Financial Modeling Interview Questions and Answers PDF

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lecture notes on financial modeling for the students of MMS Finance course...

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Financial Modeling Interview Questions and Answers – I fy ouar el ooki ngf oraj obt hati sr el at edt ofi nanci almodel i ng,y ouneedt o pr epar ef ort hei nt er vi ew quest i ons.Now,ev er yi nt er vi ew i sdi ffer entandt he scopeofaj obposi t i oni sal sodi ffer ent .St i l l ,wecanpi npoi ntt op20financi al model i ngi nt er vi ewquest i ons( wi t hans wer s) ,whi chwi l lhel py out ak et hel eap f r om bei ngapot ent i alempl oy eet oanewone. Accor di ngt oafinanci almodel erwhohasbeendoi ngmodel i ngf ornear l y15 y ear sdepi ct sf ol l owi ngwayoft aki ngt hei nt er vi ew–  Fi r st ,askf oras ampl ewher et hei nt er vi eweehasdonesomewor kand  Then,askquest i onsbasedont hat . Aski ngquest i onsont hebasi soft hesampl emayv ar y ,butt hef ol l owi ngar e t het opquest i onsi nt er vi ewerasksf orhi r i ngf ort heposi t i onoffi nanci alanal y st andfinanci almodel er . Let ’ s gets t ar t ed.Her ei st he l i s tofTop 20 Fi nanci alModel i ng I nt er vi ew Ques t i ons–                

#1–Whati sfinanci almodel i ng?Whyi si tusef ul ? #2–Howdoy oubui l daFi nanci alModel ? #3–Whati swor ki ngcapi t alandhowdoy ouf or ecasti t ? #4–Whatar et hedesi gnpr i nci pl esofagoodfinanci almodel ? #5–Whati sanar r ayf unct i onandhowwoul dy ouusei t ? #6–Whati st hedi ffer encebet weenNPVandXNPV? #7–Pi ckamodely ouhav ebui l tandwal kmet hr oughi t . #8–Let ’ ssayt hatIhav eboughtnewequi pment .Howi twoul daffect3 financi al st at ement s . #9–Whati sSensi t i vi t yAnal y si si nFi nanci alModel i ng? #10–Whatar eLOOKUPandVLOOKUP?Whatt ousewhen? #11–Whati st hewor stfinanci al f or ecasty ouhav emadei ny ourl i f e ? #12–Howdoy ouf or ecastr ev enues ? #13–Howdoy ouf or ecastCost s ? #14–Wher edoy oupi ckt hehi s t or i calFi nanci alSt at ement s ? #15–Howdoy ouf or ecastDebti ny ourFi nanci alModel ? #16–Howdoy ouconsi derSt ockOpt i onsi nFi nanci alModel s ?

 #17–Whi c hv al uat i ont ool sar eusedoncey ouhav epr epar edt he Fi nanci alModel  #18–Whi c hFi nanci alModelLay outdoy oupr ef er ?  #19–Whi c hr at i osdoy oucal cul at ef orFi nanci alModel i ng?  #20–Cany out el lwhi chex cel f unct i onwoul dsl owdownt he r ecal cul at i onpr ocessofal ar gefinanci almodel ?

#1 – WHAT IS FINANCIAL MODELING? WHY IS IT USEFUL? IS IT ONLY CONFINED TO COMPANY’S FINANCIAL AFFAIRS? Thi si st hemostbasi candi mpor t antFi nanci alModel i ngI nt er vi ewQues t i on.

 Fi r stofal l ,financi almodel i ngi saquant i t at i v eanal y si swhi chi susedt o mak eadeci si onoraf or ecas taboutapr oj ectgener al l yi nass etpr i ci ng modelorcor por at efinance.Di ffer enthypot het i calv ar i abl esar eusedi n af or mul at oascer t ai nwhatf ut ur ehol dsf orapar t i cul ari ndus t r yorf ora par t i c ul arpr oj ect .  I nI nv est mentBanki ng and Fi nanci alResear ch,Fi nanci almodel i ng alst at ement sl i k eBal anceSheet , meansf or ecast i ngcompani esfinanci CashFl ows ,andI ncomeSt at ement .Thesef or ecast sar ei nt ur nused f orcompanyv al uat i onsandfinanci alanal y si s.  I ti sal way sgoodt oci t eanex ampl ewi t ht hi s .Youcani l l ust r at ey our poi nti nt hef ol l owi ngmanner–Let ’ ss ayt her ear et wopr oj ect st hata company i s wor ki ng on.The company want st o know whet heri ti s pr udentt ok eep on wor ki ng on t wo pr oj ect sorconcent r at et hei rf ul l

