FA FA Financial Modeling & Valuation 1 — Questions and Answers
Question 1: Which valuation method estimates a company's value by discounting its projected future free cash flows to the present?
- Discounted Cash Flow (DCF) (Correct answer)
- Price-to-Earnings (P/E) ratio
- Book value method
- Liquidation value method
Correct answer: Discounted Cash Flow (DCF)
DCF analysis values a company by discounting its expected future free cash flows back to present value using an appropriate discount rate.
Question 2: In a three-statement financial model, which statements are linked together?
- Income statement, balance sheet, and cash flow statement (Correct answer)
- Income statement, budget report, and tax return
- Balance sheet, accounts receivable, and payroll
- Cash flow statement, budget, and audit report
Correct answer: Income statement, balance sheet, and cash flow statement
A three-statement model integrates the income statement, balance sheet, and cash flow statement so changes in one automatically flow through the others.
Question 3: What does EBITDA stand for in financial analysis?
- Earnings Before Interest, Taxes, Depreciation, and Amortization (Correct answer)
- Equity Before Income Taxes, Dividends, and Adjustments
- Estimated Base Income Tax, Depreciation, and Accruals
- Earnings Before Inflation, Trade Debt, and Allocation
Correct answer: Earnings Before Interest, Taxes, Depreciation, and Amortization
EBITDA measures a company's core operational profitability by removing non-cash charges and financing costs from net income.
Question 4: Which financial modeling technique tests how changes in key assumptions affect the output of a model?
- Sensitivity analysis (Correct answer)
- Regression analysis
- Cohort analysis
- Trend extrapolation
Correct answer: Sensitivity analysis
Sensitivity analysis (also called what-if analysis) shows how the model's output changes as individual input variables are adjusted.
Question 5: In comparable company analysis (comps), which multiple is most commonly used to value capital-intensive businesses?
- EV/EBITDA (Correct answer)
- Price-to-Book (P/B)
- Price-to-Sales (P/S)
- Dividend yield
Correct answer: EV/EBITDA
EV/EBITDA is preferred for capital-intensive firms because it is capital-structure neutral and removes the distortion of varying depreciation policies.
Question 6: What is the terminal value in a DCF model used to estimate?
- The value of all cash flows beyond the explicit forecast period (Correct answer)
- The scrap value of a company's assets at wind-down
- The present value of the first year's cash flow
- The total debt owed at the end of the projection period
Correct answer: The value of all cash flows beyond the explicit forecast period
Terminal value captures the value of cash flows generated after the detailed projection period, often representing the majority of total DCF value.
FA FA Financial Modeling & Valuation 1
Which valuation method estimates a company's value by discounting its projected future free cash flows to the present?