Financial Analyst Exam With Complete
Solutions A+ Graded
Methods of valuing a business - ANSWER 1. Market capitalization
2. Times Revenue Method
3. Earnings Multiplier, Earnings Multiple
4. Discounted Cash Flow Method
5. Book Value
6. Liquidation Value
7. Enterprise Value
8. Comparable Transactions
Gross Margin - ANSWER (Revenue - COS) / Revenue
The amount of profit a business retains on each dollar of sales to service it's other debts
and financial obligations.
A higher number/percentage means higher profitability and reflects that your business
is efficient at producing its goods/services.
ROE - ANSWER Net Income/Shareholder's Equity
This tells us the dollar amount of profit earned per dollar of equity investment. If it's 9.3%
that means for every 100 dollars invested into the company, the company earns 9.30
dollars of profit.
DuPont Equation/Framework - ANSWER A way to break the ROE equation into more
,identifiable pieces (profitability x efficiency x leverage)
- Profitability: Measures how much income is generated from sales. /Net
Income/Revenue/
- Efficiency: Measures how much sales are generated from the company's assets.
/Revenue/Total Assets/
- Leverage: How much money has been borrowed to purchase assets. /Total
Assets/Stockholder's Equity
DSO (Days Sales Outstanding) or Avg. Collection Period - ANSWER [(Avg. AR/Revenue)
* Days
The average no of days it takes to collect payment from our customers after the sale is
completed.
- How quickly are we getting paid by our customers
- DSO reflects a company's cash flow.
- High DSO = Lag in receivable, can create CF problem
- Low DSO = Get paid fast, that is a good thing
Cash sales are excluded in the calculation of DSO because they actually have a DSO
value of 0.
If a company's DSO is trending upwards, that is an indication of a warning signal that all
is not well. Either the customers are not as happy as before, or the sales persons are
giving longer days of credit to generate high sales. Alternatively, the company may be
granting credit facilities to customers who cannot afford to pay their bills.
Normally, a DSO less than 45 is considered good.
Parexel: [(Billed AR + Unbilled AR - Deferred Revenue)/Revenue] * Days
We also provide the balance sheet account of deferred revenue, which is customer
payments received in advance of work performed. Such account was impacted by our
, ability to negotiate upfront payments from our customers, which we believe to be an
industry standard. As we present the deferred revenue adjustment, we are measuring
our ability to collect from our customers during the entire revenue process, inclusive of
advance billings in addition to collections for services for which no upfront payments
were received.
Deferred Revenue/Unearned Revenue - ANSWER A type of liability that results from a
business collecting cash from customers before earning the cash through rendering a
service or delivering a product.
Utilization Rate - ANSWER The portion of an employee's time that is used for productive
billable work. (Total billable hours / total hours available).
Typically available hours are hours spent at work so excludes PTO, holidays, etc.
Lunch breaks, phone calls, training, etc., can bring down utilization because it is not
billed to the client.
Capex vs. Opex - ANSWER The capital expenditure, money invested in acquiring,
maintaining, or upgrading both physical and intangible assets, is an expense incurred to
create future benefits. For example, purchasing a new software platform or upgrading
machinery on a factory floor. Purchases of property, equipment, land, computers,
furniture, and software.
The operating expenses include the costs of salaries, electricity, maintenance, and
repair, which are necessary to conduct the day-to-day operations of the firm. Expenses,
which can change inventory into output. Operating expenses also include the
depreciation of plants and machinery, which are used in the production process.
Book to Bill Ratio (B2B) - ANSWER is Bookings/ NBA)/Revenue for a period.
Compare new orders in a period vs. amount of goods or services billed in a period. In
the best of worlds, this ratio should be more than 1. Example - B2B of 1.30: For every
$1.30 of new deals we sign, $1.00 in revenue comes in. That way, we always have more
bookings then burn and backlog/ pipeline grows.
Solutions A+ Graded
Methods of valuing a business - ANSWER 1. Market capitalization
2. Times Revenue Method
3. Earnings Multiplier, Earnings Multiple
4. Discounted Cash Flow Method
5. Book Value
6. Liquidation Value
7. Enterprise Value
8. Comparable Transactions
Gross Margin - ANSWER (Revenue - COS) / Revenue
The amount of profit a business retains on each dollar of sales to service it's other debts
and financial obligations.
A higher number/percentage means higher profitability and reflects that your business
is efficient at producing its goods/services.
ROE - ANSWER Net Income/Shareholder's Equity
This tells us the dollar amount of profit earned per dollar of equity investment. If it's 9.3%
that means for every 100 dollars invested into the company, the company earns 9.30
dollars of profit.
DuPont Equation/Framework - ANSWER A way to break the ROE equation into more
,identifiable pieces (profitability x efficiency x leverage)
- Profitability: Measures how much income is generated from sales. /Net
Income/Revenue/
- Efficiency: Measures how much sales are generated from the company's assets.
/Revenue/Total Assets/
- Leverage: How much money has been borrowed to purchase assets. /Total
Assets/Stockholder's Equity
DSO (Days Sales Outstanding) or Avg. Collection Period - ANSWER [(Avg. AR/Revenue)
* Days
The average no of days it takes to collect payment from our customers after the sale is
completed.
- How quickly are we getting paid by our customers
- DSO reflects a company's cash flow.
- High DSO = Lag in receivable, can create CF problem
- Low DSO = Get paid fast, that is a good thing
Cash sales are excluded in the calculation of DSO because they actually have a DSO
value of 0.
If a company's DSO is trending upwards, that is an indication of a warning signal that all
is not well. Either the customers are not as happy as before, or the sales persons are
giving longer days of credit to generate high sales. Alternatively, the company may be
granting credit facilities to customers who cannot afford to pay their bills.
Normally, a DSO less than 45 is considered good.
Parexel: [(Billed AR + Unbilled AR - Deferred Revenue)/Revenue] * Days
We also provide the balance sheet account of deferred revenue, which is customer
payments received in advance of work performed. Such account was impacted by our
, ability to negotiate upfront payments from our customers, which we believe to be an
industry standard. As we present the deferred revenue adjustment, we are measuring
our ability to collect from our customers during the entire revenue process, inclusive of
advance billings in addition to collections for services for which no upfront payments
were received.
Deferred Revenue/Unearned Revenue - ANSWER A type of liability that results from a
business collecting cash from customers before earning the cash through rendering a
service or delivering a product.
Utilization Rate - ANSWER The portion of an employee's time that is used for productive
billable work. (Total billable hours / total hours available).
Typically available hours are hours spent at work so excludes PTO, holidays, etc.
Lunch breaks, phone calls, training, etc., can bring down utilization because it is not
billed to the client.
Capex vs. Opex - ANSWER The capital expenditure, money invested in acquiring,
maintaining, or upgrading both physical and intangible assets, is an expense incurred to
create future benefits. For example, purchasing a new software platform or upgrading
machinery on a factory floor. Purchases of property, equipment, land, computers,
furniture, and software.
The operating expenses include the costs of salaries, electricity, maintenance, and
repair, which are necessary to conduct the day-to-day operations of the firm. Expenses,
which can change inventory into output. Operating expenses also include the
depreciation of plants and machinery, which are used in the production process.
Book to Bill Ratio (B2B) - ANSWER is Bookings/ NBA)/Revenue for a period.
Compare new orders in a period vs. amount of goods or services billed in a period. In
the best of worlds, this ratio should be more than 1. Example - B2B of 1.30: For every
$1.30 of new deals we sign, $1.00 in revenue comes in. That way, we always have more
bookings then burn and backlog/ pipeline grows.