effor ton one pr oj ect .Usi ng financi almodel i ng,y ou can use v ar i ous hypot het i calf act or sl i k er et ur n,r i s k,cashi nflow,t hecostofr unni ngt he pr oj ect sandt hencomet oaf or ecast i ngwhi chmayhel pt hecompanyt o gof ort hemostpr udentchoi ce.  Wi t hr espectt oI nv est mentBanki ng,y ouc ant al kaboutt heFi nanci al PO Model st haty ouhav epr epar ed.Youmayr ef ert oex ampl esl i k eBoxI ModelandAl i babaFi nanci alModel  Al so,not et hatFi nanci almodel i ngi susef ulbecausei thel pscompani es andi ndi vi dual smak ebet t erdeci si ons .  Fi nanci almodel i ngi snotconfinedt oonl ycompany’ sfinanci alaffai r s.I t can be used i n any ar ea ofany depar t mentand ev en i ni ndi vi dual cases .

#2 – HOW DO YOU BUILD A FINANCIAL MODEL? Fi nanci alModel i ngi seas yaswel lascompl ex .I fy oul ookatt heFi nanci al Modely ouwi l lfindi tcompl ex ,howev er ,financi almodelasum t ot alofsmal l er andsi mpl emodul es .Thek eyher ei st opr epar eeachsmal l ermodul esand i nt er connecteachot hert opr epar et hefinalfinanci almodel .

Pl easenot et hef ol l owi ng–  Thecor emodul esar et heI ncomeSt at ement ,Bal anceSheet ,andCash Fl ows.

 Theaddi t i onalmodul esar et hedepr eci at i onschedul e,wor ki ngcapi t al sc hedul e,i nt angi bl es s chedul e,s har ehol der ’ s equi t y schedul e,ot her l ongt er mi t emsschedul e,debtschedul eet c.  Theaddi t i onalschedul esar el i nk edt ot hecor est at ement supont hei r compl et i on

#3 – WHAT IS WORKING CAPITAL AND HOW DO YOU FORECAST IT? Thi si sabasi cquest i onoffinancei ncl udedi nFi nanci alModel i ngI nt er vi ew Ques t i ons.Youwoul dans weri nt hef ol l owi ngmanner– I fwedeductcur r entl i abi l i t i esf r om c ur r entasset soft hecompanydur i nga per i od( usual l yay ear )wewoul dgetwor ki ngcapi t al .Wor ki ngcapi t ali st he di ffer ence bet ween how much cash i st i ed up i ni nv ent or i es ,account s r ecei v abl eset c.andhow muchcashneedst obepai df oraccount spay abl e andot hers hor t t er m obl i gat i ons . Fr om t he wor ki ng capi t al ,y ou woul d al so be abl et o under st and t he r at i o ( cur r entr at i o)bet weencur r entasset sandcur r entl i abi l i t i es .Thecur r entr at i o wi l lgi v ey ouani deaaboutt hel i qui di t yoft hecompany . Gener al l y ,when y ou f or ecastWor ki ng Capi t al ,y ou do nott ak e Cash i n “ Cur r entAsset s ”andanydebti nt he“ Cur r entLi abi l i t i es ” . Wor ki ng Capi t al For ecast es sent i al l yi nvol v es f or ecas t i ng Recei vabl es , I nv ent or y ,andPay abl es .

Account sRecei vabl eFor ecast  Gener al l ymodel edasDay sSal esOut st andi ngf or mul a;  Recei vabl est ur nover=Recei vabl es/ Sal es*365  Amor edet ai l edappr oachmai ncl udeagi ngorr ecei v abl esbybusi ness segmenti ft hecol l ect i onsv ar ywi del ybysegment s  Recei vabl es=Recei vabl est ur noverdays/ 365* Revenues I nvent or i esFor ecast  I nv ent or i esar edr i v enbycos t s( nev erbysal es) ;  I nvent or yt ur nover=I nvent or y/ COGS*365;ForHi st or i cal  AssumeanI nv ent or yt ur nov ernumberf orf ut ur ey ear sbasedon hi s t or i calt r endormanagementgui danceandt hencomput et he I nv ent or yusi ngt hef or mul agi v enbel ow  I nvent or y=I nvent or yt ur noverdays/ 365* COGS;ForFor ecas t Account sPayabl eFor ecast  Account sPayabl es( Par tofWor ki ngCapi t alSchedul e) :  Payabl est ur nover=Payabl es/ COGS*365;ForHi s t or i cal

