Financial Modeling Final Exam: 6
financial statement /Financial Modeling
Exam
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
What is the main advantage of forecasting the inflation rate separately for calculating
NPV? - ANS 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 - ANS 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 - ANS 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? - ANS 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? - ANS 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 - ANS
=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.
financial statement /Financial Modeling
Exam
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
What is the main advantage of forecasting the inflation rate separately for calculating
NPV? - ANS 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 - ANS 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 - ANS 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? - ANS 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? - ANS 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 - ANS
=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.
