Financial Modeling Exam Questions and Answers Fully Solved Latest Version 2025
Which are the two points that identify the break even unit sales? - 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? - Answers Revenue - Total Costs, because
Describe and Explain the relationship between NPV and Year 1 Unit Sales - 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? - Answers NPV is more sensitive
to growth rate because growth rate is compounded
List the general steps used to forecast the financial statements - 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 - 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 -
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 - 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? - 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 - 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 - Answers PV of earlier cash outflows was
greater than PV of later cash inflows
If the Unit Sales Scale Factor is 90% what is the maximum date 1 real cost of capital at which the project
will be acceptable? Why? - Answers The Unit Sales scale factor is $652 at 11% because any higher
percentage the NPV would be negative and the project would have to be rejected
If the Date 1 Real Cost of Capital is 17%, what is the minimum unit sales scale factor at which the project
will be acceptable? Why? - Answers The minimum unit sales scale factor at which the project will be
acceptable is 110%, there with a 17% costs of capital your NPV is $422, which is the lowest value yielded
by an 11% cost of capital greater than 0 for NPV
Fully explain the formula for calculating the With Investment Depreciation - Answers =Without
Investment Depreciation + (-New Investment Depreciation - Salvage Value) / Number of years to
depreciate
This formula takes into account the original amount of depreciation, while also factoring in any
additional depreciation per year from the new investment.
List all the primary differences between the With Investment and Without Investment Cash Flows that
are reflected in the differential project cash flows - Answers With the new investment you can expect
your cash flows to decrease by an additional $6300 in year 0, as you are doing additional spending for
the new investment. But for years 1-5, there's a decrease in annual labor costs and an increase in annual
depreciation, and that is reflected is the projected CF
Which are the two points that identify the break even unit sales? - 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? - Answers Revenue - Total Costs, because
Describe and Explain the relationship between NPV and Year 1 Unit Sales - 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? - Answers NPV is more sensitive
to growth rate because growth rate is compounded
List the general steps used to forecast the financial statements - 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 - 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 -
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 - 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? - 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 - 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 - Answers PV of earlier cash outflows was
greater than PV of later cash inflows
If the Unit Sales Scale Factor is 90% what is the maximum date 1 real cost of capital at which the project
will be acceptable? Why? - Answers The Unit Sales scale factor is $652 at 11% because any higher
percentage the NPV would be negative and the project would have to be rejected
If the Date 1 Real Cost of Capital is 17%, what is the minimum unit sales scale factor at which the project
will be acceptable? Why? - Answers The minimum unit sales scale factor at which the project will be
acceptable is 110%, there with a 17% costs of capital your NPV is $422, which is the lowest value yielded
by an 11% cost of capital greater than 0 for NPV
Fully explain the formula for calculating the With Investment Depreciation - Answers =Without
Investment Depreciation + (-New Investment Depreciation - Salvage Value) / Number of years to
depreciate
This formula takes into account the original amount of depreciation, while also factoring in any
additional depreciation per year from the new investment.
List all the primary differences between the With Investment and Without Investment Cash Flows that
are reflected in the differential project cash flows - Answers With the new investment you can expect
your cash flows to decrease by an additional $6300 in year 0, as you are doing additional spending for
the new investment. But for years 1-5, there's a decrease in annual labor costs and an increase in annual
depreciation, and that is reflected is the projected CF
