DOC FILE

PART 1: TOTAL VALUE = 60 POINTS

Fordham Gabelli School of Business

Financial Modeling
Midterm Exam: GFGB_6005_003:
Fall 2019

Full Name:

Student ID:

Bruce Tavel
Fall 2019
Confidential Information
Financial Modeling – Bruce Tavel Midterm Exam

Multiple Choice : Choose best answer: write your answer, letter, on Page 6 ( 2 POINTS EACH)

1. Consider an Income statement. Interest earned on a firm’s investments, recurring

but not core to the business, would appear in which section of the income statement?
a. Non-Operating Income
b. Operating Income
c. Extraordinary Items
d. Gross Profit

2. How do Prepaid Expenses (PE) and Accounts Payable (AP) differ from each other?
a. PE has not yet been paid out in cash, whereas AP has been.
b. PE has been paid out in cash but hasn’t yet shown up on the Income Statement as an
expense, until due; whereas AP has not yet been paid out in cash but has appeared on
the Income Statement.
c. PE refers to payment for future products/services that have not yet been delivered,
whereas AP refers to payment for products/services that have already been delivered.
d. Both B and C.

3. What is the formula of Net Income

a. Net Income = Revenue – COGS – SG&A + Other Income
b. Net Income = Revenue – COGS – SG&A + Other Income - D&A – Tax – Interest
Expense + Interests Income – Tax
c. Net Income = Revenue – COGS – SG&A + Other Income + D&A – Tax – Interest
Expense - Interests Income – Tax
d. Net Income = Revenue – COGS – SG&A - D&A – Tax – Interests Expense - Interest
Income – Tax

4. In a general industry, which component is not a part of Cost of Goods Sold?

a. Finished Goods
b. Raw Materials
c. Salaries

5. You see a Noncontrolling Interest (AKA Minority Interest) of $30 on a company’s Balance
Sheet. What could this mean?
a. The company owns 70% of another company, and that other company is worth $100
total.
b. The company owns 30% of another company, and that other company is worth $100
total.
c. The company owns 100% of another company, and that other company is worth $30
total.
d. None of the above.

Fordham Gabelli School of Business Page 1

Financial Modeling – Bruce Tavel Midterm Exam

6. What are the major line Income Statement components?

a. Revenue, COGS, Operating Expenses, Other Income, Depreciation, Interest Expense,
Interest Income, Tax, Non-recurring items, Distributions, Net Income
b. Revenue, COGS, Gross profit, Operating Expenses, Operating Income, EBITDA,
Interest Expenses, Interest Income, Net Income
c. Revenue, COGS, Gross profit, Operating Expenses, EBIT, Interest Expense, Net
Income
d. Revenue, COGS, Gross profit, Operating Expenses, EBIT, EBITDA, Cash, Tax, Net
Income

7. Tax Deferred Liability:

a. Must appear on the Income Statement
b. Is utilized by all corporations
c. Created when there is a difference between straight line and accelerated depreciation
d. Increases corporate taxes in the short term

8. Two companies have the same Net Income but different Depreciation numbers. Which
one will have the higher Cash Flow from Operations, assuming all else is equal?
a. The one with the lower Depreciation number.
b. Misleading question – Cash Flow from Operations will be the same.
c. Cannot determine the answer just from this information.
d. The one with the higher Depreciation number.

9. What are the components of cash flow from operating activities?

a. Net Income, Depreciation, Other Non-Cash items, changes in the working capital
b. Net Income, Depreciation, Deferred Taxes, Other Non-Cash items, changes in the
working capital
c. Net Income, Depreciation, Changes in the working capital, dividends
d. Net Income, Depreciation, Other Non-Cash items, changes in the working capital,
Capex,

10. _____ provides a snapshot of the financial condition of the firm at a particular time.
a. The balance sheet
b. The cash flow
c. The income statements
d. All of the above

11. Which of the following would not be an appropriate way to project Accounts Receivable?
a. % of Net Sales
b. % of Credit Sales
c. % of Cost of Goods Sold
d. Calculate Accounts Receivable Days and average that going forward
e. All of the above are acceptable

Fordham Gabelli School of Business Page 2

Financial Modeling – Bruce Tavel Midterm Exam

12. ______ is a measure of how much cash a company has produced or spent over a period
of time.
a. Cash flow statement
b. Profit & Loss
c. Balance Sheet
d. Income Statement

13. Which one is the major components of cash flow from Financing activities
a. Non-Cash Items
b. Buying or selling asset
c. Distributions to equity holders (non-controlling interests and dividends)
d. Investing in or selling marketable and non-marketable securities

