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Financial Modeling & Forecasting Flashcards

7 cards from real ABC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. In a leveraged buyout (LBO) model, which source of value creation is typically considered the most sustainable long-term?

    Answer: Operational improvements (EBITDA growth)

    Operational improvements that grow EBITDA are considered the most durable value driver since they reflect genuine business performance rather than financial engineering.

  2. When modeling working capital, an INCREASE in accounts payable is treated as:

    Answer: A source of cash (positive cash flow)

    Increasing accounts payable means the company is delaying cash payments to suppliers, effectively conserving cash — a positive operating cash flow item.

  3. The term 'circular reference' in financial modeling most commonly arises from:

    Answer: Interest expense depending on debt, which depends on cash, which depends on interest

    Interest expense affects net income and cash, which affects ending debt balance, which in turn affects interest expense — creating a loop that requires iterative calculation.

  4. A company has EBIT of $500,000, depreciation of $80,000, capex of $120,000, and a working capital increase of $30,000 with a 25% tax rate. What is unlevered free cash flow?

    Answer: $305,000

    UFCF = EBIT(1-t) + D&A - Capex - ΔNWC = $375,000 + $80,000 - $120,000 - $30,000 = $305,000.

  5. Which regression statistic indicates the proportion of variance in the dependent variable explained by the independent variables?

    Answer: R-squared

    R-squared (coefficient of determination) ranges from 0 to 1 and measures how well the regression model explains variability in the outcome.

  6. In scenario analysis for a financial model, which scenario is typically used as the basis for all other scenarios?

    Answer: Base case

    The base case represents management's most likely outcome and serves as the reference point from which upside (bull) and downside (bear) scenarios are constructed.

  7. A 'bridge' in financial modeling is used to:

    Answer: Explain the change between two values by breaking it into contributing factors

    A bridge (or waterfall chart) decomposes the difference between a starting and ending value into individual line items that explain the movement.