 AssumePay abl est ur nov erday sf orf ut ur ey ear sbasedonhi st or i cal t r endormanagementgui danceandt hencomput et heAccount s Pay abl esusi ngt hef or mul agi v enbel ow  Account sPayabl es=Payabl est ur noverdays/ 365* COGS;f or For ecast

#4 – WHAT ARE THE DESIGN PRINCIPLES OF A GOOD FINANCIAL MODEL? Ans wert hi sFi nanci alModel i ngquest i onusi nganacr onym –FAST. Fs t andsf orFl exi bi l i t y:Ev er yfinanci almodelshoul dbeflex i bl ei ni t sscope and adapt abl ei n ev er ys i t uat i on ( as c ont i ngenc yi s a nat ur alpar tofany busi nessori ndust r y) .Fl exi bi l i t yofafi nanci almodeldependsonhoweas yi ti s t omodi f yt hemodelwhenev erandwher ev eri twoul dbenecess ar y . As t ands f orAppr opr i at e:Fi nanci al model ss houl dn’ t be cl ut t er ed wi t h ex c essi v edet ai l s .Whi l epr oduci ngafi nanci almodel ,t hefinanci almodel l er al way sshoul dunder st andwhatfi nanci almodeli s ,i . e.agoodr epr esent at i on ofr eal i t y . Sst andsf orSt r uct ur e:The l ogi cali nt egr i t yofafinanci almodeli sofut t er i mpor t ance.Ast heaut horoft hemodelmaychange,t hest r uct ur eshoul dbe r i gor ousandi nt egr i t yshoul dbek eptatt hef or ef r ont . Ts t andsf orTr anspar ent :Fi nanci almodel sshoul d be such and based on suchf or mul aswhi chcanbeeasi l yunder st oodbyot herfi nanci almodel l er s andnonmodel l er s.

#5 – WHAT IS AN ARRAY FUNCTION AND HOW WOULD YOU USE IT? I fy ouhav eal apt opwi t hy ou,i twoul dbeeasi ert os how andanswert hi s Fi nanci alModel i ngI nt er vi ewQues t i on.I fnot ,t henj ustexpl ai nhowi ti sdone. Anar r ayf or mul ahel psy out oper f or m mul t i pl ecomput at i onsoneormor eset s ofv al ues. Ther ear et hr eest epsoneshoul df ol l owt ocomput ear r ayf unct i oni nex cel–  Bef or eent er i ngt hear r ayf or mul ai nt ot hecel l ,fir st ,hi ghl i ghtt her angeof cel l s .  Typei nt hear r ayf or mul ai nt hefi r stcel l .  Pr essCt r l+Shi f t+Ent ert ogett her esul t s.

I nt heFi nanci al model ,wemak euseofar r ay si nDepr eci at i onSchedul ewher e t he br eakup ofAsset s( shown hor i z ont al l y)ar et r ansposed v er t i cal l yusi ng Tr ansposeFunct i onwi t hAr r ay s .

#6 – WHAT IS THE DIFFERENCE BETWEEN NPV AND XNPV? Theanswert ot hi sFi nanci almodel i ngQuest i onwi l lbecl earcut .Ther ei sa cl eardi ffer encebet weenNPVandXNPV.Bot hoft hesecomput eNetPr esent Val ue byl ooki ng i nt ot he f ut ur ec ash fl ows( posi t i v e & negat i v e) .The onl y di ffer encebet weenNPVandXNPVi s–  #NPVas sumest hatt hecashflowscomei nequalt i mei nt er v al s .  #XNPVassumest hatt hecashflowsdon’ tcomei nequalt i mei nt er v al s . Whent her ewi l lbemont hl yorquar t er l yory ear l ypayment s ,onecaneasi l y useNPVandi nt hecasenot sor egul arpay ment s,XNPVwoul dbesui t abl e.

#7 – PICK A MODEL YOU HAVE BUILT AND WALK ME THROUGH IT. I fy ouhav eal r eadybui l tamodel ,t hi sFi nanci alModel i ngI nt er vi ewQues t i oni s supereas y .J ustopeny ourl apt op,opent hespr eadsheetandshowt hemodel y ouhav ebui l tf oranypr oj ectorcompany .Thenex pl ai nhowy ouhav ebui l tt he

modelandwhi chhypot het i c alf act or sy ouhav et ak eni nt oconsi der at i onwhi l e cr eat i ngt hatmodelandwhy . Remember ,t hi si soneoft hemosti mpor t antquest i onsofal l .Becausey our t echni calexper t i sewi l lbej udgedbyt hemodely ouwi l lwal kt hei nt er v i ewer t hr ough.Andmaybet henextquest i onsf ort her es toft hei nt er v i ew wi l lbe basedont hemodely ouhav ebui l t .Sochoosepr udent l y .