14. If account receivable decrease by $10, please explain the effects on the 3-statement.
(Assume the tax rate is 40%)
a. No changes on Income Statement; Account receivables decrease by $10 on Cash Flow
Statement, total cash decreases $10; Total cash decreases on Balance Sheet, and
Account Receivable increases by $10.
b. No changes on Income Statement; Account receivables increases by $10 on Cash Flow
Statement, total cash increases $10; Cash increases on Balance Sheet, and Account
Receivable, an asset, decrease by $10.
c. Revenue Increases by $10 on Income Statement, and Tax increase by $4, so the Net
Income Increases by $6; Net Income increases by $6, Account receivables decreases
by $10 on Cash Flow Statement, total cash decreases by $4; Total cash decreases by
$4 on Balance Sheet, and Account Receivable increases by $10, and retained earning
decreases by $6
d. Revenue decreases by $10 on Income Statement, and Tax increase by $4, so the Net
Income Increases by $6; Net Income increases by $6, Account receivables increases by
$10 on Cash Flow Statement, total cash decreases by $4; Total cash decreases by $4
on Balance Sheet, and Account Receivable increases by $10, and retained earning
decreases by $6

15. The DCF valuation methodology relies on the WACC (weighted average cost of
capital) of the company to discount projected free cash flows.
Which of the following is NOT true?
a. WACC is used for making investment decisions by the company
b. WACC can be used to evaluate company projects with different / same risks
c. WACC represents the minimum return that all investors in the company expect to earn
for investing their monies in that company
d. None of the above

Fordham Gabelli School of Business Page 3

Financial Modeling – Bruce Tavel Midterm Exam

16. When doing valuation the cost of equity, expected return to equity investors relative
to the investment risk, is often computed using CAPM.
The capital asset pricing model.
To use CAPM what components must be estimated?
a. Future beta of the target company
b. The expected long term risk free rate of return
c. The expected long term return of the aggregate stock market
d. All of the above

17. Defining Enterprise Value (EV) as an economic measure reflecting the market value of
a business, it is therefore the sum of all claims by all claimants.
Which of the following is the best definition?
a. EV= market cap + net debt
b. EV= market cap + debt + minority interest + preferred stock + capital lease obligations
- cash
c. EV= market cap + debt + minority interest + preferred stock + capital lease obligations
+ unfunded pension obligations + employee stock options – cash
d. All of the above

18. Given the following information about XYZ company:

2009 2010
Revenue 3,600 4,000
COGS 1,840 2,000
SG&A 540 400
Depreciation 430 500
Amortization 190 200
EBIT 600 700
Net Interest Income 20 40
Pre-Tax Income 580 660
Income Tax Expenses 145 165
Net Income 435 495

CAPEX 500 600

OWC 500 550
Income Tax Rate 25% 25%

This Company’s unlevered free cash flow (UFCF) in 2010 should be:
a. 750
b. 475
c. 553
d. 575

Fordham Gabelli School of Business Page 4

Financial Modeling – Bruce Tavel Midterm Exam

19. What is the formula to project account receivables when given the days metric?
a. % of Cost of Goods
b. Account receivable/360 * Free Cash Flow
c. Account receivable/360 * Gross Profit
d. Account receivable/360 * Revenue
e. Account receivable/360 * Inventory

20. Which of the following would be classified a cash inflow from investing activity?
a. Proceeds from selling investments in equities
b. Cash paid to retire bonds
c. Cash paid for dividends

Fordham Gabelli School of Business Page 5

Financial Modeling – Bruce Tavel Midterm Exam

YOUR MULTIPLE CHOICE ANSWERS

1 A 9 B 17 C
2 C 10 A 18 D
3 B 11 C 19 D
4 C 12 A 20 A
5 A 13 C
6 A 14 B
7 C 15 D
8 D 16 D

Fordham Gabelli School of Business Page 6

Financial Modeling – Bruce Tavel Midterm Exam

Question and answer. (Round your answer to 1 decimal: 5 questions: 4 POINTS EACH)

1. For a recent year a corporation’s financial statements reported the following:

a. Net Income = $200,000
b. Depreciation = $20,000
c. Increase in accounts receivable = $60,000
d. Decrease in accounts payable = $30,000
Based on above info what amount will the corporation report as Cash Flow Operating
Activities on the cash statement? Please show your work. (4 Points)

ANSWER: 130,000 = 200,000 + 20,000 - 60,000 - 30,000

Fordham Gabelli School of Business Page 7

Financial Modeling – Bruce Tavel Midterm Exam

2. Please fill the blank (where “?” appears) with the answer (4 Points)

EBITDA Partners INCOME STATEMENT

Revenue $2,500.0
Cost of Goods Sold $1,100.0
Gross Profit ? 1,400
? OPERATING EXPENSES $900.0
EBITDA ? 500
Depreciation $90.0
Amortization $10.0
Operating Income ? 400
Interest Expense $55.0
Interest Income ($5.0)
Net Interest Expense ($50.0)
Pre Tax Income ? 350
Income Tax Expense $160.0
Net Income ? 190

