Financial Modeling & Forecasting Flashcards

In a discounted cash flow model, which approach to calculating terminal value assumes the company grows at a constant rate in perpetuity?

Answer: Gordon Growth Model (perpetuity growth method)

The Gordon Growth Model calculates terminal value as FCF × (1 + g) / (WACC − g), assuming perpetual growth at a stable rate g.

When stress-testing a financial model for debt covenant compliance, which metric is most commonly subject to a minimum coverage ratio covenant?

Answer: Interest coverage ratio (EBITDA / Interest Expense)

Lenders frequently require borrowers to maintain a minimum EBITDA-to-interest-expense ratio to ensure debt service capacity is maintained.

In a multi-year financial model, what is the purpose of including a 'stub period' in the first forecast year?

Answer: To reflect a partial year when the model's start date does not align with the company's fiscal year-end

A stub period captures the remaining portion of the first fiscal year from the transaction or valuation date, preventing overstatement of the first year's projected results.

Which of the following best describes 'roll-forward' schedules used in financial modeling?

Answer: Schedules that calculate an ending balance by starting with the prior period's balance, adding increases, and subtracting decreases

Roll-forward schedules (used for PP&E, debt, equity, etc.) follow the pattern: Beginning Balance + Additions − Reductions = Ending Balance.

In an integrated financial model, how does a share repurchase program typically affect the earnings per share (EPS) forecast?

Answer: EPS increases because fewer shares are outstanding, even if net income stays the same

Buying back shares reduces the weighted average diluted share count, so the same net income is divided among fewer shares, mechanically increasing EPS.

What does 'EBITDA bridge' analysis show in a financial model?

Answer: The reconciliation of EBITDA from one period to the next, breaking down the drivers of change (volume, price, cost)

An EBITDA bridge decomposes the year-over-year change into components like volume effect, pricing effect, cost savings, and one-time items to explain performance drivers.

When a financial model projects 'deferred revenue' on the balance sheet, what does an increase in deferred revenue imply for operating cash flow?

Answer: It is a source of cash and increases operating cash flow

An increase in deferred revenue means the company collected cash before recognizing it as revenue, providing a cash inflow that adds to operating cash flow.