FINANCIAL MODELING EXAM
1 QUESTIONS AND CORRECT
K
C
DETAILED / VERIFIED
LO
ANSWERS
YC
D
U
ST
,Chapter One - ANS Basic Financial Calculations
Time Value of Money - ANS - 100 dollars today does not have the same value as 100 dollars in
a year
- put money in the bank and earn the 1-year risk-free rate
- this leads us to the Discounted Cash Flow Analysis (DCF)
DCF - ANS Discounted Cash Flow Analysis:
-most basic and most widely used too for financial modeling
-Converting future cash flows into present value equivalents so that cash flows at different
K
points in time can be compared.
*usually there is more than one way to do things- e.g., writing own formulas in Excel vs. Excel
C
built-in functions. Depends on situation as too which is better.
Future Value (of a Lump Sum) - ANS FV = Present Cash Flow x (1+r)^t
LO
- $100 in the bank today at 10% interest
- after 1-year: 100 + 100*0.10 = $110 = 100 * (1.10)
- after 2-years: 110 + 110*0.10 = $121 = 110 * (1.10)
- so, 100*(1+.10)*(1.10) = 100 * (1.10)^2 = $121
YC
Present Value of a Lump Sum - ANS PV = Future Cash Flow / (1+r)^t
- Present Value $121, 2-years, discount factor 10%
- =$100
- In other words, you need to deposit $100 today to get $121 in two years.
D
Relationship Between Interest Rates and Present and Future Values - ANS Present Value =
decreasing interest rates
U
Future Value = increasing interest rates
ST
Present Value of Annuity - ANS PV = PMT SUM(t, j=1)[1/(1+r)]^j=PMT x [1-(1+i)^-t/1]
- PMT = periodic annuity payment
The present value of a finite series of equal cash flows received on the last day of equal
intervals throughout the investment horizon.
Future Value of Annuity - ANS FVt = PMT SUM(t-1, j=0) = (1+r)^j = PMT x [(1+i)^t-1 / i]
- PMT = periodic annuity payment
, The future value of a finite series of equal cash flows received on the last day of equal intervals
throughout the investment horizon.
Financial Calculator - ANS -CFA exams require the sole usage of a financial calculator
-Common Financial Calculator: Texas Instruments BA II Plus
-Key inputs/outputs (solve for one of five)
N = number of compounding periods
I/Y = annual interest rate
K
PV = present value (i.e. current price)
C
PMT = a constant payment every period
FV = future value (i.e. future price)
LO
Perpetuity - ANS PV of Perpetuity = D / r
A perpetuity is a type of annuity that receives an infinite amount of period payments.
YC
As with any annuity, the perpetuity value formula sums the present value of future cash flows.
NPV - ANS Net Present Value
NPV = CFo + SUM(n,t=1) CFt / (1+r)^t
D
Convention is that cash inflows are positive in sigh and cash outflows are negative in sign.
In capital budgeting, a positive NPV means that the project is worth taking. The present value of
U
the cash inflows is greater than the present value of the cash outflows.
IRR - ANS Internal Rate of Return (IRR)
ST
CFo + SUM (N,i=1) CFt / (1+r)^t = 0
The Internal Rate of Return is defined as the compound rate of return r which makes the NPV
equal to zero.
Ways to determine IRR:
1. Trial and Error
2. Goal Seek in Excel
1 QUESTIONS AND CORRECT
K
C
DETAILED / VERIFIED
LO
ANSWERS
YC
D
U
ST
,Chapter One - ANS Basic Financial Calculations
Time Value of Money - ANS - 100 dollars today does not have the same value as 100 dollars in
a year
- put money in the bank and earn the 1-year risk-free rate
- this leads us to the Discounted Cash Flow Analysis (DCF)
DCF - ANS Discounted Cash Flow Analysis:
-most basic and most widely used too for financial modeling
-Converting future cash flows into present value equivalents so that cash flows at different
K
points in time can be compared.
*usually there is more than one way to do things- e.g., writing own formulas in Excel vs. Excel
C
built-in functions. Depends on situation as too which is better.
Future Value (of a Lump Sum) - ANS FV = Present Cash Flow x (1+r)^t
LO
- $100 in the bank today at 10% interest
- after 1-year: 100 + 100*0.10 = $110 = 100 * (1.10)
- after 2-years: 110 + 110*0.10 = $121 = 110 * (1.10)
- so, 100*(1+.10)*(1.10) = 100 * (1.10)^2 = $121
YC
Present Value of a Lump Sum - ANS PV = Future Cash Flow / (1+r)^t
- Present Value $121, 2-years, discount factor 10%
- =$100
- In other words, you need to deposit $100 today to get $121 in two years.
D
Relationship Between Interest Rates and Present and Future Values - ANS Present Value =
decreasing interest rates
U
Future Value = increasing interest rates
ST
Present Value of Annuity - ANS PV = PMT SUM(t, j=1)[1/(1+r)]^j=PMT x [1-(1+i)^-t/1]
- PMT = periodic annuity payment
The present value of a finite series of equal cash flows received on the last day of equal
intervals throughout the investment horizon.
Future Value of Annuity - ANS FVt = PMT SUM(t-1, j=0) = (1+r)^j = PMT x [(1+i)^t-1 / i]
- PMT = periodic annuity payment
, The future value of a finite series of equal cash flows received on the last day of equal intervals
throughout the investment horizon.
Financial Calculator - ANS -CFA exams require the sole usage of a financial calculator
-Common Financial Calculator: Texas Instruments BA II Plus
-Key inputs/outputs (solve for one of five)
N = number of compounding periods
I/Y = annual interest rate
K
PV = present value (i.e. current price)
C
PMT = a constant payment every period
FV = future value (i.e. future price)
LO
Perpetuity - ANS PV of Perpetuity = D / r
A perpetuity is a type of annuity that receives an infinite amount of period payments.
YC
As with any annuity, the perpetuity value formula sums the present value of future cash flows.
NPV - ANS Net Present Value
NPV = CFo + SUM(n,t=1) CFt / (1+r)^t
D
Convention is that cash inflows are positive in sigh and cash outflows are negative in sign.
In capital budgeting, a positive NPV means that the project is worth taking. The present value of
U
the cash inflows is greater than the present value of the cash outflows.
IRR - ANS Internal Rate of Return (IRR)
ST
CFo + SUM (N,i=1) CFt / (1+r)^t = 0
The Internal Rate of Return is defined as the compound rate of return r which makes the NPV
equal to zero.
Ways to determine IRR:
1. Trial and Error
2. Goal Seek in Excel