#8 – LET’S SAY THAT I HAVE BOUGHT NEW EQUIPMENT. HOW IT WOULD AFFECT 3 FINANCIAL STATEMENTS. Thi s mayseem a bi tl i k e account i ng quest i ons .Butt oc heckt he fi nance knowl edge ofa model er ,i nt er vi ewerof t en asks t hi s Fi nanci alModel i ng ques t i on. Her e’ showy oushoul dans weri t :  I nt hebegi nni ng,t her ewoul dbenoi mpactont hei ncomest at ement .  I nt hebal ances heet ,cashwi l lgodownandPP&E ( Pr oper t y ,Pl ant& Equi pment )woul dgoup.  I nt hecashflow s t at ement ,t hepur chaseofPP&E woul dbet r eat edas cashout flow( cashflowf r om I nv es t ment s) .  Af t erf ew y ear s ,t her ewi l lbewear&t earoft hePP&E,sot hecompany needst odeductdepr eci at i oni nt hei ncomes t at ementwhi chwi l lal so r esul ti nl essneti ncome.  I nt hebal ancesheet ,r et ai nedear ni ngswi l lgetr educed.  Andi nt hecashflows t at ement ,t hedepr eci at i onwi l lbeaddedbackasa cashflowf r om oper at i ons” . noncashexpensei nt he“

#9 – WHAT IS SENSITIVITY ANALYSIS IN FINANCIAL MODELING? I fy ouhav eananal y si sal r eadyi ny ourl apt op,show i tt oy ouri nt er vi ewert o ans wert hi sFi nanci alModel i ngI nt er vi ewQuest i on.

Sensi t i vi t yanal y si si sone oft he anal y sesused i n fi nanci almodel i ng.Thi s anal y si s hel ps one under s t and how t he t ar getv ar i abl ei s affect ed by t he changei ni nputv ar i abl e.Forex ampl e,i fy ouwantt oseehow t hest ockpr i ce ofa c ompany i s affect ed by i t si nputv ar i abl es;we woul dt ak ef ew i nput v ar i abl esandwoul dcr eat eananal y s i si nex cel . WeuseDATATABLESt oper f or m sensi t i vi t yanal y si s .Mostpopul arsensi t i vi t y anal y si si sdoneont heeffectofWACC andCompany’ sGr owt hr at eont he Shar ePr i ce.

Asweseef r om abov e,ononesi dei schangesi nWACCandt heot hersi dei s changesi nGr owt hRat es .I nt hemi ddl eboxi sShar ePr i cesensi t i vi t yt ot hese v ar i abl es.

#10 – WHAT ARE LOOKUP AND VLOOKUP? WHAT TO USE WHEN? Of t ent hei nt er vi ewerwant st oknowwhet hery ouar epr ofici enti nusi ngex cel s i nfi nanci almodel i ngornot . LOOKUP i saf unct i onwhi chal l owsy out oconsi dert hev al ueent er ed;t hen findi twi t hi nadat ar ange;oncet hedat ar angei ssel ect ed,t hent hef unct i on r et ur nsav al uef r om t hesamedat ar angewi t houtneedi ngt osc r ol lt hr ough. VLOOKUP,ont heot herhand,i soneofsubf unct i onofLOOKUP. i oni st osear chf orav al uei nt hel ef t most Thepur poseofVLOOKUP Funct col umnoft hedat ar ange,andt heni tfi ndsoutav al uei nt hes amer owf r om a col umny ouhav especi fied.

VLOOKUP i s t ypi cal l y used t o pr epar eCompar abl e Compswher e t her ef er encedat ai sst or edi nsepar at esheet sandar epul l edt oget heri na condensedCompar abl eCompanyAnal y si st abl e.

