Fin Modeling Exam 2 Practice Questions and Correct Answers
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Course
Financial Modelling
Institution
Financial Modelling
List the five equivalent methods for firm valuation 1. Adjusted Present Value 2. Free Cash Flow to Equity 3. Free Cash Flow to the Firm 4. Dividend Discount Model 5. Residual Income
Fully list all the broad steps for calculating the Value Added by the firm with the ADJUSTED PRESENT VALUE method in...
Fin Modeling Exam 2 Practice Questions
and Correct Answers
List the five equivalent methods for firm valuation ✅1. Adjusted Present Value
2. Free Cash Flow to Equity
3. Free Cash Flow to the Firm
4. Dividend Discount Model
5. Residual Income
Fully list all the broad steps for calculating the Value Added by the firm with the
ADJUSTED PRESENT VALUE method in Figure 10.3 ✅1. Take the Free Cash Flow to
the Firm and discount at the Unlevered Cost of Equity Capital to get the Value of the
Unlevered Firm
2. Take the Tax Shield Benefit and discount at the Cost of Risk-free Debt to get the
Value of the Tax Shield
3. Sum the Value of the Unlevered Firm and the Value of the Tax Shield to get the
Value of the Firm
4. Subtract initial capital to get the Value Added by the Firm
Fully list all the broad steps for calculating Value Added by the Firm with the FREE
CASH FLOW TO EQUITY method in Figure 10.4 ✅1. Take the Free Cash Flow to
Equity and the discount at the Levered Cost of Equity Capital to obtain the Value of
Equity
2. Take the Cash Flow to Debtholders and discount at the Cost of Risk-free Debt to
obtain the Value of Debt
3. Sum the value of the Equity and the Value of Debt to get the Value of the Firm
4. Subtract initial capital to get the Value Added by the Firm
Fully list all the broad steps for calculating the Value Added by the Firm with the FREE
CASH FLOW TO FIRM method in Figure 10.5 ✅1. Take the Free Cash Flow to the
Firm and discount at the Cost of Firm Capital (WACC) to obtain the Value of the Firm
2. Subtract initial capital to get the Value Added by the Firm
Fully list all the broad steps for calculating the Value Added by the Firm with the
DIVIDEND DISCOUNT MODEL method in Figure 10.6 ✅1. Take the Dividends and
discount at the Levered Cost of Equity Capital to obtain the Value of Equity
2. Take the Cash Flow to Debtholders and discount at the Cost of Risk-free Debt to
obtain the Value of Debt
3. Sum the Value of the Equity and the Value of Debt to get the Value of the Firm
4. Subtract initial capital to get the Value Added by the Firm
, Fully list all the broad steps for calculating the Value Added by Firm with RESIDUAL
INCOME method in Figure 10.7 ✅1. Take the Economic Profit and discount at the
Cost of the Firm Capital (WACC) to obtain the Value of Economic Profit
2. Add the initial Book Value of the Firm to get the Value of the Firm
3. Subtract initial capital to get the Value Added by the Firm
Fully state the main advantage of forecasting the inflation rate separately for calculating
Net Present Value in Figure 14.1-14.2 ✅It ensures that we are handling the inflation
rate of cash flows in the numerator of the NPV and the inflation of the discount rate in
the denominator of the NPV calculation
Fully explain why the Discount Rate is increasing over the years in Figure 14.1 ✅This
is because the increasing real cost of capital is compounded by the increasing inflation
rate
State all the steps for calculating the Operating Cash Flows in Figure 14.2, starting with
Sales Revenue ✅1. Compute the sales revenue by multiplying unit sales and sales
revenue/unit
2. Compute variable costs by multiplying unit sales and variable costs/unit and subtract
from sales revenue to find the gross margin
3. Add cash, fixed costs, and depreciation to get total fixed costs
4. Subtract total fixed costs from gross margin to get operating profit
5. Subtract the taxes to get net profit
6. Add depreciation back in
7. Get the operating cash flow
Fully explain why the NPV falls from $5,822 in figure 14.2 to $3,180 in Figure 14.4 even
though the investment in working capital in years 0 to 4 are fully recovered in years 5 to
7 ✅Because the present value of earlier cash outflows is greater than the present
value of later cash inflows
Based on the Data Table in Figure 14.6, if the Unit Sales Scale Factor is 90%, what is
the MAX Date 1 Real Cost of Capital at which the project will be acceptable? Why? ✅It
would be 11% because anything above that would result in a negative NPV which
makes the project unacceptable
Based on the Data Table in Figure 14.6, if the Date 1 Real Cost of Capital is 13.0%,
what is the MIN Unit Sales Scale Factor at which the project will be acceptable? Why?
✅It would be 100% because that is where the first positive NPV is meaning it is
acceptable
Fully explain the formula for calculating the With Investment Depreciation in cell C50 of
Figure 15.2 ✅You take the depreciation and add the year 1 investment and salvage
value minus the year 5 investment and salvage value divided by 5
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