CAIIB – ABFM – Mock Test- 06

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In the context of deciding between using a diesel or petrol car for a long journey, which costs are considered relevant?

Sunk costs

Road tax and insurance

Unknown future costs

Petrol and diesel costs

How is the value of an asset with cash flows determined in discounted cash flow valuation?

By the number of available models within the approach.

By the analyst’s personal preferences and experience.

By historical market performance.

By multiplying the predicted cash flows by their present value.

What criteria can be altered in discounted cash flow (DCF) models?

The estimation of inputs, projected cash flows, predicted growth, discount rates, growth flows, and growth patterns.

The choice of industry, the historical performance data, and the economic conditions.

The type of financial assets, the duration of projections, and the experience of the analysts.

The number of valuation models, the complexity of projections, and the variety of inputs.

How is the payback period calculated when the net cash inflow varies each year?

By calculating the discount rate for each year of operation

By averaging the net cash inflow for all years of operation

By adding net cash inflows each year until they equal the initial investment

By dividing the initial investment by the total net cash inflow

What are some advantages and disadvantages of obtaining long-term loans? A) Advantages: The real rate of interest may sometimes be lower considering inflation and the fall in the value of the currency. B) Disadvantages: Restrictive clauses can hinder the management's decision-making process. C) Advantages: Companies with medium to heavy borrowings are generally rated higher. D) Advantages: Interest on long-term loans is always tax-deductible.

B, C

A, B, D

A, C, D

A, B, C

What is the broader definition of cash flows to equity that includes cash flows left over after satisfying the claims of non-equity investors?

Interest payments

Free cash flow to equity (FCFE)

Free cash flow to the firm (FCFF)

Dividends

Why is it important to take into account the cash balance when valuing young companies?

To determine the cost of equity.

To calculate the overall market value.

Because it’s the primary source of profitability.

Because their operations consume cash rather than producing it.

What are the key characteristics of the payback period method for investment appraisal? A) It considers the time value of money. B) It identifies the period for full recovery of the initial investment. C) It is suitable for small businesses. D) It takes into account cash flows beyond the payback period.

A, C

B, D

B, C

A, D

What are the different approaches mentioned for selecting the appropriate multiple for valuation? A) The Preconceived Notions Approach. B) The Regression Approach. C) The Best Multiple D) None of the above

A and B

C and D

A, B, and C

B, C, and D

10.

What does NOPLAT stand for in financial valuation?

Net Operating Loss after Tax

Net Operating Profit Loss Adjusted for Taxes

Net Operating Profit Less Adjusted Taxes

Non-Operating Profit with Taxes

11.

What are the key considerations regarding Transfer Pricing's impact on cross-country investment decisions? A) Transfer Pricing rules are established to eliminate unfair trade practices in international transactions. B) These rules apply only to transactions between unrelated parties. C) Corporates often manipulate rates or charges to amass more profits in tax havens. D) Breaching Transfer Pricing Rules imposes no financial burden on busin/esses.

A, C

B, C

A, D

A, B

12.

What qualities should an organization endeavor to inculcate in its members for ethical decision-making?

Profit maximization and market domination

Profitability, competition, and resource control

Trust, integrity, honesty, respect, responsibility, fairness, care, and civility

Trust, integrity, and honesty

13.

What challenge is associated with identifying and appraising omitted assets in the asset-based valuation approach?

These assets are actively traded in the market.

The individual values of omitted assets always equal the total value of all assets.

Omitted assets often include intangible assets, making them difficult to recognize and assess.

Market values for these assets are highly efficient.

14.

What are the advantages and challenges associated with simulation analysis? A) Simulation analysis is versatile and can handle complex interrelationships among parameters and exogenous variables.(Advantages) B) Manual calculations are suitable for simulation analysis due to its simplicity.(Advantages) C) Skilled judgment is not required when selecting variables and combinations for simulation. (Advantages) D) Handling correlations between variables in simulation analysis can be a major problem if not done properly.(Challenge)

A, C, D

A, D

A, B

B, D

15.

How does the decision tree change as more uncertainties are associated with each decision?

It becomes smaller, with fewer branches.

It becomes a flowchart of decision options.

It remains the same size, representing only the initial decision.

It grows bigger and more complex.

16.

What does the degree of financial leverage (DFL) formula represent? A) DFL is a measure of how much interest expense impacts changes in EBIT. B) DFL is equal to the percentage change in earnings per share (EPS) divided by the percentage change in earnings before interest and tax (EBIT). C) DFL is a measure of how changes in tax rate and the number of equity shares impact EPS. D) DFL is a constant value that does not change with variations in EBIT or EPS.

A, B

B, C

A, C

B, D

17.

How is the enterprise value (EV) calculated in the EV-EBITDA multiple?

EV = Market Value of Equity + Market Value of Debt – Cash

EV = Market Value of Equity – Market Value of Debt + Cash

EV = Market Value of Equity – Market Value of Debt

EV = Market Value of Equity + Market Value of Debt

18.

What does the Capital Asset Pricing Model (CAPM) describe the relationship between?

Returns and market risk premium

Systemic risk and market risk premium

Risk and expected returns

Risk and time value of money

19.

What factors influence the rate of interest on term loans?

The period, risk, creditworthiness, and purpose of the loan

The borrower’s political connections

The borrower’s personal assets

The lender’s goodwill in the market

20.

How is the value of the subject company determined in relative valuation?

By applying a single valuation multiple to the subject company.

By calculating the average of the comparable companies’ valuation multiples.

By conducting an independent financial analysis of the subject company.

By using the most conservative valuation multiples.

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