Financial Modeling Exam Wallstreet Prep

Financial Modeling Exam Wallstreet Prep Which are the two points that identify the break even unit sales? - ANS 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? - ANS Revenue - Total Costs, because Describe and Explain the relationship between NPV and Year 1 Unit Sales - ANS 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? - ANS NPV is more sensitive to growth rate because growth rate is compounded List the general steps used to forecast the financial statements - ANS 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 - ANS 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 - ANS 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 - ANS 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