Financial Modeling & Analysis Exam 1 Questions and Correct Answers
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Course
Financial Modelling
Institution
Financial Modelling
Name the Excel function that can be used to calculate the Present Value of an Annuity. PV
State and explain the effect on the present value of a single future cash flow when you decrease the number of periods. Present value increases because a larger investment is required to have the same amount ...
Financial Modeling & Analysis Exam 1
Questions and Correct Answers
Name the Excel function that can be used to calculate the Present Value of an Annuity.
✅PV
State and explain the effect on the present value of a single future cash flow when you
decrease the number of periods. ✅Present value increases because a larger
investment is required to have the same amount after a shorter period.
State and explain the effect of increasing the discount rate on the Present Value of an
Annuity. ✅Present Value of the Annuity decreases because a smaller investment is
required if more interest is earned.
Show the formula for calculating the Annuity Future Value (AFV), using the Annuity
Present Value (APV), Discount Rate (r), and Number of Periods (t), in Excel notation.
✅AFV = APV * (1 + r) ^ t
Can the general discount rate method be used to calculate Net Present Value if the
discount rate is constant over time? If not, why not? If yes, how? ✅Yes, by entering the
same discount rate for each year.
List the two different components of the payment amount of an amortized loan.
✅Interest and principal.
In which year is the interest component of the payment of a 30-year amortized loan at
its highest level? Why? ✅Year 1, because the principal balance is at its highest level.
State the intuitive interpretation (name) of the following component of the Return on
Equity in the DuPont System of Ratio Analysis: EBIT / Sales. ✅Profit (EBIT) Margin
State whether the APR convention results in a higher or lower bond price than the EAR
Convention and give the reason for this. ✅APR convention results in lower bond price
than EAR convention because simple discount rate is higher than compounded discount
rate.
State the interest rate convention under which Excel's PRICE function can be used to
value bonds. ✅APR
A 5-year lease requires payments of $2,500 per year in years 0 through 4. State
whether the lease payments represent an ordinary annuity or an annuity due, and give
the reason for your answer. ✅Annuity due, because the first payment is in year 0.
, Fully state what Excel's YEARFRAC function calculates. ✅The fractional years
between two calendar dates.
Fully state any one of the two major dynamic properties regarding the volatility of the
U.S. yield curve. ✅Short rates of 0 to 5 years are more volatile than long rates of 15 to
30 years, or overall volatility of the yield curve is higher when its level is higher.
Fully list the three equivalent ways of calculating the present value of a single cash flow.
✅a) PV timeline
b) PV formula
c) PV function
State and explain the effect on the present value of a single clash flow when you
increase the future value. ✅An increase in the future value increases the present value
of a single cash flow because you need to invest more.
State and explain the effect on the present value of a single clash flow when you
increase the discount rate. ✅An increase in the discount rate decreases the present
value of a single cash flow because a higher interest rate means you would have to set
aside less today to earn a specified amount in the future.
State and explain the effect on the present value of a single clash flow when you
increase the number of periods. ✅An increase in the number of periods decreases the
present value of a single cash flow because if you have more time you would have to
set aside less today to earn a specified amount in the future.
Fully explain the formula used for calculating the Future Value of Each Cash Flow in cell
C17 of Figure 2.2. ✅Based on the cash flow being compounded at a certain rate and
within a certain time, this formula provides the future value of that cash flow. The
formula shows how each cash flow is compounded at a discount rate for the remaining
periods.
What is the name of the term that the Present Value is divided by to get the Payment in
cell B28 of Figure 2.3? Explain why this formula gives the payment amount? ✅The
present value interest factor of an annuity (PVIFA) gives the payment amount by
dividing the present value by the PVIFA.
Show the formula for calculating the Annuity Present Value (APV) using the Annuity
Future Value (AFV), Discount Rate (r), and Number of Periods (t), in Excel notation.
✅APV = AFV/(1+r)^t
State and explain the effect on an Annuity Future Value if you increase the payment
amount. ✅If you increase the payment amount, the Annuity Future Value will increase
because you are collecting more money in every period.
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