Financial Modeling Exam 2 Questions and Answers Fully Solved Latest Version 2025 Rated A+
List the five equivalent methods for firm and project valuation. - Answers Equivalent Methods: Adjusted
Present Value, Free Cash Flow to Equity, Free Cash Flow to the Firm, Dividend Discount Model, Residual
Income.
Valuation Methods: Free Cash Flow to Equity, Dividends, Tax Shield Benefit, Free Cash Flow to the Firm,
Economic Profit.
Fully list all the broad steps for calculating the Value Added by the Firm with the Adjusted Present Value
method in Figure 10.2. - Answers a) Take the Free Cash Flow to the Firm and discount at he Unlevered
Cost of Equity Capital to get the Value of the Unlevered Firm.
b) Take the Tax Shield Benefit and discount at the Cost of Risk-free Debt to get the Value of the Tax
Shield.
c) Sum the Value of the Unlevered Firm and the Value if the Tax Shield to get the Value of the Firm.
d) Subtract Date 0 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
Equity method in Figure 10.3. - Answers a) Take the Free Cash Flow to Equity and the discount at the
Levered Cost of Equity Capital to obtain the Value of Equity.
b) Take the Cash Flow to Debtholders and discount at the Cost of Risk-free Debt to obtain the Value of
Debt.
c) Sum the Value of the Equity and the Value of Debt to get the Value of the Firm.
d) Subtract Date 0 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 10.4. - Answers a) Take the Free Cash Flow to the Firm and discount at the Cost of Firm
Capital (WACC) to obtain the Valuev of the Firm.
b) Subtract Date 0 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 10.5. - Answers a) Take the Dividends and discount at the Levered Cost of
Equity Capital to obtain the Value of the Equity.
b) Take the Cash Flow to Debtholders and discount at the Cost of Risk-free Debt to obtain the Value of
Debt.
c) Sum the Value of the Equity and the Value of Debt to get the Value of the Firm.
, d) Subtract Date 0 Capital to get he Value Added by the Firm.
Fully list all the broad steps for calculating the Value Added by Firm with the Residual Income method in
Figure 10.6. - Answers a) Take the Economic Profit and discount at the Cost of the Firm Capital (WACC)
to obtain the Value of Economic Profit.
b) Add the Date 0 Book Value of the Firm to get the Value of the Firm.
c) Subtract Date 0 Capital to get the Value Added by the Firm.
Fully explain why the Discount Rate is increasing over the years in Figure 14.1. - Answers Because the
slightly increasing Real Cost of Capital is being compounded by the increasing Inflation Rate; This results
in an increasing Discount Rate.
What is the main advantage of forecasting the inflation rate separately for calculating Net Present Value
in Figure 14.1-14.2? - Answers This guarantees that we are consistent in the way that we are treating the
inflation component of cash flows in the numerator of the NPV calculation and the inflation component
of the discount rate in the denominatior of the NPV calculation.
State all the steps for calculating the Operating Cash Flows in Figure 14.2, starting with Sales. - Answers
a. Compute Sales Revenue by multiplying Unit Sales and Sales Revenue/Unit
b. Compute Variable Costs by multiplying Unit Sales and Variable Costs/Unit and subtract from Sales
Revenue to get the Gross Margin
c. Add Cash fixed costs and Depreciation to get Total Fixed Costs
d. Subtract Total Fixed Costs from Gross Margin to get Operating Profit
e. Subtract Taxes to get Net Profit
f. Add Depreciation back in
g. You now have 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 1 to 4 is fully recovered in years 5 to 7. - Answers The NPV falls
from $5,822 in Figure 14.2 to $3,180 in Figure 14.4 even though the working capital in years 1 to 4 is
fully recovered in years 5 to 7 because of the PV of Earlier Cash Outflows is greater than the PV of later
Cash Inflows.
Based on the Data Table in Figure 14.6, if the Unit Sales Scale Factor is 100%, what is the maximum Date
1 Real Cost of Capital at which the project will be acceptable? Why? - Answers If the Unit Sales Scale
Factor is 100%, the maximum Date 1 Real Cost of Capital at which the project will be acceptable is 15%
because after that point the NPV becomes negative, and thus unacceptable.
