CPA Financial Modeling & Forecasting 3

Question 1

What is the purpose of a 'sensitivity table' (also called a data table) in Excel-based financial models?

Accepted Answer

To show how the output metric changes across a range of two input assumptions simultaneously

Answer

A two-variable sensitivity table displays how an output (e.g., enterprise value or IRR) changes as two key inputs (e.g., revenue growth and EBITDA margin) vary.

Question 2

In a DCF model, 'terminal value' typically represents what portion of total enterprise value for a mature company?

Accepted Answer

60–80% of total enterprise value

Answer

For most mature companies, terminal value accounts for 60–80% of total DCF enterprise value, reflecting the long-term going-concern cash generation beyond the explicit forecast period.

Question 3

Which depreciation method results in higher depreciation expense in the early years of an asset's life, reducing taxable income more quickly?

Accepted Answer

Double-declining balance depreciation

Answer

Double-declining balance is an accelerated method that applies twice the straight-line rate to the remaining book value, front-loading depreciation expense.

Question 4

What does 'normalization' of financial statements mean in the context of building a financial model?

Accepted Answer

Adjusting historical results to remove non-recurring or unusual items to reflect ongoing business performance

Answer

Normalization removes one-time items (restructuring charges, litigation settlements, asset write-downs) so the model's baseline reflects true recurring operations.

Question 5

In a merger model, 'accretion' to EPS occurs when:

Accepted Answer

The acquirer's post-merger EPS is higher than its pre-merger EPS

Answer

An accretive deal increases the acquirer's earnings per share, often when the target is purchased at a lower P/E than the acquirer's own P/E multiple.

(CPA) Certified Practicing Accountant Practice Test

(CPA) Certified Practicing Accountant Practice Test

CPA Financial Modeling & Forecasting 3