Financial Modeling Exam questions with answers
Which are the two points that identify the break even unit sales? - **🔰 VERIFIED
ANSWERS🔰 ✔✔1. Where the Sales revenue line crosses the Total costs line
2. Where accounting profit hits zero and changes from negative to positive
What is the formula for accounting profit? - **🔰 VERIFIED ANSWERS🔰 ✔✔Revenue -
Total Costs, because
Describe and Explain the relationship between NPV and Year 1 Unit Sales - **🔰 VERIFIED
ANSWERS🔰 ✔✔They have a direct relationship because PV of Net cash flows rises as year
1 unit sales rises
Is NPV more sensitive to Year 1 Unit sales or year 2 sales growth rate? - **🔰 VERIFIED
ANSWERS🔰 ✔✔NPV is more sensitive to growth rate because growth rate is compounded
List the general steps used to forecast the financial statements - **🔰 VERIFIED
ANSWERS🔰 ✔✔1. Use financial statements to find which income statement items and
balance sheet items are close to being a constant percentage of sales and which aren't
2 Forecast sales
3. Apply average historic percentage of sales to generate most of the income statement and
balance sheet
4. Use forecasting to generate the rest of teh statements
5. Make balance sheet balance by calculating longer term debt
6. Raise or lower the portion of equity relatiev to the portion of debt by raising/lowering
paid in capital
List 6 major individual income statement and balance sheet items that are not constant
percentages of sales - **🔰 VERIFIED ANSWERS🔰 ✔✔1. Depreciation
, 2. Interest Expense
3. Taxes
4. Property Plant and Equipment
5. Short Term Debt
6. Long term debt
Fully describe and explain the relationship between external funds needed and sales growth
rate - **🔰 VERIFIED ANSWERS🔰 ✔✔External funds needed is very sensitive to sales
growth rate, they have a positive linear relationship because most items are a percentage of
sales
Fully explain why the discount rate is increasing over years - **🔰 VERIFIED ANSWERS🔰
✔✔discount rate increases over the years because the inflation rate and the real cost of
capital increases each year. These two figures (real cost of capital and inflation rate) are a
part of calculating discount rate, they have a direct relationship
What is the main advantage of forecasting the inflation rate separately for calculating NPV?
- **🔰 VERIFIED ANSWERS🔰 ✔✔It assures that we are consistent in how we treat
inflation when we apply it to NPV calculations, and include it as a component in the
discount rate
State all the steps for calculating the Operating Cash Flows - **🔰 VERIFIED ANSWERS🔰
✔✔1. Start with Sales and subtract VC to get gross margin
2. Subtract TFC (depreciation plus cash fC) to get operating profit
3. Subtract taxes to get net profit
4. Add back depreciation and you get operating cash flows
Fully explain why NPV falls from a higher number to a lower number even though the
investment in working capital in years 1-4 is fully recovered in years 5-7 - **🔰 VERIFIED
ANSWERS🔰 ✔✔PV of earlier cash outflows was greater than PV of later cash inflows
Which are the two points that identify the break even unit sales? - **🔰 VERIFIED
ANSWERS🔰 ✔✔1. Where the Sales revenue line crosses the Total costs line
2. Where accounting profit hits zero and changes from negative to positive
What is the formula for accounting profit? - **🔰 VERIFIED ANSWERS🔰 ✔✔Revenue -
Total Costs, because
Describe and Explain the relationship between NPV and Year 1 Unit Sales - **🔰 VERIFIED
ANSWERS🔰 ✔✔They have a direct relationship because PV of Net cash flows rises as year
1 unit sales rises
Is NPV more sensitive to Year 1 Unit sales or year 2 sales growth rate? - **🔰 VERIFIED
ANSWERS🔰 ✔✔NPV is more sensitive to growth rate because growth rate is compounded
List the general steps used to forecast the financial statements - **🔰 VERIFIED
ANSWERS🔰 ✔✔1. Use financial statements to find which income statement items and
balance sheet items are close to being a constant percentage of sales and which aren't
2 Forecast sales
3. Apply average historic percentage of sales to generate most of the income statement and
balance sheet
4. Use forecasting to generate the rest of teh statements
5. Make balance sheet balance by calculating longer term debt
6. Raise or lower the portion of equity relatiev to the portion of debt by raising/lowering
paid in capital
List 6 major individual income statement and balance sheet items that are not constant
percentages of sales - **🔰 VERIFIED ANSWERS🔰 ✔✔1. Depreciation
, 2. Interest Expense
3. Taxes
4. Property Plant and Equipment
5. Short Term Debt
6. Long term debt
Fully describe and explain the relationship between external funds needed and sales growth
rate - **🔰 VERIFIED ANSWERS🔰 ✔✔External funds needed is very sensitive to sales
growth rate, they have a positive linear relationship because most items are a percentage of
sales
Fully explain why the discount rate is increasing over years - **🔰 VERIFIED ANSWERS🔰
✔✔discount rate increases over the years because the inflation rate and the real cost of
capital increases each year. These two figures (real cost of capital and inflation rate) are a
part of calculating discount rate, they have a direct relationship
What is the main advantage of forecasting the inflation rate separately for calculating NPV?
- **🔰 VERIFIED ANSWERS🔰 ✔✔It assures that we are consistent in how we treat
inflation when we apply it to NPV calculations, and include it as a component in the
discount rate
State all the steps for calculating the Operating Cash Flows - **🔰 VERIFIED ANSWERS🔰
✔✔1. Start with Sales and subtract VC to get gross margin
2. Subtract TFC (depreciation plus cash fC) to get operating profit
3. Subtract taxes to get net profit
4. Add back depreciation and you get operating cash flows
Fully explain why NPV falls from a higher number to a lower number even though the
investment in working capital in years 1-4 is fully recovered in years 5-7 - **🔰 VERIFIED
ANSWERS🔰 ✔✔PV of earlier cash outflows was greater than PV of later cash inflows
