Financial Analyst Exam With Complete Solutions
Latest Update
How would you analyze the financial statements? - ANSWER Leverage: Debt-to-Equity
Ratio = Total Liabilities / Shareholders Equity
Liquidity: Current Ratio = Current Assets / Current Liabilities
Liquidity: Quick Ratio=(Current Assets - Inventories)/ Current Liabilities
Profitability: Return on Equity (ROE)= Net Income/Shareholder's Equity
Efficiency: Net Profit Margin=Net Profit / Net Sales
What else will you need to look at aside from the financial statements in order to analyze
a company? - ANSWER Risk: It is important to be managed and maintained.
Credit Risk- the risk that a company or person will not be able to pay the contractual
interest or principal on its debt obligations.
Interest Rate Risk - the risk that the value of an investment will alter because of a
change in interest rates.
Market Risk- the day-to-day fluctuations in a stock's price.
What is the difference between discount rate and cap rate? - ANSWER Cap rate- the
ratio of Net Operating Income (NOI) to property asset value/ current market value
,estimation for an investor's potential return on a real estate investment.
Cap rate is most useful as a comparison of relative value of similar real estate
investments
Discount rate - The interest rate selected and used in a discounted cash flow to
determine the current value of anticipated revenues or expenses.
The cap rate allows us to value a property based on a single year's NOI. The discount
rate, on the other hand, is the investor's required rate of return. The discount rate
discounts future cash flows back to the present to determine value and accounts for all
years in the holding period, rather than just a single year like the cap rate.
What is the most accurate means of retrieving the Earnings before interest and taxes? -
ANSWER EBIT = Operating Revenue - Operating Expenses (OPEX) + Non-operating
Income
*Walk me through a DCF? - ANSWER Discounted cash flow, or DCF, projects future free
cash flow and then discounts it-usually with weighted average cost of capital-to arrive at
a present value, which can be used to evaluate an investment opportunity. If the DCF is
greater than the current cost of an investment, the opportunity may yield positive
returns.
In essence, it is a valuation method used to estimate the value of an investment by using
future cash flows that would be generated by it.
As a banker, I would rather give out a loan to the company with the high DCF because
this way, the company would be able to pay me back my loan.
The DCF has some limitations: it is mostly based on the estimation of cash flows, which
may turn out not to be correct.
*Which one of the following financial statements would best be used for an analysis on a
,company? - ANSWER Statement of Cash Flows.
only reflects the change in the cash generated from operating, investing and financing
activities
This statement provides an indication of the ease with which a firm is able to meet its
debt and interest payments as well as provide funds for investments
In this statement, one may get a better representation about the cash flows of a firm
compared to the income statement-income statement is prone to errors due to
accounting conventions
Income statement:
reveals the ability of a business to generate a profit. However, it does not reveal the
amount of assets and liabilities required to generate a profit, and its results do not
necessarily equate to the cash flows generated by the business. Also, the accuracy of
this document can be suspect when the cash basis of accounting is used. Thus, the
income statement, when used by itself, can be somewhat misleading.
Balance sheet. Though most users probably would consider the balance sheet to be the
third most useful of the financial statements because it does not disclose the results of
operations and because some of the numbers included on it may be based upon
historical costs, thereby making the report less informative.
What are some growth drivers of the company? - ANSWER Strategic Priorities:
Putting customers first- find and offer solutions to our customers financial needs.
Increasing revenue- 1) Gain more business from active customers, 2) Steal customers
from our competitors, 3) Purchase or acquire a new company.
Cutting costs- Always search out methods to make our operations easier, and
streamlining our processes.
Building a connection with our shareholders and our communities- Provide service for
all of our customers, help them to financially succeed and invest back into our
, communities.
*
What is an EBITDA or earnings before interest, taxes, depreciation, and amortization
and what does not go into it? Why is it not a good measure? -ANWSWER EBITDA reflects
operating income of a firm without the capital structure effects -financing and
accounting decision. It is applied to calculate a firm's financial performance and their
capability to repay debt in a short period of time -a few years.
EBITDA is actually one of the more common measures of corporate profitability!!!!!!!
EBITDA can be used to compare companies against one another and against industry
averages.
EBITDA has become a common means of comparing the financial health of a company
and to assess firms with various tax rates and deprecation policies.
not a substitute for analyzing a company's cash flow and can make a company appear
as if it is bringing in more money in order to make interest payments that it actually is.
EBITDA also ignores the quality of the underlying earnings of a company and can make
it look cheaper than it actually is.
It's a good proxy for profitability but NOT cash flow. It ignores working capital- the cash
needed to cover day-to-day operations
and also leaves out cash requirements that are needed to fund capital expenditures,
which can be significant depending on the firm's business.
Also, EBITDA adds back D&A. Interest and taxes are real expenses and should be
considered when looking at a company's ability to service their debt!
