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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. Which depreciation method results in the highest net income in the early years of an asset's life?

    Answer: Straight-line

    Straight-line depreciation spreads costs evenly, resulting in lower depreciation expense (and thus higher net income) in early years compared to accelerated methods.

  2. In DCF valuation, terminal value typically represents what percentage of total enterprise value for a mature company?

    Answer: 60-80%

    For most mature companies, terminal value accounts for roughly 60-80% of total DCF value, highlighting the importance of terminal growth rate and WACC assumptions.

  3. Monte Carlo simulation is most useful in financial modeling when:

    Answer: Multiple uncertain input variables create a range of possible outcomes

    Monte Carlo simulation runs thousands of iterations by randomly sampling input variable distributions, producing a probability distribution of outcomes when many variables are uncertain.

  4. When forecasting Cost of Goods Sold (COGS) as a percentage of revenue, which modeling approach is being used?

    Answer: Percent-of-revenue (common-size) forecasting

    Expressing COGS as a percentage of revenue (gross margin assumption) is the most common income statement forecasting approach for maintaining proportional relationships.

  5. A company reports EBITDA of $2 million and net debt of $6 million. If comparable companies trade at 8x EV/EBITDA, what is the estimated equity value?

    Answer: $10 million

    EV = 8 × $2M = $16M; Equity Value = EV - Net Debt = $16M - $6M = $10M.

  6. Which best describes the purpose of a 'plug' in a three-statement financial model?

    Answer: A balancing item that makes the balance sheet equation hold

    A plug (often cash or the revolver) is the variable that ensures Assets = Liabilities + Equity after all other items are calculated.

  7. The Altman Z-Score model is primarily used to predict:

    Answer: Probability of corporate bankruptcy

    The Altman Z-Score combines five financial ratios to produce a score that estimates the likelihood a company will enter financial distress or bankruptcy.