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Banking and Finance Quiz 4

Ques 1: What reduces the quality of your financial model?

(a) using historical revenue and expense trends to project their future values

(b) projecting price, cost, of new capacity, and cost structure

(c) using multiple measures of sales in representing operating data

(d) accounting for real-world drivers when projecting changes to wages

Answer: Option(C): using multiple measures of sales in representing operating data

Ques 2: Which choice is NOT a method of financial forecasting?

(a) regression analysis

(b) top-down analysis

(c) bottoms-up analysis

(d) side-to-side analysis

Answer: Option(D): side-to-side analysis

Feedback

Side-to-side analysis is not a method for forecasting.

Ques 3: To better understand the value of a firm, what should your valuation model consider?


(a) Free cash flows should be calculated for the worst-case scenario.

(b) Free cash flows must ignore any capital expenditures.

(c) Free cash flows need to be projected for at least 10 years.

(d) Free cash flow must be converted to its present value.
Answer: Option(D): Free cash flow must be converted to its present value.

Feedback

Future cash flow must be converted to present value to properly valuate the firm at the current time.

Ques 4: What is the key component in terminal value?

(a) discount rate


(b) interest rate

(c) wacc

(d) historical expense ratios
Answer: Option(A): discount rate

Feedback

Discount rate is the key.

Ques 5: After paying for project operations, what will the cash flow pay for next?


(a) senior debt reserves

(b) returns to equity investors

(c) senior debt service

(d) a rainy day fund
Answer: Option(C): senior debt service
Ques 6: What type of model technique enables a user to link last period's ending sales or profit figures to this period's beginning figures?
(a) Corkscrew Analysis

(b) Top-Down analysis

(c) Waterfall Analysis

(d) Sensitivity Analysis

Answer: Option(A): Corkscrew Analysis

Feedback

This enables the user to link last period's ending sales or profit figures to this period's beginning figures.

Ques 7: Your model includes a gray-sky scenario. In this scenario, what will happen with the internal rate of return (IRR)?


(a) The IRR will go up.

(b) The IRR will be above projections.

(c) The IRR will become negative.

(d) The IRR will remain the same.
Answer: Option(C): The IRR will become negative.

Feedback

Not only will the IRR go negative, you are likely to be in default of debt obligations.

Ques 8: Which statement is inaccurate regarding buyout models?


(a) They give a go/no-go decision to buy.

(b) They assume future valuations and interest rates.

(c) They often link to a three-statement model.

(d) They show actions independent of cash flows.
Answer: Option(D): They show actions independent of cash flows.

Feedback

Buyout models in fact show anticipated future actions that are dependent on the projected cash flows.

Ques 9: Which parameter is not relevant when you are calculating the price per share using the dividend discount model (DDM)?


(a) the level of future free cash flows

(b) a company's discount rate

(c) a company's terminal growth rate

(d) earnings before tax, depreciation, and amortization
Answer: Option(D): earnings before tax, depreciation, and amortization

Feedback

EBITDA is used in the multiples approach but not the DDM method.

Ques 10: What is the decision criteria used with NPV?


(a) Is the NPV greater than 0?

(b) Is the NPV greater than the IRR?

(c) Is the NPV greater than WACC?

(d) Is the NPV greater than cost?
Answer: Option(A): Is the NPV greater than 0?

Feedback

We look at whether NPV is greater than 0 to make a decision based on our model.

 

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