushion. D is nonsensical.
Question 222
The primary reason private equity firms use leverage (debt) in buyout transactions is to:
Select an option first.
Correct answer: B — Amplify equity returns — a given improvement in enterprise value creates a proportionally larger return on the smaller equity investment
Explanation: B is correct: If a PE firm buys a company for $100M (70% debt, 30% equity = $30M) and sells it for $150M, the equity return is ($150M − $70M debt) / $30M = $80M/$30M − 1 = 167%. Without leverage, return is only 50% on $100M equity. Leverage amplifies both gains and losses. A, C, and D are incorrect.
Question 223
A management buyout (MBO) is a transaction in which:
Select an option first.
Correct answer: B — The existing management team of a company uses private equity financing to acquire the business they currently operate
Explanation: B is correct: In an MBO, the current management team (often with strong operational knowledge) partners with a PE firm to acquire their company. Management typically contributes some equity alongside the PE firm. The assumption is that management's insider knowledge helps them run the business better as owners. A is a regular PE buyout. C is a strategic acquisition. D is a secondary buyout.
Question 224
A 'secondary buyout' (SBO) in private equity refers to:
Select an option first.
Correct answer: B — The sale of a portfolio company from one private equity fund to another PE fund
Explanation: B is correct: In an SBO, a PE fund sells a portfolio company to another PE firm rather than through an IPO or strategic sale. The second PE firm believes it can generate additional value that the first did not fully capture. SBOs have become more common as the PE industry has grown, creating a larger buyer pool.
Question 225
In leveraged buyout analysis, DSCR (Debt Service Coverage Ratio) is used to assess:
Select an option first.
Correct answer: B — Whether the portfolio company generates sufficient operating cash flow to meet its debt interest and principal repayment obligations
Explanation: B is correct: DSCR = Operating Cash Flow ÷ Total Debt Service (interest + principal). A ratio above 1.0 means the company earns more than enough to service its debt. LBO lenders typically require DSCR of 1.2× or higher as a covenant condition. A is the equity IRR calculation. C and D are unrelated to DSCR.
Question 226
The 'equity bridge' in an LBO financial model most accurately refers to:
Select an option first.
Correct answer: B — The reconciliation that shows how the equity value at exit is determined from enterprise value after deducting debt and adding cash
Explanation: B is correct: Enterprise Value at Exit − Net Debt at Exit = Equity Value. The equity bridge shows step-by-step how each element (debt paydown, cash accumulation, EV change) contributes to the final equity return. A describes a bridge loan. C is a seller note. D is a transaction bonus.
Question 227
Which of the following is a common operational value creation strategy for a private equity-backed company during the holding period?
Select an option first.
Correct answer: B — Implementing cost efficiencies, expanding into new markets, improving pricing, or making bolt-on acquisitions to grow revenue and margins
Explanation: B is correct: PE firms create value through active portfolio management — optimising costs, driving organic revenue growth, acquiring complementary businesses, improving management teams, and strengthening governance. These operational improvements increase EBITDA and thus exit valuations. A, C, and D are counterproductive strategies.
Question 228
A 'platform acquisition' in private equity followed by multiple 'add-on acquisitions' is a strategy designed to:
Select an option first.
Correct answer: B — Build a larger, more valuable company by starting with a core business and adding complementary businesses to achieve scale, breadth, and improved exit multiples
Explanation: B is correct: Buy-and-build strategies create value by growing a company's size (which often justifies higher multiples) and improving its market position. The platform is the initial acquisition; add-ons bolt on additional revenue, capabilities, or geographies. Small companies often sell at lower multiples than large ones — aggregating them into a larger entity can generate 'multiple arbitrage'.
Question 229
'Multiple arbitrage' in private equity refers to:
Select an option first.
Correct answer: B — Buying a company at a lower valuation multiple than the multiple at which the PE investor expects to sell it, generating additional return beyond operational improvements
Explanation: B is correct: If a PE firm buys a company at 6× EBITDA and exits at 9× EBITDA (because it has grown the business or because market conditions are more favourable at exit), the 3-turn improvement in multiple generates significant additional equity return beyond operational improvements. A is derivative hedging. C is a different form of arbitrage. D is cost cutting.
Question 230
An LBO entry price is often described in terms of 'EV/EBITDA turns'. If a company is acquired at a 7× EBITDA multiple with EBITDA of $40 million, the enterprise value paid is:
Select an option first.
Correct answer: C — $280 million
Explanation: C is correct: Enterprise Value = EBITDA × Multiple = $40M × 7× = $280M. This is the total amount paid for the company including assumed debt. A is just EBITDA. B is 4× ($40M × 4). D is 8× ($40M × 8).
Question 231
Senior secured debt in a leveraged capital structure is described as 'first lien' because:
Select an option first.
Correct answer: B — It has a first-priority claim on specified collateral assets in the event of default, giving it the highest seniority and therefore the lowest risk among debt holders
Explanation: B is correct: First lien secured creditors have priority over the company's specific collateral assets (e.g., real property, equipment, accounts receivable) if the company defaults. In a liquidation, first lien lenders are paid before second lien, mezzanine, and equity holders. This seniority comes at the cost of lower interest rates compared to junior debt.