Fordham Gabelli School of Business Page 8

Financial Modeling – Bruce Tavel Midterm Exam

3. PLEASE MAKE THE PROJECTIONS FOR THE FOLLOWING TABLE,

FILL IN THE BLANK WITH YOUR ANSWER ( 4 POINTS)

EBITDA PARTNERS PROJECTIONS

2018A 2019E
SALES $2,500.0 ? 2,650
? COGS $1,000.0 ? 1,166
GROSS PROFIT ? 1,500 ? 1,484
? OPERATING EXPENSES $800.0 ? 821.5
EBITDA ? 700 ? 662.5
SALES GROWTH N/A 6.0%
? COGS (% OF SALES) 40.0% 44.0%
? OPERATING EXPENSE (% OF
SALES) 32.0% 31.0%

Fordham Gabelli School of Business Page 9

Financial Modeling – Bruce Tavel Midterm Exam

4. PLEASE FILL IN THE NUMBERS WITH YOUR ANSWER (4 POINTS)

EBITDA PARTNERS PROJECTED CASH FLOWS

2019 2020 2021 2022 2023
PROJECT 1 CASH FLOW -$1,500.0 $450.0 $500.0 $550.0 $600
PROJECT 2 CASH FLOW -$1,500.0 $0.0 $0.0 $0.0 $2,100

DISCOUNT RATE = 8.0%

?
NPV PROJECT 1 = 222.97
NPV PROJECT 2 = ? 43.56
?
IRR PROJECT 1= 14.18%
?
IRR PROJECT 2= 8.78%

5. Explain what is EBITDA, and why this item is important? You need to have a clear
explanation in order to receive full credits (4 Points)

ANSWER:
An acronym, EBITDA stands for earnings before interest, taxes, depreciation, and
amortization, and is a useful metric for understanding a business's ability to generate
cash flow for its owners and for judging a company's operating performance.
The benefit of using EBITDA to evaluate a company's performance is that it is
capital structure neutral. Thus, it is not affected by decisions like how a company
finances its balance sheet (debt or equity, or a mix of both). In addition, it also excludes
non-cash expenses like depreciation, which may or may not reflect a company's ability
to generate cash that it can pay back as a dividend to its owners.

Fordham Gabelli School of Business Page

10
Financial Modeling – Bruce Tavel Midterm Exam

-------------------------------LONG DISCUSSION, NOT REQUIRED-------------------------------

Suppose you wanted to evaluate two lemonade stands. For the purposes of illustration,
we'll assume these two companies use the exact same lemonade
Stands and carry the same amount of inventory, cash in the register, etc., thus their
balance sheets carry the same amount of assets.
Lemonade Stand A was funded entirely by equity. Lemonade Stand B primarily uses
debt to fund its operations. The only difference between them is how they choose to
finance these assets -- one with debt, one with equity.
Income statements for these two lemonade stands appear below.

Lemonade Stand A
Revenue $1,000
Cost of Goods Sold $200
Interest Expense $0
Depreciation of Lemonade Stand $50
Income before taxes $750
Net income (35% tax rate) $487.50
EBITDA $800

Note that Lemonade Stand A earned $487.50 in net income, while EBITDA was $800 in the
example year above.

Lemonade Stand B
Revenue $1,000
Cost of Goods Sold $200
Interest Expense ($1,500 at 10% interest) $150
Depreciation of Lemonade Stand $50
Income before taxes $600
Net income (35% tax rate) $390
EBITDA $800
Because Lemonade Stand B uses substantially more debt ($1,500 at 10% interest) to finance
its operations, it is less profitable in terms of net income ($390 in profits versus $487.50).
However, when compared on the basis of EBITDA, the lemonade stands are equal, each
producing $800 in EBITDA from $1,000 in sales last year.

Fordham Gabelli School of Business Page

11
Financial Modeling – Bruce Tavel Midterm Exam

If you had to decide which lemonade stand to buy, you might think Lemonade Stand A is the
better investment because it has higher net income. However, in reality, these companies are
equal; Lemonade Stand B simply employed more debt than equity, and thus had more interest
expense dragging on its net income.
When a company is sold, it is typically delivered to the buyer debt-free. Thus, the differences in
how these businesses currently finance their assets is not at all important to a new owner, who
can choose how he or she would prefer to finance the business. This is why using EBITDA as
an earnings metric is very common in private equity or in mergers and acquisitions, where it is
assumed that a new owner will have the ability to change the construction of a company's
balance sheet.
----------------------------------------------------------------------------------------------------------------

Fordham Gabelli School of Business Page

12