MGT8803 - Business Fundamentals for
Analytics - Module 2: Finance UPDATED
ACTUAL Exam Questions and CORRECT
Answers
Relevant Cash Flows Principle #1 - CORRECT ANSWER - Record cash flows when the
money actually moves, not when the accountant using accrual concepts says they occur.
Relevant Cash Flows Principle #2 - CORRECT ANSWER - Imagine 2 worlds: one in which
he investment is made and one in which it is rejected, All cash flows that are different in these
two worlds are relevant to the decision, and those that are the same are irrelevant.
Working capital - CORRECT ANSWER - changes that are the result of an investment
decision are relevant to the decision. At the beginning of the project life, working capital would
be treated as cash flows. At the end of the project life, working capital would be treated as cash
inflows.
Depreciation - CORRECT ANSWER - A noncash expense. Add depreciation back to income
after tax to calculate the after tax cash flow (ATCF)
After Tax Cash Flow (ATCF) - CORRECT ANSWER - (revenue - costs - depreciation) (1-
tax)+depreciation
Inflation and Returns: Real Return - CORRECT ANSWER - The percentage change in the
amount of stuff ypu can actually buy
Inflation and Returns: Nominal Return - CORRECT ANSWER - The percentage change in
the amount of money you have.
Inflation and Returns: The Fisher Effect - CORRECT ANSWER - The relationship between
real and nominal returns.
, The equation is: 1+R = (1-r) x (1+h)
where R=nominal, r=real, h=inflation
Capital Budgeting & Inflation (2 methods) - CORRECT ANSWER - 2 methods:
1. express cash flows in real terms and discount them at the real interest rate OR
2. Convert real cash flows to nominal cash flows by allowing them to grow at rate of inflation
and discount them at a nominal rate (prof recommends this method)
Capital Budgeting & Inflation (why is it important) - CORRECT ANSWER - Issue is
important when dealing with
1. long horizons
2. high inflationary times
(note that depreciation is always expressed in nominal terms)
Capital Investment General Summary: - CORRECT ANSWER - 1. Net Present Value (NPV)
is the most preferred technique
2. Capital budgeting must be done on an incremental basis. This means that sunk costs must be
ignored, while opportunity costs and side effects must be considered.
3. Inflation must be correctly handled. The first approach is to express both cash flows and
discount rate in nominal terms. The second approach is to express both cash flow and discount
rate in real terms
4. Uncertainty in the forecasts can be addressed by conducting sensitivity analysis or simulation
The Present Value (PV) of Common Stocks - CORRECT ANSWER - The value of any asset
is the present value of its expected future cash flows
Stock ownership produces cash flows from: - CORRECT ANSWER - 1. Dividends
2. Capital gains
Analytics - Module 2: Finance UPDATED
ACTUAL Exam Questions and CORRECT
Answers
Relevant Cash Flows Principle #1 - CORRECT ANSWER - Record cash flows when the
money actually moves, not when the accountant using accrual concepts says they occur.
Relevant Cash Flows Principle #2 - CORRECT ANSWER - Imagine 2 worlds: one in which
he investment is made and one in which it is rejected, All cash flows that are different in these
two worlds are relevant to the decision, and those that are the same are irrelevant.
Working capital - CORRECT ANSWER - changes that are the result of an investment
decision are relevant to the decision. At the beginning of the project life, working capital would
be treated as cash flows. At the end of the project life, working capital would be treated as cash
inflows.
Depreciation - CORRECT ANSWER - A noncash expense. Add depreciation back to income
after tax to calculate the after tax cash flow (ATCF)
After Tax Cash Flow (ATCF) - CORRECT ANSWER - (revenue - costs - depreciation) (1-
tax)+depreciation
Inflation and Returns: Real Return - CORRECT ANSWER - The percentage change in the
amount of stuff ypu can actually buy
Inflation and Returns: Nominal Return - CORRECT ANSWER - The percentage change in
the amount of money you have.
Inflation and Returns: The Fisher Effect - CORRECT ANSWER - The relationship between
real and nominal returns.
, The equation is: 1+R = (1-r) x (1+h)
where R=nominal, r=real, h=inflation
Capital Budgeting & Inflation (2 methods) - CORRECT ANSWER - 2 methods:
1. express cash flows in real terms and discount them at the real interest rate OR
2. Convert real cash flows to nominal cash flows by allowing them to grow at rate of inflation
and discount them at a nominal rate (prof recommends this method)
Capital Budgeting & Inflation (why is it important) - CORRECT ANSWER - Issue is
important when dealing with
1. long horizons
2. high inflationary times
(note that depreciation is always expressed in nominal terms)
Capital Investment General Summary: - CORRECT ANSWER - 1. Net Present Value (NPV)
is the most preferred technique
2. Capital budgeting must be done on an incremental basis. This means that sunk costs must be
ignored, while opportunity costs and side effects must be considered.
3. Inflation must be correctly handled. The first approach is to express both cash flows and
discount rate in nominal terms. The second approach is to express both cash flow and discount
rate in real terms
4. Uncertainty in the forecasts can be addressed by conducting sensitivity analysis or simulation
The Present Value (PV) of Common Stocks - CORRECT ANSWER - The value of any asset
is the present value of its expected future cash flows
Stock ownership produces cash flows from: - CORRECT ANSWER - 1. Dividends
2. Capital gains