#11 – WHAT IS THE WORST FINANCIAL FORECAST YOU HAVE MADE IN YOUR LIFE? Thi si sav er yt r i ckyFi nanci alModel i ngI nt er vi ewques t i on. Youneedt ohandl ei twel l . Ans wer i ngt hi sques t i oni ss i mi l arasans wer i ngabouty ourweaknesses . So,y ouneedt obet act f ul . Youshoul dnev erpi ckonefinanci almodelandt al kabouti t .Rat herpi ckt wo model s–onet haty oucoul dn’ tf or ecastr i ghtandanot herwher ey ouhav ehi t t he nai l .And t hen gi v eac ompar i son bet ween t hese t wo.And t el lt he i nt er vi ewerwhyonewentbel l yupandanot herhasbecomeoneofy ourbest pr edi ct i ons .

12. HOW DO YOU FORECAST REVENUES? For most compani es, r ev enues ar eaf undament aldr i v er of economi c per f or mance.Awel ldesi gnedandl ogi calr ev enuemodelr eflect i ngaccur at el y t het ypeandamount sofr ev enueflowsi sex t r emel yi mpor t ant .Ther ear eas manyway st odesi gnar ev enues chedul east her ear ebusi nesses.

Somecommont ypesi ncl ude: 1.Sal esGr owt h 2.I nflat i onar yandVol ume/Mi xeffect s 3.Uni tVol ume,Changei nVol ume,Av er agePr i ceandChangei nPr i ce

4.Dol l arMar k etSi z eandGr owt h 5.Uni tMar k etSi z eandGr owt h 6.Vol umeCapaci t y ,Capaci t yUt i l i z at i onandAv er agePr i ce 7.Pr oductAv ai l abi l i t yandPr i ci ng 8.Rev enuedr i v enbyi nv est menti ncapi t al ,mar k et i ngorR&D 9.Rev enue based on i nst al l ed base ( cont i nui ng sal es of par t s , di spos abl es,s er vi ceandaddonset c ) . 10. Empl oy eebased 11. St or e,f aci l i t yorSquar ef oot agebased 12. Occupanc y f act orbased Anex ampl ey oucani ncl udei st hatofpr oj ect i ngr ev enuesofHot el s .

Rev enuef orHot el sshoul dbecal cul at edasf ol l ows–  Gett het ot alnumberofr oomseachy earal ongwi t hf or ecast s  Hot elI ndus t r yt r acksocc upancyr at es( eg.80% et c ) .Thi smeanst hat 80% oft her oomsar eoccupi ed,ot her sar ev acantanddon’ tr esul ti n r ev enues .Mak eanes t i mat eofoccupanc yr at ef ort hi shot el .  Al so,mak eanest i mat eonAv er ageRentperr oom perdayont hebasi s ofhi st or i c al s .  Tot alRev enues=Tot alNumberofRoomsxOccupancyRat esx Av er ageRentperr oom Perdayx365

13. HOW DO YOU FORECAST COSTS? Youcanf or ecastCost sandot herexpensesasf ol l ows–

1.Per cent ageofRevenues:Si mpl ebutoffer snoi nsi ghti nt oany l ev er age( economyofscal eorfix edcostbur den 2.Cost sot hert handepr eci at i onasaper centofr evenuesand depr eci at i onf r om asepar at eschedul e:Thi sappr oachi sr eal l yt he mi ni mum accept abl ei nmos tcases ,andper mi t sonl ypar t i alanal y s i sof oper at i ngl ev er age. 3.Var i abl ecost sbasedonr evenueorvol ume,fixedcost sbasedon hi st or i calt r endsanddepr eci at i onf r om asepar at eschedul e:Thi s appr oachi st hemi ni mum necessar yf orsensi t i vi t yanal y si sof pr ofit abi l i t ybasedonmul t i pl er ev enuescenar i os

14. WHERE DO YOU PICK THE HISTORICAL FINANCIAL STATEMENTS? Bes tpr act i cei st opi ckt hefinanci als t at ement sf r om t heAnnualRepor t sort he SEC Fi l i ngsdi r ect l y .Thi smayi nv ol v ecopyi ngandpas t i ngt hedat af r om t he annualr epor tt ot heex celsheet . Manyf eelt hatt hi st as ki sf orl oser s ,howev er ,myt ak ei st hatt hi si st hemost i mpor t antt aski ncr eat i ngt hefinanci almodel .Oncey ous t ar tpopul at i ngt he dat a,y ouwi l lr eal i z et hesubt l echangesi nt hefinanci alst at ement st hatt he companymayhav edone.Addi t i onal l y ,y ouwi l lgetagoodunder st andi ngof t heki ndofi t emsi ncl udedi nt hefi nanci alst at ement s. oomber gandot herdat abaseswi l lpr ovi deaner r or Manywoul dar guet hatBl f r ee financi als t at ement s .Ir espectt hese dat abases ,howev er ,If ace one pr obl em whi l e usi ng t hese dat abases . These dat abases use a v er y s t andar di z ed way t or epor tt he fi nanci als t at ement s .Wi t ht hi s ,t hey may

i ncl ude/ ex cl udek eyi t emsf r om onel i nei t em t oanot herandt her ebycr eat i ng conf usi on.Wi t ht hi s ,y oumaymi ssoutoni mpor t antdet ai l s . i ngsand not hi ng el se f or Fi nanci al My gol den r ul e – Use t heSEC fil St at ement s.

