Financial Modeling Midterm Exam Questions and Correct Answers
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Course
Financial Modelling
Institution
Financial Modelling
What are the four steps of business analysis 1. Strategy analysis 2. Accounting analysis 3. Financial analysis 4. Prospective analysis
What does strategy analysis encompass 1. Identifying key profit drivers and business risks. Also, assesing profit potential 2.It is essential because it enables th...
Financial Modeling Midterm Exam
Questions and Correct Answers
What are the four steps of business analysis ✅1. Strategy analysis
2. Accounting analysis
3. Financial analysis
4. Prospective analysis
What does strategy analysis encompass ✅1. Identifying key profit drivers and
business risks. Also, assesing profit potential
2.It is essential because it enables the analyst to better frame the subsequent financial
and accounting analysis
3.Enables the analyst to make sound assumptions in forecasting a firm's future
performance
What is accounting analysis ✅Evaluate the degree to which a firm's accounting
captures its underlying business economics
It helps improve the reliability of financial analysis
What is financial analysis. Why is it important? ✅-Evaluate the current and past
performance of a firm and assess its sustainability
Ratio analysis and financial analysis
What is the difference between cash flow and ratio analysis ✅Ratio analysis helps
evaluate a firm's product market performance and financial policies, whereas cash flow
analysis shows a firm's liquidity and financial flexibility)
What is prospective analysis ✅Focuses on projections and the firm's future
Uses forecasting and evaluation to synthesize the insights from business analysis,
accounting analysis, and financial analysis
What are the five drivers of profitability ✅Rivalry among existing firms
Threat of new entry
Threat of subsditute products or services
Bargaining power of buyers
Bargaining power of suppliers
Rivalry among existing firms ✅Industry growth rate - if an industry is growing rapidly,
incumbent firms need not grab market share from each other to grow
Degree of differentiation and switching costs - extent to which firms in an industry can
avoid head - onncompetition depends on the extent to which they can differentiate their
products and services
, Threat of new entry of new firms ✅Economies of scale - when there are large
economies of scale, new entrants face the choice of having to invest in large capacity,
which might not be utilized right away, or to enter with less than optimum capacity
First Mover advantage - early entrants in an industry may deter future entrants
exclusive deal with suppliers and intellectual property rights
Threat of substitute products or services ✅Depends on the relative price or
performance of the competing products or services and on customers willingness to
substitute
Taxis vs uber and cable vs netflix
Bargaining power of buyers ✅Two factors price sensitivity and relative bargaining
power
price sensitivity ✅determines the extent to which buyers care to bargain on price.
Relative bargaining power ✅determines the extent to which they will succeed in forcing
the price down.
Bargaining power of suppliers ✅Suppliers are powerful when there are only a few
companies and few substitutes available to their customers
i.e coke and pepsi with bottlers
i.e. metal can suppliers to the soft drink industry are not very powerfil because of
intense competition among can producers and threat of substitute plastic bottles
What types of competitive strategy can a firm adopt ✅cost leadership and
differentiation
What is the intuition for the balance sheet ✅Tracks A, L, and E at any specific point in
time
Assets and liabilities are listed in order of liquidity
What is the intuition for gross profit ✅Sales - COGS
What is the intuition for operating income ✅Gross Profit - SG&A - Depreciation
What is the intuition for net income ✅operating income - interest income/expenses -
taxes
Why do we make adjustments for on recurring items ✅In order to compare to other
companies in the industry and serve as a baseline to compare on an annual basis
EBIT vs EBITDA ✅EBITDA is used a proxy for cash flows
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