Financial Modelling (FIN508)

Paper B
Final Term Examination
1. Which of the following is not a core building block of a robust financial model?*
a) Inputs
b) Interpretation
c) Processing
d) Outputs
2. Which of the following is not true about the Scenario tool in Excel?*
a) Users can model up to 32 variables using the Scenario tool
b) Scenarios only work with a single worksheet (all result cells need to be on the same
worksheets)
c) The scenario tool can be found under What-if-analysis in the Data ribbon
d) Users can test only one scenario at a time
3. Which of the following is not a common Excel audit tool used to test a model's integrity (i.e.
whether the model contains errors)?
a) Go to special
b) Goal seek
c) Trace precendents
d) Test data
4. Which of the following is the best way to make a financial model easier to audit?*
a) Keep all formulas on one spreadsheet
b) Name all cells within the model
c) Create a legend for all formulas used
d) Separate assumptions from formulas
5. The best financial models should (choose the best option from below)*
a) Keep things as simple as possible while provides sufficient detail for decision making
b) Offer users a high degree of detail and precision
c) Be easy to follow and audit
d) Be very simple and have the minimum level of detail
6. Which of the following is not an objective for solid model processing?*
a) Easy to maintain
b) Accurate processing
c) Opacity
d) Transparency
7) The situation where a project has two or more IRRs.
A) Projects’ IRRs
B) Multiple IRRs -
C) NPV
D) NONE

8) An effect on the firm or the environment that is not reflected in the project’s cash flows.
A) Externality -
B) Cannibalization
C) Opportunity Cost
D) NONE

9) Considers both firm and stockholder diversification. It is measured by the project’s beta
coefficient.
A) Stand-Alone Risk
B) Market (Beta) Risk -
C) Risk-Adjusted Cost of Capital
D) NONE

10) An analysis in which all of the input variables are set at their worst reasonably forecasted
values
A) Base-Case Scenario
B) Best-Case Scenario
C) Worst-Case Scenario -
D) NONE
11) The value of stock is $300 and the preferred dividend is $60 then the required rate of return
would be
A) 18000
B) 0.2-
C) 4
D) NONE

12) The preferred dividend is divided for required rate of return to calculate
A) Value of number of shares
B) Value of equity
C) Value of preferred stock-
D) NONE

13) A type of beta which incorporates about company such as changes in capital structure is
classified as
A) Industry beta
B) Market beta
C) Fundamental beta-
D) NONE

14) The dividend per share is $18 and sell it for $122 and floatation cost is $4 then the
component cost of preferred stock will be
A) 0.1525-
B) 15.25
C) 0.001525
D) NONE

15) The interest rates, tax rates and market risk premium are the factors which an/a
A) Firm must control
B) Firm cannot control-
C) Industry cannot control
D) NONE

16) The stock selling price is $45, an expected dividend is $10 and an expected growth rate is
8% then cost of common stock would be
A) 53
B) 55
C) 0.3022-
D) NONE

17) In expected future returns, tighter probability distribution shows risk on given investment
which is
A) Smaller
B) Greater
C) Less Riskier
D) NONE

18) Amount invested is US$1500 and amount received is US$2000 then dollar return is
A) US$3,500
B) US$500
C) −US$500
D) NONE

19) Standard deviation of tighter probability distribution is

A) Smaller
B) Long-termed
C) Short-termed
D) NONE
20) Beta coefficient is used to measure market risk which is an index of
A) Portfolio market portfolio
B) Co-efficient risk volatility
C) Stock market volatility
D) NONE

21) A critical assumption of the net operating income (NOI) approach to valuation is:
a) that debt and equity levels remain unchanged.
b) that dividends increase at a constant rate.
c) that ko remains constant regardless of changes in leverage.
d) that interest expense and taxes are included in the calculation.

22) The traditional approach towards the valuation of a company assumes:

a) that the overall capitalization rate holds constant with changes in financial leverage.
b) that there is an optimum capital structure.
c) that total risk is not altered by changes in the capital structure.
d) that markets are perfect.

23) Two firms that are virtually identical except for their capital structure are selling in the
market at different values. According to M&M
a) one will be at greater risk of bankruptcy.
b) the firm with greater financial leverage will have the higher value.
c) this proves that markets cannot be efficient.
d) this will not continue because arbitrage will eventually cause the firms to sell at the
same value.

24) What is the value of the tax shield if the value of the firm is $5 million, its value if
unlevered would be $4.78 million, and the present value of bankruptcy and agency costs
is $360,000?
a) $140,000
b) $220,000
c) $360,000
d) $580,000

25) Reserves & Surplus are which form of financing?

a) Security Financing
b) Internal Financing
c) Loans Financing
d) International Financing

26) What are the different options other than cash used for distributing profits to
shareholders?
a) Bonus shares
b) Stock split
c) Stock purchase
d) All of these

27) In Walter model formula D stands for

a) Dividend per share
b) Direct Dividend
c) Dividend Earning
d) None of these

28) What is the difference between the current ratio and the quick ratio?
a) The current ratio includes inventories and the quick ratio does not.
b) The current ratio does not include inventories and the quick ratio does.
c) The current ratio includes physical capital and the quick ratio does not.
d) The current ratio does not include physical capital and the quick ratio does.

29) Which of the following working capital strategies is the most aggressive?
a) Making greater use of short term finance and maximizing net short term asset.
b) Making greater use of long term finance and minimizing net short term asset.
c) Making greater use of short term finance and minimizing net short term asset.
d) Making greater use of long term finance and maximizing net short term asset.
30) Which of the following is not a metric to use for measuring the length of the cash cycle?
a) Acid test days.
b) Accounts receivable days.
c) Accounts payable days.
d) Inventory days.

ANSWER KEY

1 B 11 A 21 A
2 A 12 B 22 D
3 B 13 D 23 C
4 B 14 C 24 B
5 B 15 A 25 C
6 A 16 B 26 D
7 A 17 D 27 C
8 B 18 C 28 D
9 A 19 A 29 D
10 A 20 C 30 A