List the five equivalent methods for firm and project valuation. - Answers Equivalent Methods: Adjusted
Present Value, Free Cash Flow to Equity, Free Cash Flow to the Firm, Dividend Discount Model, Residual
Income.
Valuation Methods: Free Cash Flow to Equity, Dividends, Tax Shield Benefit, Free Cash Flow to the Firm,
Economic Profit.
Fully list all the broad steps for calculating the Value Added by the Firm with the Adjusted Present Value
method in Figure 10.2. - Answers a) Take the Free Cash Flow to the Firm and discount at he Unlevered
Cost of Equity Capital to get the Value of the Unlevered Firm.
b) Take the Tax Shield Benefit and discount at the Cost of Risk-free Debt to get the Value of the Tax
Shield.
c) Sum the Value of the Unlevered Firm and the Value if the Tax Shield to get the Value of the Firm.
d) Subtract Date 0 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
Equity method in Figure 10.3. - Answers a) Take the Free Cash Flow to Equity and the discount at the
Levered Cost of Equity Capital to obtain the Value of Equity.
b) Take the Cash Flow to Debtholders and discount at the Cost of Risk-free Debt to obtain the Value of
Debt.
c) Sum the Value of the Equity and the Value of Debt to get the Value of the Firm.
d) Subtract Date 0 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 10.4. - Answers a) Take the Free Cash Flow to the Firm and discount at the Cost of Firm
Capital (WACC) to obtain the Valuev of the Firm.
b) Subtract Date 0 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 10.5. - Answers a) Take the Dividends and discount at the Levered Cost of
Equity Capital to obtain the Value of the Equity.
b) Take the Cash Flow to Debtholders and discount at the Cost of Risk-free Debt to obtain the Value of
Debt.
c) Sum the Value of the Equity and the Value of Debt to get the Value of the Firm.
, d) Subtract Date 0 Capital to get he Value Added by the Firm.
Fully list all the broad steps for calculating the Value Added by Firm with the Residual Income method in
Figure 10.6. - Answers a) Take the Economic Profit and discount at the Cost of the Firm Capital (WACC)
to obtain the Value of Economic Profit.
b) Add the Date 0 Book Value of the Firm to get the Value of the Firm.
c) Subtract Date 0 Capital to get the Value Added by the Firm.
Fully explain why the Discount Rate is increasing over the years in Figure 14.1. - Answers Because the
slightly increasing Real Cost of Capital is being compounded by the increasing Inflation Rate; This results
in an increasing Discount Rate.
What is the main advantage of forecasting the inflation rate separately for calculating Net Present Value
in Figure 14.1-14.2? - Answers This guarantees that we are consistent in the way that we are treating the
inflation component of cash flows in the numerator of the NPV calculation and the inflation component
of the discount rate in the denominatior of the NPV calculation.
State all the steps for calculating the Operating Cash Flows in Figure 14.2, starting with Sales. - Answers
a. Compute Sales Revenue by multiplying Unit Sales and Sales Revenue/Unit
b. Compute Variable Costs by multiplying Unit Sales and Variable Costs/Unit and subtract from Sales
Revenue to get the Gross Margin
c. Add Cash fixed costs and Depreciation to get Total Fixed Costs
d. Subtract Total Fixed Costs from Gross Margin to get Operating Profit
e. Subtract Taxes to get Net Profit
f. Add Depreciation back in
g. You now have 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 1 to 4 is fully recovered in years 5 to 7. - Answers The NPV falls
from $5,822 in Figure 14.2 to $3,180 in Figure 14.4 even though the working capital in years 1 to 4 is
fully recovered in years 5 to 7 because of the PV of Earlier Cash Outflows is greater than the PV of later
Cash Inflows.
Based on the Data Table in Figure 14.6, if the Unit Sales Scale Factor is 100%, what is the maximum Date
1 Real Cost of Capital at which the project will be acceptable? Why? - Answers If the Unit Sales Scale
Factor is 100%, the maximum Date 1 Real Cost of Capital at which the project will be acceptable is 15%
because after that point the NPV becomes negative, and thus unacceptable.
