Financial Modelling

Question 1

What are the 3 statements with a ‘3-Statement Model’?

1.

Answer 1

1. Income Statement - compares revenues and costs to determine profit or loss (using accrual accounting method)
2. Balance Sheet - Snapshot of a companies A, L & E at a specific time
3. Cash Flow Statement - shows cash flows when they occur) (good for examing large time periods, like in a DCF

Question 2

What is the standard number of years in the future to project a Financial Model?

Answer 2

5 Years

Question 3

What is a DCF?

Answer 3

Discounted Cash Flow Model

Question 4

What is the purpose of a ‘3-Statement Model’?

Answer 4

To forecast the income statement, balance sheet, and cash flow statement of a company for purposes of projecting its forward-looking financial performance.

Question 5

Is a ‘Profit & Loss’ statement the same as an ‘Income Statement’?

Answer 5

Yes

It summarizes the revenues, costs, expenses, showing a companies profits/losses during a specified period.

This is achieved by using the accruals accounting method and putting the cash spent to purchase inventory or produce the product, on the same report as the income gained from selling the product so it can be compared.

Question 6

What does a ‘Balance Sheet’ show?

(A, L, E)

Answer 6

It shows all the business assets (what your business owns) and liabilities (what your business owes) and owners equity.

It reports a company’s assets, liabilities, and shareholder equity at a specific point in time.

Question 7

What is ‘Owners Equity’ (Also known as ‘Shareholder Equity’)?

Answer 7

The proportion of the total value of a company’s assets that can be claimed by its owners (sole proprietorship or partnership) or by its shareholders (if it is a corporation)

Question 8

What is a Cost vs an Expense?

Answer 8

While a cost is generally a one-time payment, an expense is best described as an amount paid regularly towards ongoing business operations.

Question 9

What is included on a Cash Flow Statement?

Answer 9

Shows all cash inflows that a company receives from its ongoing operations and external investment sources, aswell as cash outflows when they occur

Question 10

What is EBITDA?

Answer 10

Earnings Before Interest, Taxes, Depreciation and Amortisation

EBITDA = Net Income
+ Interest
+ Taxes
+ Depreciation
+ Amortisation

It provides a much better idea of profitability and growth trends when the cost of capital is removed from the picture. Ironically, EBITDA provides a good metric for gauging a business’s ability to service debt when examining a potential leveraged buyout (LBO).

Question 11

Walk me through a DCF?

Question 12

How would you assess a capital investment?

Answer 12

Net Present Value (NPV) - if it’s >1 you accept the investment, <1 you reject

Internal Rate of Return - if it’s >discount rate you accept, if it’s <discount rate you reject

Payback Period (How many years it takes to make back the investment) - There’s no set rule for this

Question 14

How is working capital calculated?

Answer 14

Working capital = current assets – current liabilities

Question 15

What do PP&E refer to in terms of Non-current assets

Answer 15

Property, Plant & Equipment