Question 232
A 'term loan B' (TLB) in leveraged finance differs from a traditional bank term loan primarily in that:
Select an option first.
Correct answer: B — TLBs are typically institutional non-amortising loans sold to institutional investors with floating interest rates, more flexible prepayment terms, and fewer maintenance covenants than traditional bank loans
Explanation: B is correct: Term Loan B is the institutional tranche of leveraged finance. It is sold to CLOs, loan funds, and hedge funds rather than held by banks. It typically has minimal amortisation (1% per year), matures in 5–7 years, bears floating rate interest (SOFR/LIBOR plus spread), and includes incurrence-only covenants. A, C, and D are incorrect.
Question 233
High-yield bonds (also called 'junk bonds') are best described as:
Select an option first.
Correct answer: B — Corporate bonds rated below investment grade (below BBB-/Baa3) that offer higher interest rates to compensate investors for elevated credit risk
Explanation: B is correct: High-yield or sub-investment grade bonds are rated BB+ or below (S&P) / Ba1 or below (Moody's). They offer higher coupons than investment-grade bonds to reflect higher default probability. They are often used in LBO transactions alongside bank debt. C is incorrect (government bonds are sovereign debt). D describes convertible bonds.
Question 234
Mezzanine debt in a private market capital structure is best described as:
Select an option first.
Correct answer: B — Subordinated debt sitting between senior secured debt and equity, earning higher interest rates than senior debt while bearing greater risk, and sometimes including equity warrants
Explanation: B is correct: Mezzanine is 'in the middle' — riskier than senior debt (unsecured or with second-priority claims) but safer than equity. This junior position demands higher returns, typically through higher interest rates and often equity warrants (options to buy shares) that allow the mezzanine lender to participate in equity upside. A is wrong. C is wrong because senior debt is typically larger. D is incorrect.
Question 235
A 'unitranche' loan structure in private lending combines:
Select an option first.
Correct answer: B — Senior and subordinated debt into a single integrated loan from one lender at a blended interest rate, simplifying the capital structure
Explanation: B is correct: Unitranche provides a single, all-in-one loan facility that replaces the traditional split between senior bank debt and mezzanine debt. It uses an 'agreement among lenders' to specify how proceeds and recoveries are split between lenders if there are multiple participants. Borrowers benefit from simplicity; lenders earn a blended rate between senior and mezz.
Question 236
A convertible bond gives its holder the right to:
Select an option first.
Correct answer: B — Convert the bond into a specified number of common shares of the issuer at a predetermined conversion price, at the holder's discretion
Explanation: B is correct: Convertible bonds have debt characteristics (interest payments, maturity, seniority at default) but include an embedded equity option. If the stock price exceeds the conversion price, converting becomes attractive. Below conversion price, the holder keeps the bond. This optionality allows issuers to pay lower coupons than straight debt.
Question 237
Covenant-lite loans in leveraged finance have fewer or no maintenance covenants. This primarily benefits:
Select an option first.
Correct answer: B — Borrowers (companies), who have more operational flexibility and are not required to regularly demonstrate compliance with financial tests such as minimum interest coverage ratios
Explanation: B is correct: Traditional loans include maintenance covenants (tested quarterly) requiring borrowers to maintain minimum ratios. Covenant-lite loans have incurrence-only covenants, triggered only when specific corporate actions are taken. This gives management more flexibility but reduces lender early warning signals. The rise of covenant-lite lending reflects increased borrower leverage in the credit market.
Question 238
In private lending, PIK (Payment In Kind) interest refers to:
Select an option first.
Correct answer: B — Interest that accrues and is added to the outstanding principal balance rather than paid in cash, compounding over the loan term
Explanation: B is correct: PIK interest preserves the borrower's cash by not requiring periodic cash outflows. Instead, the principal grows over time (compounded). At maturity, the entire balance (original principal plus all accrued PIK interest) is repaid. PIK is attractive for high-growth companies that need to retain cash but is expensive in total cost terms. A describes cash-pay interest. C is equity-linked. D is different.
Question 239
Private credit (direct lending) has grown significantly because:
Select an option first.
Correct answer: B — Regulatory constraints post-2008 reduced bank appetite for leveraged lending, creating a gap that private credit funds filled by lending directly to mid-market companies
Explanation: B is correct: Post-2008 regulations (Dodd-Frank, Basel III) significantly increased capital requirements for leveraged loans held by banks. Banks pulled back from mid-market leveraged lending, which was filled by private credit funds offering direct loans, often at higher yields than comparable broadly syndicated loans, in exchange for illiquidity and complexity. A, C, and D are incorrect.
Question 240
In a leveraged loan agreement, an 'accordion feature' allows:
Select an option first.
Correct answer: B — The borrower to increase the facility size up to a pre-agreed amount in the future without renegotiating the entire credit agreement
Explanation: B is correct: The accordion (or incremental facility) allows a borrower to upsize its debt facility (e.g., to finance an acquisition) using the same documentation, same lender group (or new lenders), and typically the same or similar pricing without renegotiating the entire loan agreement. A, C, and D are not the accordion feature.
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