Question

51)

You are working on a 3-statement model for this same airline company, and you decide to project the number of aircraft and the fleet composition separately.Your co-worker sees this and says that you are wasting time because these assumptions will barely make a difference next to the direct revenue and expense assumptions.

Which of the following answer choices represent the BEST ways to respond to your co-worker?

a) We need this level of detail because the number of aircraft of each type will DIRECTLY influence fuel spending and other expenses.

b) More aircraft are required if the company’s Available Seat Kilometers (ASK) or Available Seat Miles (ASM) increase, and so we need to link those figures.

c) More aircraft also result in higher CapEx; if we didn’t track the number of aircraft, we could not link CapEx to the number of aircraft purchased.

d) If we did not project the aircraft fleet composition, it would be nearly impossible to make estimates for the operating lease and capital lease (AKA finance lease) expenses each year.

52)

How would the Balance Sheet and Cash Flow Statement drivers and projections differ in an interim 3-statement projection model compared to the same drivers and projections in an annual model?

a) You would not link items like Accounts Receivable or Prepaid Expenses to revenue and expense line items on the interim Income Statement since they trend with annual revenue and expenses, not interim-period revenue and expenses.

b) You may still link items such as Accounts Receivable and Prepaid Expenses to Income Statement line items, but you’ll have to annualize the interim figures or use the LTM numbers instead.

c) If the company only discloses an item on an annual basis, you may have to divide it into the appropriate figures for the interim periods (e.g., take annual amortization and divide it by 2 to get the half-year figures).

d) It’s less justifiable to hold percentages such as Receivables % LTM Revenue constant in the projection period since the business may be seasonal.

e) You may have to reflect that the company only pays out dividends in certain interim periods, or that it defers taxes in certain periods and then pays them in cash later on.

69)

You have selected a set of comparable companies for use in valuing a company you are analyzing. You notice there is almost no correlation between the revenue, EBITDA, and Net Income growth rates and the corresponding multiples for each of those metrics in this set of companies. Why might this be the case?

a) The premise of this question is incorrect because multiples are correlated with the corresponding margins (e.g., the EBITDA margin or Net margin), not the growth rates.

b) Some of the companies in this set might have made acquisitions or divestitures that distort their financial metrics.

c) This result might indicate that you have selected the incorrect set of comparables and that the companies within are not similar.

d) The most likely explanation is that many of these companies are releasing deceptive information in their filings, which can distort their financial metrics.

e) Your set might contain big conglomerates or other diversified businesses that are difficult to value with metrics and multiples applied to the entire business.

Answer 1

Question 51).
Option A:
We need this level of detail because the number of aircraft of each type will DIRECTLY influence fuel spending and other expenses.

Question 52).
Option A:
You would not link items like Accounts Receivable or Prepaid Expenses to revenue and expense line items on the interim Income Statement since they trend with annual revenue and expenses, not interim-period revenue and expenses.

Question 69).
Option B:
Some of the companies in this set might have made acquisitions or divestitures that distort their financial metrics