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FMVA practice questions

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Question 1Finance

Which financial statement reports the cash generated and used by a company's operating, investing, and financing activities over a period?

  1. Statement of retained earnings
  2. Statement of cash flows Correct answer.
  3. Balance sheet
  4. Income statement

Explanation

The statement of cash flows classifies cash movements into operating, investing, and financing activities for a period. The balance sheet is a point-in-time snapshot, while the income statement reports accrual-based performance.

Question 2Finance

If $1,000 is invested at an annual interest rate of 10% compounded annually, what is the investment worth after two years?

  1. $1,200
  2. $1,331
  3. $1,210 Correct answer.
  4. $1,100

Explanation

Future value equals $1,000 × (1.10)^2 = $1,210, because the second year earns interest on both the original principal and the first year's interest. Simple interest would give $1,200.

Question 3Finance

Under the net present value rule, a capital project should generally be accepted when its NPV is:

  1. Greater than zero Correct answer.
  2. Equal to its initial cost
  3. Less than zero
  4. Equal to zero

Explanation

A positive NPV means the present value of discounted cash inflows exceeds the initial outlay, so the project adds value at the required return. An NPV of zero earns exactly the discount rate and leaves value unchanged.

Question 4Finance

Which ratio is most directly used to assess a company's ability to meet its short-term obligations?

  1. Gross profit margin
  2. Current ratio Correct answer.
  3. Total asset turnover
  4. Debt-to-equity ratio

Explanation

The current ratio compares current assets with current liabilities and is a direct measure of short-term liquidity. The other ratios address leverage, profitability, or operating efficiency.

Question 5Finance

When building an EBITDA measure from operating income, which item is added back?

  1. Depreciation Correct answer.
  2. Income tax expense
  3. Dividends paid
  4. Interest expense

Explanation

EBITDA adds back depreciation and amortization to operating income because those are non-cash charges. Interest, taxes, and dividends are not part of operating income or are financing items.

Question 6Finance

In a WACC calculation, the cost of debt is normally multiplied by (1 minus the tax rate) because:

  1. Debt is repaid at maturity
  2. Interest is tax-deductible Correct answer.
  3. Dividends are not deductible
  4. Interest rates are fixed

Explanation

The tax deductibility of interest creates a tax shield that lowers the effective after-tax cost of debt. Principal repayment and fixed coupon rates do not create a tax adjustment.

Question 7Finance

A machine costs $100,000, has a salvage value of $10,000, and is depreciated straight-line over five years. What is the annual depreciation expense?

  1. $18,000 Correct answer.
  2. $10,000
  3. $20,000
  4. $22,000

Explanation

Straight-line depreciation equals (cost minus salvage value) divided by useful life: ($100,000 - $10,000) / 5 = $18,000. Ignoring the salvage value would incorrectly produce $20,000.

Question 8Finance

In an unlevered free cash flow calculation, which item is subtracted from cash generated by operations?

  1. Principal repayments
  2. Increase in NWC Correct answer.
  3. Interest expense
  4. Dividends paid

Explanation

Unlevered free cash flow deducts capital expenditures and increases in net working capital because cash tied up in receivables or inventory is not available to investors. Interest, dividends, and principal repayments are financing flows.

Question 9Finance

A company's revenue grew from $100 million to $161.05 million over five years. What was the compound annual growth rate?

  1. 12.2%
  2. 8.0%
  3. 61.1%
  4. 10.0% Correct answer.

Explanation

CAGR equals (ending value / beginning value)^(1/number of years) - 1: (161.05/100)^(1/5) - 1 = 10.0%. The 61.1% figure is total growth over the period, not an annual rate.

Question 10Finance

A project requires an initial investment of $500 and generates $200 per year for three years. At a 10% discount rate, what is the NPV?

  1. $2.63
  2. -$97.37
  3. $97.37
  4. -$2.63 Correct answer.

Explanation

The present value of inflows is 200/1.10 + 200/1.21 + 200/1.331 ≈ 497.37. Subtracting the $500 initial outlay gives an NPV of approximately -$2.63.

