Financial Modeling & Forecasting Flashcards

What is the purpose of a 'sensitivity table' (also called a data table) in Excel-based financial models?

Answer: To show how the output metric changes across a range of two input assumptions simultaneously

A two-variable sensitivity table displays how an output (e.g., enterprise value or IRR) changes as two key inputs (e.g., revenue growth and EBITDA margin) vary.

In a DCF model, 'terminal value' typically represents what portion of total enterprise value for a mature company?

Answer: 60–80% of total enterprise value

For most mature companies, terminal value accounts for 60–80% of total DCF enterprise value, reflecting the long-term going-concern cash generation beyond the explicit forecast period.

Which depreciation method results in higher depreciation expense in the early years of an asset's life, reducing taxable income more quickly?

Answer: Double-declining balance depreciation

Double-declining balance is an accelerated method that applies twice the straight-line rate to the remaining book value, front-loading depreciation expense.

What does 'normalization' of financial statements mean in the context of building a financial model?

Answer: Adjusting historical results to remove non-recurring or unusual items to reflect ongoing business performance

Normalization removes one-time items (restructuring charges, litigation settlements, asset write-downs) so the model's baseline reflects true recurring operations.

In a merger model, 'accretion' to EPS occurs when:

Answer: The acquirer's post-merger EPS is higher than its pre-merger EPS

An accretive deal increases the acquirer's earnings per share, often when the target is purchased at a lower P/E than the acquirer's own P/E multiple.

When a financial model uses a 'plug' to balance the balance sheet, what is the most common plug used?

Answer: Revolving credit facility (revolver) on the liabilities side or excess cash on the assets side

The revolver (if the company needs cash) or excess cash (if the company generates surplus) is used as the balancing plug to ensure Assets = Liabilities + Equity.

Which forecasting method extrapolates a future value by applying an assumed constant percentage growth rate to the most recent historical period?

Answer: Compound annual growth rate (CAGR) extension

CAGR extension applies a single assumed growth rate compounded forward from the last known data point to project future values.