Module 7

Question 1

_________ financials is an important part of accounting skills and is used by managers, financial analysts, and
investors to predict future potential revenue streams, expenses, and cash flows.

Answer 1

Forecasting

Question 2

_______ financial statements are one of the most common types of financial forecasts.

Answer 2

Pro-forma

Question 3

The __________ forecasting method is often used and involves determining future expected sales and finding trends amongvarious accounts in the financial statements.

Answer 3

percent of sales

Question 4

In forecasting _______ and _______, while longer term
planned capital expenses may roughly mirror sales, we will often use more detailed descriptions about planned
purchases in the notes sections of financial statements as the basis of our forecast.

Answer 4

PPE; depreciation

Question 5

_______, which, if the business is stable, generally can be estimated as a certain percentage of income before taxes.

Answer 5

income tax expense

Question 6

A company that may need additional funding, meaning an _______ in borrowings, will have _______ income expense.

Answer 6

increase; increased

Question 7

How does one calculate retained earnings?

Answer 7

Retained Earnings = Net Income + Retained Earnings Account balance of Prior Year

Question 8

Any _______ to be paid need to be subtracted

from retained earnings.

Answer 8

dividends

Question 9

Another important component in planning and evaluating the future of a business is to look at the expected ________ that the company will generate.

Answer 9

cash flows

Question 10

What is the equation to estimate free cash flows?

Answer 10

FCF = (1-t) x EBIT + DEP - CAPX - Delta NWC

Question 11

FCF?

Answer 11

Free Cash Flows

Question 12

t?

Answer 12

tax rate

Question 13

EBIT?

Answer 13

Earnings Before Interest and taxes

Question 14

DEP?

Answer 14

Depreciation and Amortization

Question 15

CAPX?

Answer 15

Capital Expenditures

Question 16

Delta NWC?

Answer 16

Change in Net Working Capital

Question 17

Stakeholders must consider the _____________ because a dollar received today is worth more than one that would be received a year from now due to opportunity costs, inflation, and the certainty of payments.

Answer 17

time value of money

Question 18

For simplicity we often translate all cash flows to the value that they would be worth today, the __________.

Answer 18

“present value”

Question 19

What is the rate that would otherwise be available in the market or the rate that best captures the risk inherent in the project being evaluated?

Answer 19

discount rate

Question 20

We can use the ___________ to determine the terminal value of the cash flows.

Answer 20

Gordon Growth model

Question 21

What number gives a good indication of what a business or a particular investment is worth today?

Answer 21

Net Present Value (NPV)

Question 22

It is important that the NPV uses only _______ cash flows in the analysis.

Answer 22

relevant

Question 23

Costs that will be incurred whether we go ahead with the project or not are also _______ for this decision.

Answer 23

irrelevant

Question 24

The _______ of a project will change as the assumptions that go into the NPV model, such as the cash flows and discount rate, change.

Answer 24

valuation

Question 25

The _______ is the discount rate that sets the NPV of a project equal to zero and allows us to see the percentage rate that would be earned for a given set of cash flows.

Answer 25

Internal Rate of Return (IRR)

Question 26

The _________ tells us how fast the investors can expect to have their money returned.

Answer 26

payback period

Question 27

The _________ ignores the time value of money and the cash flows that occur after the payback period.

Answer 27

payback period