Reference no: EM131982558

Which of the following are sanity checks on pro forma financial models? Check all that apply.

1) Total assets must equal Liabilities plus Owners Equity

2) Long run capital expenditures must be approximately equal to long run depreciation expense

3) Pro forma accounts should change fairly smoothly with the assumed inputs. Large deviations relative to the historical trend should be checked.

4) A successful new product should produce a smooth increase in operating cash flow followed by a smooth decline to the long run average.

5) The long term growth rate of free cash flow should be the industry average or may, if it makes sense, be set to 3%

6) If we introduce a loss leader product, operating cash flow should smoothly decline then gradually increase to the long term industry average or perhaps 3%.

7) Fast changes need to be checked when they occur in any pro forma financial statement account.

8) If EBIT falls are debt repayments made in accord with the firm's debt covenants.