,Your company projects free cash flows for the next five years as follows: Year 1 = $50m; Year 2
= $55m; Year 3 = $61m; Year 4 = $68m; Year 5 = $75m. After Year 5, you assume a perpetual
growth rate of 2%. If the company’s weighted average cost of capital (WACC) is 10%, what is
the terminal value at the end of Year 5 using the growing-perpetuity formula?
A. ~$825m
B. ~$938m
C. ~$940m
D. ~$750m
Answer: B. ~$938m
The terminal value is calculated using the growing-perpetuity formula:
FCF₅ × (1 + g) ÷ (WACC − g). Using Year-5 cash flow and the given growth and discount rates
yields a value close to the option provided.
In an Excel model you have a “ticker lookup” sheet where you maintain the cost of equity inputs.
You build your DCF on a separate sheet. What is the best practice modelling design?
A. Hard-code the cost of equity directly in the DCF sheet
B. Link the DCF sheet to the “ticker lookup” sheet so the cost of equity is referenced there
C. Duplicate the cost of equity value in two separate sheets to avoid links
D. Use a separate Excel file for constants and reference that
Answer: B. Link the DCF sheet to the “ticker lookup” sheet
Best-practice financial modeling keeps assumptions in a centralized inputs sheet and links
calculations to those inputs to improve transparency, auditability, and ease of updates.
,A company’s current share price is $40, it pays no dividend, and EPS is $2. The market P/E for
comparable firms is 20×. Using the relative valuation (P/E) method, what implied share price
would you get?
A. $40
B. $30
C. $50
D. $60
Answer: A. $40
Relative valuation uses EPS multiplied by the peer P/E multiple, giving 2 × 20 = $40.
You’re building a 3-statement linking model for a retailer. Sales growth next year is forecast at
8%. Gross margin declines by 50 basis points due to cost inflation, SG&A is flat in absolute
dollars, and the tax rate is 25%. Which statement best describes operating income (EBIT)
behavior, assuming other factors are constant?
A. EBIT will grow more than 8% because SG&A is flat
B. EBIT will grow less than 8% because margin is declining
C. EBIT will decline because gross margin is falling
D. EBIT will stay the same
Answer: B. EBIT will grow less than 8% because margin is declining
Revenue growth supports EBIT growth, but lower gross margin offsets some of that benefit even
with flat SG&A.
A firm has $200m in debt at 6% and $300m in equity with a cost of equity of 12%. The tax rate
is 30%. What is the after-tax cost of debt and its contribution to WACC?
A. After-tax cost of debt = 4.2%; contribution = 1.68%
B. After-tax cost of debt = 6%; contribution = 2.40%
C. After-tax cost of debt = 4.2%; contribution = 2.40%
D. After-tax cost of debt = 6%; contribution = 1.68%
Answer: A. After-tax cost of debt = 4.2%; contribution = 1.68%
, The after-tax cost of debt equals 6% × (1 − 0.30) = 4.2%, and debt represents 40% of total
capital, so 0.40 × 4.2% = 1.68%.
In a terminal value calculation using the “exit multiple” approach, what is the most important
risk?
A. Estimating the future free cash flow next year
B. Selecting the correct discount rate
C. Pushing the exit multiple too high relative to comparables
D. The fact that the model only uses five years of forecast
Answer: C. Pushing the exit multiple too high relative to comparables
The exit multiple is highly subjective and can dominate overall valuation; overly optimistic
multiples relative to peers can materially inflate terminal value.
You’re asked to build a scenario and sensitivity table showing target EBITDA based on revenue
growth (5%, 8%, 10%) and gross margin (30%, 32%, 34%). Which Excel feature best shows all
combinations in one table?
A. Data → What-If Analysis → Goal Seek
B. Data → What-If Analysis → Scenario Manager
C. Data → What-If Analysis → Data Table (two-variable)
D. Solver
Answer: C. Data → What-If Analysis → Data Table (two-variable)
A two-variable data table efficiently displays outputs across all combinations of two changing
assumptions.
Company A acquires Company B for $500m in an all-stock deal. When modelling the post-
merger pro-forma financials, which item is NOT required?
