advanced modeling quiz questions

Question: 22
Currently, a company has approximately 150 million shares outstanding, at a share price of $10.00, for a market cap of $1.5 billion. It has announced plans to reduce its share count from 150 million to 140 million over the next 3 years.

Historically, the company has repurchased an average of $20 million worth of shares each year and has issued $10 million worth of new shares each year.

Which of the following would be VALID methods for projecting share issuances and repurchases over the next 3 years in your 3-statement model for the company?
Answer Choices:
1) Assume that the company repurchases approximately $33 million worth of shares per year reducing its share count by 3.3 million each year assuming a constant $10.00 share price. Also assume that it issues no new shares during this period.
2) Assume that the company repurchases $43 million worth of shares each year but also continues to issue $10 million worth of new shares per year also resulting in a net decrease of 3.3 million shares each year.
3) Assume that the company's share price will increase from $10.00 to $15.00 by the end of the period due to its increasing Net Income so that it has to repurchase $33 million worth of shares in Year 1 - $41.3 million in Year 2 and $49.5 million in Year 3.
4) Assume that the company repurchases all $100 million worth of shares in Year 1 instantly reducing its share count to 140 million.Question: 24
In the schedule shown above, we're projecting CapEx as a percentage of revenue. Some people argue, however, that it is better to project CapEx as an absolute dollar amount (e.g. $200 in Year 1, $225 in Year 2, and $250 in Year 3 rather than 5% of revenue in all 3 years), because CapEx spending drives revenue growth, not the other way around.

Which of the following answer choices represent VALID reasons why we might ignore this and still project CapEx as a percentage of revenue anyway?
Answer Choices:
1) We don't have enough information to estimate these numbers - for example management may not indicate what they expect to spend on CapEx in the next few years.
2) There are multiple scenarios in this model and projecting CapEx as an absolute dollar amount may not make sense for the Upside and Downside cases.
3) This particular company re-invests in its business based on its sales growth not the other way around - CapEx does little to drive revenue growth.
4) CapEx is jumping around too much historically and doesn't trend in a clear direction - so using the historical average of CapEx as a percentage of revenue is the only way to project it properly.
Question: 26
You're reviewing a set of annual 3-statement model projections for a company over the next 5 years. Your Managing Director looks at the projections and asks you to create a set of quarterly projections instead, so that he can share more granular data with a potential buyer.

Which of the following answer choices represent CORRECT steps in this process of converting annual projections into quarterly projections?
Answer Choices:
1) Allocate a percentage of annual revenue and expenses to each quarter based on historical trends (e.g. 20% of revenue in Q1 - 25% in Q2 - 30% in Q3 - and 25% in Q4).
2) Assume Year-over-Year (YoY) growth rates for revenue and expenses in each quarter and then at the end make sure total revenue and expenses equal the annual numbers.
3) Calculate the key drivers for Balance Sheet line items such as Days Sales Outstanding on a quarterly basis and apply those drivers to calculate the quarterly versions of all the figures in future periods.
4) Estimate future interest rates on a quarterly basis and use those to project the interest income / (expense) in each future quarter.
5) Assume an even split of certain Cash Flow Statement items, such as CapEx and Dividends Issued in each quarter (e.g. divide the annual number by 4).
6) Calculate Quarter-in-Current-Year-over-Quarter-in-Previous-Year revenue growth rates for the historical periods simply for informational purposes.
7) Allocate non-cash expenses such as Amortization of Intangibles and Stock-Based Compensation based on the historical percentage in each quarter.