FA Financial Modeling & Valuation Flashcards

Which approach to calculating the Weighted Average Cost of Capital (WACC) reflects the market-value weights of debt and equity?

Answer: Using current market capitalization and market value of debt

WACC should use market-value weights because they represent the current opportunity cost investors face, not historical accounting values.

In LBO modeling, what is the primary driver of equity returns for a private equity sponsor?

Answer: Financial leverage, operational improvements, and multiple expansion

LBO returns are driven by the combination of leverage (amplifying gains), EBITDA growth, and selling at a higher multiple than the purchase price.

What does a 'hockey stick' projection in a financial model typically indicate?

Answer: Unrealistically optimistic growth assumptions skewed heavily toward future periods

Hockey stick projections show flat or slow near-term performance followed by a sharp upward inflection, often signaling overly optimistic management assumptions.

Which schedule in a financial model tracks the beginning balance, additions, depreciation, and ending balance of fixed assets?

Answer: PP&E (Property, Plant & Equipment) roll-forward schedule

The PP&E roll-forward schedule links capital expenditures and depreciation to the balance sheet and income statement in a three-statement model.

What financial ratio measures how efficiently a company converts sales into profit after all expenses?

Answer: Net profit margin

Net profit margin (net income ÷ revenue) shows the percentage of each dollar of revenue that ultimately becomes profit.

When building a merger model (M&A), what does 'accretion' mean in the context of EPS?

Answer: The deal increases the acquirer's earnings per share

An accretive deal raises the combined entity's EPS above the acquirer's standalone EPS, often due to synergies or a lower-cost funding mix.