FA Financial Modeling and Valuation

Question 1

What is a three-statement financial model?

Accepted Answer

An integrated model linking the income statement, balance sheet, and cash flow statement

Answer

A three-statement model integrates all three core financial statements so that changes in one automatically flow through and affect the others, providing a complete financial picture.

Question 2

In financial modeling, what is a 'plug' or 'balancing item'?

Accepted Answer

A line item used to make the balance sheet balance after projections are built

Answer

A plug is typically the revolver or cash balance used to ensure the balance sheet balances, adjusting automatically as other projections change.

Question 3

Which valuation multiple is most commonly used for capital-intensive industries where depreciation varies significantly?

Accepted Answer

EV/EBITDA

Answer

EV/EBITDA is preferred in capital-intensive industries because it excludes depreciation and amortization, making comparisons across companies with different asset structures more meaningful.

Question 4

In a DCF model, what happens to the present value of cash flows when the discount rate increases?

Accepted Answer

Present values decrease

Answer

A higher discount rate reduces the present value of future cash flows because future dollars are penalized more heavily for the time value of money and risk.

Question 5

What is enterprise value (EV)?

Accepted Answer

The total value of a company including both equity and debt, minus cash

Answer

Enterprise value represents the total value of a business (equity + net debt) and is considered a more complete measure of company value than market cap alone.

FA - Finance Analyst Practice Test

FA - Finance Analyst Practice Test

FA Financial Modeling and Valuation