FA FA Financial Modeling & Valuation 2

Question 1

Which approach to calculating the Weighted Average Cost of Capital (WACC) reflects the market-value weights of debt and equity?

Accepted Answer

Using current market capitalization and market value of debt

Answer

WACC should use market-value weights because they represent the current opportunity cost investors face, not historical accounting values.

Question 2

In LBO modeling, what is the primary driver of equity returns for a private equity sponsor?

Accepted Answer

Financial leverage, operational improvements, and multiple expansion

Answer

LBO returns are driven by the combination of leverage (amplifying gains), EBITDA growth, and selling at a higher multiple than the purchase price.

Question 3

What does a 'hockey stick' projection in a financial model typically indicate?

Accepted Answer

Unrealistically optimistic growth assumptions skewed heavily toward future periods

Answer

Hockey stick projections show flat or slow near-term performance followed by a sharp upward inflection, often signaling overly optimistic management assumptions.

Question 4

Which schedule in a financial model tracks the beginning balance, additions, depreciation, and ending balance of fixed assets?

Accepted Answer

PP&E (Property, Plant & Equipment) roll-forward schedule

Answer

The PP&E roll-forward schedule links capital expenditures and depreciation to the balance sheet and income statement in a three-statement model.

Question 5

What financial ratio measures how efficiently a company converts sales into profit after all expenses?

Accepted Answer

Net profit margin

Answer

Net profit margin (net income ÷ revenue) shows the percentage of each dollar of revenue that ultimately becomes profit.

FA - Financial Analyst Practice Test

FA - Financial Analyst Practice Test

FA FA Financial Modeling & Valuation 2