Financial Modeling Final Exam Questions and Correct Answers
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Course
Financial Modelling
Institution
Financial Modelling
Risk the chance an investment's actual gain will differ from the expected return. The main types of risk are systematic (tied to the broader market) and unsystematic (specific to a company or industry) risk.
Return the change in the price of an asset or investment over a period of time. A positive...
Financial Modeling Final Exam
Questions and Correct Answers
Risk ✅the chance an investment's actual gain will differ from the expected return. The
main types of risk are systematic (tied to the broader market) and unsystematic (specific
to a company or industry) risk.
Return ✅the change in the price of an asset or investment over a period of time. A
positive return means a profit while a negative return means a loss. Returns are often
annualized for comparison purposes, while a holding period return calculates the gain or
loss during the entire period an investment was held.
Liquidity ✅refers to the ease with which an asset can be converted into cash without
affecting its market price. Cash is the most liquid asset of all. The current, quick, and
cash ratios are the most commonly used ratios to measure liquidity.
Capital budgeting ✅the process a business uses to evaluate potential major projects
or investments such as new plants and equipment. This process involves analyzing a
project's cash inflows and outflows to determine whether the expected return meets a
set benchmark. One major method of capital budgeting is DCF analysis.
Capital structure ✅the combination of debt and equity used by a company to finance
its overall operations and growth. Equity capital comes from ownership shares in a
company and claims to its future cash flows and profits. Debt comes in the form of bond
issues or loans, while equity may come in the form of common stock, preferred stock, or
retained earnings. The debt to equity ratio is useful in determining the riskiness of a
company's borrowing practices.
Working Capital ✅represents the differences between a company's current assets and
current liabilities. It is a measure of a company's liquidity and short term financial health.
Positive working capital means that a company can fund its current operations and
invest in future activities and growth.
Balance Sheet ✅a financial statement that provides a snapshot of a company's assets,
liabilities, and shareholder equity at a point in time. On the BS, Assets must always
equal Liabilities + Shareholder's Equity.
Income Statement ✅a financial statement that shows a firm's revenue, expenses,
gains, losses, and net income over a period of time (usually a quarter or year). The IS
provides insight into a company's operations, efficiency of management,
underperforming sectors, and relative performance to its peers.
, Depreciation ✅an accounting method used to allocate the cost of a tangible asset over
its useful life. It represents how much of an asset's value has been used. The main
types of depreciation are straight line (evenly depreciated over useful life) and various
forms of accelerated depreciation (MACRS, sum of year's digits, etc.)
Amortization ✅the practice of spreading an intangible asset's cost over its useful life.
Amortization schedules are used by lenders to present a loan repayment schedule
based on a specific maturity date. Negative amortization may happen when the
payments of a loan are lower than the accumulated interest, causing the borrower to
owe more money instead of less.
Statement of Cash Flows ✅statement summarizes the amount of cash and cash
equivalents entering and leaving a company. Of the 3 statement, it is the best indicator
of a company's financial health and how well it generates cash. The main components
of the CF statement are cash from operating, investing, and financing activities.
Operating Cash Flow ✅a measure of the amount of cash generated by a company's
normal business operations. Operating cash flow indicates whether a company can
generate sufficient positive cash flow to maintain and grow its operations, otherwise, it
may require external financing for capital expansion.
Pro-Forma Financial Statement ✅refers to a method of calculating financial results
using certain projections or assumptions. Pro forma financials may not be GAAP
compliant but can be issued to the public to highlight certain items for potential
investors. It's illegal for publicly traded companies to mislead investors with pro forma
financial results that do not use the most conservative possible estimates of revenue
and expense.
Common-Size Statement ✅Displays items as a percentage of a common base figure,
total sales revenue, for example. This type of financial statement allows for easy
analysis between companies, or between periods, for the same company.
Common-Base Statement ✅Presents all items relative to a certain base-year amount.
Common-Base Year Financial Statements (Trend Analysis): Select a base year and
then express each item or account as a percent of the base-year value of that item. This
is useful for picking up trends through time
Financial Ratios ✅Relationships determined from a firm's financial information and
used for comparison purposes.Financial ratios are traditionally grouped into the
following categories: 1. Short-term solvency, or liquidity, ratios. 2. Long-term solvency,
or financial leverage, ratios. 3. Asset management, or turnover, ratios. 4. Profitability
ratios. 5. Market value ratios.
Future Value ✅the value of a current asset at some point in the future based on an
assumed growth rate. FV is important to investors and financial planners, as they use it
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