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FIN508 Quiz I With Answer

issue regarding firm operates as perfectly competitive, monopolistically competitive, or a monopoly.

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Rana Zain
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98 views2 pages

FIN508 Quiz I With Answer

issue regarding firm operates as perfectly competitive, monopolistically competitive, or a monopoly.

Uploaded by

Rana Zain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Quiz I

Financial Modelling
FIN508
Q. No. 1. What is financial modelling
Q.No.2: Describe the role of excel in establishing financial models.
Q.No.3 Write down the types of common budgets we make with the help of
models.
Q.No.4 How can you attract and investor by showing financial model?
Q.No. 5. What are the characteristics of a good financial model?

Answers
1. A financial model is simply a tool that’s built in spreadsheet software such as
MS Excel to forecast a business’ financial performance into the future. The
forecast is typically based on the company’s historical performance, assumptions
about the future, and requires preparing an income statement, balance sheet,
cash flow statement, and supporting schedules (known as a 3 statement model).
From there, more advanced types of models can be built such as discounted cash
flow analysis (DCF model), leveraged-buyout (LBO), mergers and acquisitions
(M&A), and sensitivity analysis. Below is an example of financial modeling in
Excel.

2. It’s critical to structure a financial model in a logical and easy to follow design.
This typically means building the whole model on one worksheet and using
grouping to create different sections. This way it’s easy to expand or contract the
model and move around it easily.

The main sections to include in a financial model (from top to bottom) are:

Assumptions and drivers


Income statement
Balance sheet
Cash flow statement
Supporting schedules
Valuation
Sensitivity analysis
Charts and graphs

3. Incremental budgeting takes last year’s actual figures and adds or subtracts a
percentage to obtain the current year’s budget. It is the most common method
of budgeting because it is simple and easy to understand. Incremental budgeting
is appropriate to use if the primary cost drivers do not change from year to year.
However, there are some problems with using the method:

It is likely to perpetuate inefficiencies. For example, if a manager knows that


there is an opportunity to grow his budget by 10% every year, he will simply take
that opportunity to attain a bigger budget, while not putting effort into seeking
ways to cut costs or economize.
It is likely to result in budgetary slack. For example, a manager might overstate
the size of the budget that the team actually needs so it appears that the team is
always under budget.
It is also likely to ignore external drivers of activity and performance. For
example, there is very high inflation in certain input costs. Incremental
budgeting ignores any external factors and simply assumes the cost will grow by,
for example, 10% this year.

4. Activity-based budgeting is a top-down budgeting approach that determines


the amount of inputs required to support the targets or outputs set by the
company. For example, a company sets an output target of $100 million in
revenues. The company will need to first determine the activities that need to
be undertaken to meet the sales target, and then find out the costs of carrying
out these activities.

5. In value proposition budgeting, the budgeter considers the following


questions:

Why is this amount included in the budget?


Does the item create value for customers, staff, or other stakeholders?
Does the value of the item outweigh its cost? If not, then is there another reason
why the cost is justified?
Value proposition budgeting is really a mindset about making sure that
everything that is included in the budget delivers value for the business. Value
proposition budgeting aims to avoid unnecessary expenditures – although it is
not as precisely aimed at that goal as our final budgeting option, zero-based
budgeting.

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