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Banking and Finance Quiz 5

Ques 1: How do the net present value (NPV) and the internal rate of return (IRR) relate to decision-making regarding a project?

(a) If the NPV is positive, regardless of IRR, you should go forward with the project.

(b) If the internal rate of return is positive, you should go forward with the project.

(c) If the IRR and NPV tell you two different things, you should not go ahead with the project.

(d) If the discount rate is higher than the IRR, you should go forward with the project.

Answer: Option(A): If the NPV is positive, regardless of IRR, you should go forward with the project.

Feedback

This tells you that the profit you will generate, in present value dollars, makes it worthwhile to move forward with the project.

Ques 2: What is the decision criteria used with IRR?


(a) Is the IRR greater than WACC?

(b) Is the IRR greater than 0%?

(c) Is the IRR greater than the NPV?

(d) Is the IRR greater than profit?
Answer: Option(A): Is the IRR greater than WACC?

Feedback

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

Ques 3: Top down models start with _ and work from there.

(a) revenues

(b) unit sales

(c) inventory

(d) amortization

Answer: Option(A): revenues

Ques 4: You are looking at various projects that have been proposed. How would an increase in the weighted average cost of capital (WACC) affect your decision of which project to go forward with?


(a) The WACC is not related to the IRR of an investment.

(b) The lower the IRR, the lower the WACC on an investment.

(c) The higher the WACC, the lower the IRR on the investment.

(d) The higher the WACC, the higher the IRR on the investment.
Answer: Option(C): The higher the WACC, the lower the IRR on the investment.
Ques 5: Which credit rating indicates the riskiest kind of investment?
(a) BB

(b) BBB

(c) B

(d) A

Answer: Option(C): B

Ques 6: The credit risk of a company in part depends on its credit rating. How does a single-A credit-rated company differ from other credit-rated companies?

(a) A single-A company has an increasing debt-leverage with access to debt markets because of a healthy business model.

(b) A single-A company can service its debt over the next three years, and pay modest dividends if it meets its debt obligations.

(c) A single-A company is growing, has positive cash flow, low leverage, and consistently pays dividends.

(d) A single-A company will cut costs to maintain debt service, will not make dividend payments, and is highly leveraged.

Answer: Option(A): A single-A company has an increasing debt-leverage with access to debt markets because of a healthy business model.

Feedback

A single-A firm shows the ability to pay debt and pay dividends, and only differs from a AA firm in its amount of debt.

Ques 7: What type of model technique enables a user to test assumptions to see how they impact outcomes?


(a) Corkscrew Analysis

(b) Top-Down analysis

(c) Sensitivity Analysis

(d) Waterfall Analysis
Answer: Option(C): Sensitivity Analysis
Ques 8: You set your column to be Plan minus Actual. At the end of the year, you see Total Revenue in the amount of $850,000. What impact will this have on your company's bottom line.
(a) an uncertain effect on earnings per share versus your plan because these are projections

(b) an increase in earnings per share versus your planned price per share

(c) no effect on earnings per share versus your planned price per share

(d) a decrease in earnings per share versus your planned price per share

Answer: Option(D): a decrease in earnings per share versus your planned price per share

Feedback

Because your variance column is Plan minus Actual, it means the $850k is a shortfall in revenue and will affect your PPS estimate.

Ques 9: Which choice is a best practice in financial modeling?


(a) short formulas

(b) object-oriented formulas

(c) long formulas

(d) nested formulas
Answer: Option(A): short formulas
Ques 10: You need to review a customer's information and all transactions. Which set of steps takes you to a screen that can do both of these activities?
(a) On the navigation bar, point at Invoicing, and then click Customers. In the Customer list, click the customer's name to open the customer's record.

(b) On the navigation bar, point at Invoicing, and then click Customers. In the Customer list, click the Review link in the customer's row.

(c) On the navigation bar, point at Invoicing, and then click All Sales. Filter the Sales Transactions list to show only the customer's transactions.

(d) On the navigation bar, point at Invoicing, and then click Invoices. Filter the Invoices list to show only the customer's invoices.

Answer: Option(A): On the navigation bar, point at Invoicing, and then click Customers. In the Customer list, click the customer's name to open the customer's record.

Feedback

When you click a customer's name in the Customer list, a screen opens with the customer's name at the top. Click the Transaction List tab to view all the transactions for the customer. Click the Customer Details tab to view and edit the customer's information.

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