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FINANCIAL STATEMENT MODELING EXAM
/ACTUAL EXAM FROM WALL STREET PREP
WITH 100% CORRECT AND VERIFIED
ANSWERS AND RATIONALES/ WSP FINANCIAL
STATEMENT MODELING/LATEST UPDATE
Which are the two points that identify the break even unit sales?
Correct answer: 1. Where the Sales revenue line crosses the
Total costs line
Correct answer: 2. Where accounting profit hits zero and
changes from negative to positive
What is the formula for accounting profit?
Correct answer: Revenue - Total Costs, because
Describe and Explain the relationship between NPV and Year 1 Unit Sales
Correct answer: They have a direct relationship because PV of
Net cash flows rises as year 1 unit sales rises
Is NPV more sensitive to Year 1 Unit sales or year 2 sales growth rate?
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Correct answer: NPV is more sensitive to growth rate because
growth rate is compounded
List the general steps used to forecast the financial statements
Correct answer: 1. Use financial statements to find which
income statement items and balance sheet items are close to being a constant percentage of sales and which aren't
Correct answer: 2. Forecast sales
Correct answer: 3. Apply average historic percentage of sales to
generate most of the income statement and balance sheet
Correct answer: 4. Use forecasting to generate the rest of teh
statements
Correct answer: 5. Make balance sheet balance by calculating
longer term debt
Correct answer: 6. Raise or lower the portion of equity relatiev
to the portion of debt by raising/lowering paid in capital
List 6 major individual income statement and balance sheet items that are not constant percentages of sales
Correct answer: 1. Depreciation
Correct answer: 2. Interest Expense
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Correct answer: 3. Taxes
Correct answer: 4. Property Plant and Equipment
Correct answer: 5. Short Term Debt
Correct answer: 6. Long term debt
Fully describe and explain the relationship between external funds needed and sales growth rate
Correct answer: External funds needed is very sensitive to sales
growth rate, they have a positive linear relationship because most items are a percentage of sales
Fully explain why the discount rate is increasing over years
Correct answer: discount rate increases over the years because
the inflation rate and the real cost of capital increases each year.These two figures (real cost of capital and inflation rate) are a part of calculating discount rate, they have a direct relationship
What is the main advantage of forecasting the inflation rate separately for calculating NPV?
Correct answer: It assures that we are consistent in how we treat
inflation when we apply it to NPV calculations, and include it as a component in the discount rate
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State all the steps for calculating the Operating Cash Flows
Correct answer: 1. Start with Sales and subtract VC to get gross
margin
Correct answer: 2. Subtract TFC (depreciation plus cash fC) to
get operating profit
Correct answer: 3. Subtract taxes to get net profit
Correct answer: 4. Add back depreciation and you get operating
cash flows
Fully explain why NPV falls from a higher number to a lower number even though the investment in working capital in years 1-4 is fully recovered in years 5-7
Correct answer: PV of earlier cash outflows was greater than PV
of later cash inflows
If the Unit Sales Scale Factor is 90% what is the maximum date
- real cost of capital at which the project will be acceptable?
Why?
Correct answer: The Unit Sales scale factor is $652 at 11%
because any higher percentage the NPV would be negative and the project would have to be rejected