A. Adjusting Company B’s balance sheet to fair value of identifiable net assets
B. Recording goodwill as purchase price minus fair value of net identifiable assets
C. Conservatively modelling synergies and cost savings
= $55m; Year 3 = $61m; Year 4 = $68m; Year 5 = $75m. After Year 5, you assume a perpetual
growth rate of 2%. If the company’s weighted average cost of capital (WACC) is 10%, what is
the terminal value at the end of Year 5 using the growing-perpetuity formula?
A. ~$825m
B. ~$938m
C. ~$940m
D. ~$750m
Answer: B. ~$938m
The terminal value is calculated using the growing-perpetuity formula:
FCF₅ × (1 + g) ÷ (WACC − g). Using Year-5 cash flow and the given growth and discount rates
yields a value close to the option provided.
In an Excel model you have a “ticker lookup” sheet where you maintain the cost of equity inputs.
You build your DCF on a separate sheet. What is the best practice modelling design?
A. Hard-code the cost of equity directly in the DCF sheet
B. Link the DCF sheet to the “ticker lookup” sheet so the cost of equity is referenced there
C. Duplicate the cost of equity value in two separate sheets to avoid links
D. Use a separate Excel file for constants and reference that
Answer: B. Link the DCF sheet to the “ticker lookup” sheet
Best-practice financial modeling keeps assumptions in a centralized inputs sheet and links
calculations to those inputs to improve transparency, auditability, and ease of updates.
,A company’s current share price is $40, it pays no dividend, and EPS is $2. The market P/E for
comparable firms is 20×. Using the relative valuation (P/E) method, what implied share price
would you get?
A. $40
B. $30
C. $50
D. $60
Answer: A. $40
Relative valuation uses EPS multiplied by the peer P/E multiple, giving 2 × 20 = $40.
You’re building a 3-statement linking model for a retailer. Sales growth next year is forecast at
8%. Gross margin declines by 50 basis points due to cost inflation, SG&A is flat in absolute
dollars, and the tax rate is 25%. Which statement best describes operating income (EBIT)
behavior, assuming other factors are constant?
A. EBIT will grow more than 8% because SG&A is flat
B. EBIT will grow less than 8% because margin is declining
C. EBIT will decline because gross margin is falling
D. EBIT will stay the same
Answer: B. EBIT will grow less than 8% because margin is declining
Revenue growth supports EBIT growth, but lower gross margin offsets some of that benefit even
with flat SG&A.
A firm has $200m in debt at 6% and $300m in equity with a cost of equity of 12%. The tax rate
is 30%. What is the after-tax cost of debt and its contribution to WACC?
A. After-tax cost of debt = 4.2%; contribution = 1.68%
B. After-tax cost of debt = 6%; contribution = 2.40%
C. After-tax cost of debt = 4.2%; contribution = 2.40%
D. After-tax cost of debt = 6%; contribution = 1.68%
Answer: A. After-tax cost of debt = 4.2%; contribution = 1.68%
, The after-tax cost of debt equals 6% × (1 − 0.30) = 4.2%, and debt represents 40% of total
capital, so 0.40 × 4.2% = 1.68%.
In a terminal value calculation using the “exit multiple” approach, what is the most important
risk?
A. Estimating the future free cash flow next year
B. Selecting the correct discount rate
C. Pushing the exit multiple too high relative to comparables
D. The fact that the model only uses five years of forecast
Answer: C. Pushing the exit multiple too high relative to comparables
The exit multiple is highly subjective and can dominate overall valuation; overly optimistic
multiples relative to peers can materially inflate terminal value.
You’re asked to build a scenario and sensitivity table showing target EBITDA based on revenue
growth (5%, 8%, 10%) and gross margin (30%, 32%, 34%). Which Excel feature best shows all
combinations in one table?
A. Data → What-If Analysis → Goal Seek
B. Data → What-If Analysis → Scenario Manager
C. Data → What-If Analysis → Data Table (two-variable)
D. Solver
Answer: C. Data → What-If Analysis → Data Table (two-variable)
A two-variable data table efficiently displays outputs across all combinations of two changing
assumptions.
Company A acquires Company B for $500m in an all-stock deal. When modelling the post-
merger pro-forma financials, which item is NOT required?
A. Adjusting Company B’s balance sheet to fair value of identifiable net assets
B. Recording goodwill as purchase price minus fair value of net identifiable assets
C. Conservatively modelling synergies and cost savings
