FA Financial Modeling and Valuation 3

Question 1

What is free cash flow to equity (FCFE)?

Accepted Answer

Cash flow available to equity shareholders after debt payments, capex, and working capital changes

Answer

FCFE represents cash available to equity holders after the company funds operations, capital expenditures, working capital needs, and debt obligations.

Question 2

Which financial model is specifically designed to analyze the financial impact of a company acquiring another?

Accepted Answer

Merger & Acquisition (M&A) / Merger Model

Answer

A merger model (accretion/dilution model) analyzes the pro forma EPS impact of a proposed acquisition on the acquirer, including deal financing and synergies.

Question 3

What is a 'haircut' in financial modeling and valuation?

Accepted Answer

A reduction applied to asset values to account for risk or illiquidity

Answer

A haircut is a percentage reduction applied to an asset's value in financial analysis, reflecting risk, illiquidity, or uncertainty in recovery value.

Question 4

Which assumption most significantly impacts the terminal value in a Gordon Growth Model DCF?

Accepted Answer

The terminal growth rate (g)

Answer

The terminal growth rate (g) is the most sensitive assumption in the Gordon Growth Model because even small changes in g cause large changes in terminal value, which often dominates total DCF value.

Question 5

What is the purpose of a 'bridge' or 'walk' in financial modeling?

Accepted Answer

To reconcile or explain the change between two values step by step

Answer

A bridge or waterfall reconciles the difference between two values (e.g., enterprise value to equity value, or year 1 EBITDA to year 2 EBITDA) by showing each contributing factor.

FA - Finance Analyst Practice Test

FA - Finance Analyst Practice Test

FA Financial Modeling and Valuation 3