What ratios would you use to judge a company? - ANSWER Leverage: Debt-to-Equity
Ratio = Total Liabilities / Shareholders Equity
Liquidity: Current Ratio = Current Assets / Current Liabilities
Liquidity: Quick Ratio= (Current Assets - Inventories)/ Current Liabilities
Latest Update
How would you analyze the financial statements? - ANSWER Leverage: Debt-to-Equity
Ratio = Total Liabilities / Shareholders Equity
Liquidity: Current Ratio = Current Assets / Current Liabilities
Liquidity: Quick Ratio=(Current Assets - Inventories)/ Current Liabilities
Profitability: Return on Equity (ROE)= Net Income/Shareholder's Equity
Efficiency: Net Profit Margin=Net Profit / Net Sales
What else will you need to look at aside from the financial statements in order to analyze
a company? - ANSWER Risk: It is important to be managed and maintained.
Credit Risk- the risk that a company or person will not be able to pay the contractual
interest or principal on its debt obligations.
Interest Rate Risk - the risk that the value of an investment will alter because of a
change in interest rates.
Market Risk- the day-to-day fluctuations in a stock's price.
What is the difference between discount rate and cap rate? - ANSWER Cap rate- the
ratio of Net Operating Income (NOI) to property asset value/ current market value
,estimation for an investor's potential return on a real estate investment.
Cap rate is most useful as a comparison of relative value of similar real estate
investments
Discount rate - The interest rate selected and used in a discounted cash flow to
determine the current value of anticipated revenues or expenses.
The cap rate allows us to value a property based on a single year's NOI. The discount
rate, on the other hand, is the investor's required rate of return. The discount rate
discounts future cash flows back to the present to determine value and accounts for all
years in the holding period, rather than just a single year like the cap rate.
What is the most accurate means of retrieving the Earnings before interest and taxes? -
ANSWER EBIT = Operating Revenue - Operating Expenses (OPEX) + Non-operating
Income
*Walk me through a DCF? - ANSWER Discounted cash flow, or DCF, projects future free
cash flow and then discounts it-usually with weighted average cost of capital-to arrive at
a present value, which can be used to evaluate an investment opportunity. If the DCF is
greater than the current cost of an investment, the opportunity may yield positive
returns.
In essence, it is a valuation method used to estimate the value of an investment by using
future cash flows that would be generated by it.
As a banker, I would rather give out a loan to the company with the high DCF because
this way, the company would be able to pay me back my loan.
The DCF has some limitations: it is mostly based on the estimation of cash flows, which
may turn out not to be correct.
*Which one of the following financial statements would best be used for an analysis on a
,company? - ANSWER Statement of Cash Flows.
only reflects the change in the cash generated from operating, investing and financing
activities
This statement provides an indication of the ease with which a firm is able to meet its
debt and interest payments as well as provide funds for investments
In this statement, one may get a better representation about the cash flows of a firm
compared to the income statement-income statement is prone to errors due to
accounting conventions
Income statement:
reveals the ability of a business to generate a profit. However, it does not reveal the
amount of assets and liabilities required to generate a profit, and its results do not
necessarily equate to the cash flows generated by the business. Also, the accuracy of
this document can be suspect when the cash basis of accounting is used. Thus, the
income statement, when used by itself, can be somewhat misleading.
Balance sheet. Though most users probably would consider the balance sheet to be the
third most useful of the financial statements because it does not disclose the results of
operations and because some of the numbers included on it may be based upon
historical costs, thereby making the report less informative.
What are some growth drivers of the company? - ANSWER Strategic Priorities:
Putting customers first- find and offer solutions to our customers financial needs.
Increasing revenue- 1) Gain more business from active customers, 2) Steal customers
from our competitors, 3) Purchase or acquire a new company.
Cutting costs- Always search out methods to make our operations easier, and
streamlining our processes.
Building a connection with our shareholders and our communities- Provide service for
all of our customers, help them to financially succeed and invest back into our
, communities.
*
What is an EBITDA or earnings before interest, taxes, depreciation, and amortization
and what does not go into it? Why is it not a good measure? -ANWSWER EBITDA reflects
operating income of a firm without the capital structure effects -financing and
accounting decision. It is applied to calculate a firm's financial performance and their
capability to repay debt in a short period of time -a few years.
EBITDA is actually one of the more common measures of corporate profitability!!!!!!!
EBITDA can be used to compare companies against one another and against industry
averages.
EBITDA has become a common means of comparing the financial health of a company
and to assess firms with various tax rates and deprecation policies.
not a substitute for analyzing a company's cash flow and can make a company appear
as if it is bringing in more money in order to make interest payments that it actually is.
EBITDA also ignores the quality of the underlying earnings of a company and can make
it look cheaper than it actually is.
It's a good proxy for profitability but NOT cash flow. It ignores working capital- the cash
needed to cover day-to-day operations
and also leaves out cash requirements that are needed to fund capital expenditures,
which can be significant depending on the firm's business.
Also, EBITDA adds back D&A. Interest and taxes are real expenses and should be
considered when looking at a company's ability to service their debt!
What ratios would you use to judge a company? - ANSWER Leverage: Debt-to-Equity
Ratio = Total Liabilities / Shareholders Equity
Liquidity: Current Ratio = Current Assets / Current Liabilities
Liquidity: Quick Ratio= (Current Assets - Inventories)/ Current Liabilities