#15 – HOW DO YOU FORECAST DEBT IN YOUR FINANCIAL MODEL? Thi si sanadv ancedFi nanci alModel i ngI nt er vi ewQuest i on.Usual l ymodel ed aspar tofdebts chedul e  Keyf eat ur eoft hedebtschedul ei st ouset heRev ol v erf aci l i t yandhowi t wor kssot hatt hemi ni mum cashbal ancei smai nt ai nedandensur est hat t heCashaccountdoesnotbecomenegat i v ei ncaset heoper at i ngcash flowi snegat i v e( Compani esi ni nv est mentphasewhoneedl otofdebti n i ni t i aly ear sofoper at i on–Tel ecom cosf orex ampl e)  Ov er al lr angeofDebtt oequi t yr at i os houl dbemai nt ai nedi ft her ei sany gui dancebyt hemanagement  Debtbal ancecan al sobeassumedt obeconst antunl esst her ei sa needt oi ncr easet hedebt  Not est ot heaccount swoul dgi v er epay mentt er msandcondi t i onswhi ch needt obeaccount edf orwhi l ebui l di ngt hedebtsc hedul e  Fors omei ndust r i es ,l i k eAi r l i nes ,Ret ai let cOper at i ngLeasesmi ght hav et ocapi t al i z eandconv er t edt odebt .Howev er ,t hi si sacompl ex t opi candbey ondt hescopeofdi scussi onatt hi spoi nt

#16 – HOW DO YOU CONSIDER STOCK OPTIONS IN FINANCIAL MODELS? Thi si sanot herex ampl eofAdv ancedFi nanci alModel i ngI nt er vi ewques t i on. St ockOpt i onsar eusedbymanycompani est oi ncent i vi set hei rempl oy ees . Empl oy eesgetanopt i ont obuyt hest ockatt heSt r i k ePr i ce. I ft he mar k etpr i ce i sgr eat ert han t he st ockpr i ce,t hen t he empl oy eecan ex er ci sei t sopt i onsandpr ofitf r om i t . Whent heempl oy eesex er ci set hei ropt i ons,t heypayt hest r i k epr i cet ot he companyandgets har esagai nsteachopt i on.Thi sr esul t si nt hei nc r easei n t henumberofshar esout st andi ng.Thi sr esul t si nl owerEar ni ngsPerShar e. Theopt i onspr oceedsr ecei v edbyt hecompanycanbet her ebyusedei t hert o buybackshar esorcanbedepl oy edi nt hepr oj ect s.

#17 – WHICH VALUATION TOOLS ARE USED ONCE YOU HAVE PREPARED THE FINANCIAL MODEL Once y ou hav e pr epar ed t he financi almodel ,y ou can use t he use scount edCashFl owsorRel at i v eVal uat i onf orfindi ngt het ar getpr i ce. ei t herDi DCFVal uat i onappr oachi ncl udesfindi ngt heFr eeCashFl ow t ot heFi r m and t her ebyfi ndi ngt hepr esentv al ueofFCFFunt i lper pet ui t y. Forex ampl e,pr esent edbel ow i st heFr eeCashFl ow t oFi r m ofAl i baba.The Fr eeCashfl owar edi v i dedi nt ot wopar t s–a)Hi s t or i calFCFFandb)For ecast FCFF

 Hi st or i calFCFFi sar r i v edatf r om t heI ncomeSt at ement ,Bal anceSheet andCashFl owsoft hecompanyf r om i t sAnnualRepor t s  For ecastFCFFi scal cul at edonl yaf t erf or ecast i ngt heFi nanci al St at ement s  Wenot et hatAl i baba’ sFr eeCashFl owar ei ncr easi ngy earaf t ery ear  I nor dert ofindt hev al uat i onofAl i baba,wemustfindt hepr esentv al ue mi nalv al ue) ofal lt hef ut ur efinanci aly ear s( t i l lper pet ui t y–...