Question 11Finance

The internal rate of return (IRR) of a project is the discount rate at which:

  1. Cash flows equal the initial cost
  2. Payback is reached
  3. NPV equals zero Correct answer.
  4. NPV is maximized

Explanation

IRR is the rate that equates the present value of future cash inflows with the initial outlay, producing an NPV of zero. It is not a rate that maximizes NPV, since NPV generally declines as the discount rate increases.

Question 12Finance

The risk-free rate is 3%, the market return is 8%, and a stock's beta is 1.2. Using CAPM, what is the cost of equity?

  1. 9.0% Correct answer.
  2. 12.6%
  3. 6.0%
  4. 8.0%

Explanation

CAPM states cost of equity = risk-free rate + beta × (market return - risk-free rate) = 3% + 1.2 × (8% - 3%) = 9.0%. The equity risk premium is the market return minus the risk-free rate.

Question 13Finance

A company's final-year free cash flow is $100. It is expected to grow at 2% forever, and the WACC is 10%. Using the Gordon growth model, what is the terminal value at the end of that year?

  1. $1,250
  2. $1,275 Correct answer.
  3. $1,000
  4. $1,020

Explanation

Terminal value equals next year's free cash flow divided by (WACC - growth): $100 × 1.02 / (0.10 - 0.02) = $1,275. The numerator must reflect one year of growth.

Question 14Finance

In the three-step DuPont analysis, return on equity equals net profit margin multiplied by:

  1. The equity multiplier and the dividend payout ratio
  2. Asset turnover and the equity multiplier Correct answer.
  3. Gross margin and the interest coverage ratio
  4. Asset turnover and the current ratio

Explanation

DuPont decomposes ROE into profitability (net profit margin), efficiency (asset turnover), and leverage (equity multiplier). The current ratio, payout ratio, and coverage ratio are not part of the standard identity.

Question 15Finance

A company's accounts receivable balance increases during the year. All else equal, what is the effect on cash?

  1. Cash decreases Correct answer.
  2. Cash increases
  3. Cash is unaffected
  4. Cash increases by the gross receivable amount

Explanation

An increase in receivables means revenue was recognized on credit without a corresponding cash collection, so cash is tied up and decreases. The income statement may show revenue, but cash has not yet been received.

Question 16Finance

A company begins the year with $1,000 of debt, ends with $1,200, and pays 5% interest on the average balance. What is the interest expense for the year?

  1. $110
  2. $55 Correct answer.
  3. $50
  4. $60

Explanation

Average debt is ($1,000 + $1,200) / 2 = $1,100, and interest at 5% is $55. Using only beginning or ending debt would misstate the expense.

Question 17Finance

Which technique changes one input at a time while holding all other inputs constant to observe the effect on an output?

  1. Sensitivity analysis Correct answer.
  2. Monte Carlo simulation
  3. Scenario analysis
  4. Break-even analysis

Explanation

Sensitivity analysis flexes a single variable to isolate its impact on an output. Scenario analysis changes several variables together, and Monte Carlo simulation samples many inputs jointly.

Question 18Finance

A target company has EBITDA of $50 million, and comparable companies trade at an EV/EBITDA multiple of 8.0x. What is the implied enterprise value?

  1. $400 million Correct answer.
  2. $450 million
  3. $58 million
  4. $6.25 million

Explanation

Implied enterprise value equals EBITDA multiplied by the EV/EBITDA multiple: $50 million × 8.0 = $400 million. The multiple is applied to EBITDA, not added to it.

Question 19Finance

If a bond's coupon rate is below the market yield required by investors, the bond will trade:

  1. At a premium
  2. At a discount Correct answer.
  3. At par
  4. Above face value

Explanation

When the coupon is below the required yield, investors pay less than par so the total return matches the market yield. A premium arises when the coupon exceeds the required yield.

Question 20Finance

A company has days inventory outstanding of 40, days sales outstanding of 30, and days payables outstanding of 25. What is its cash conversion cycle?

  1. 95 days
  2. 45 days Correct answer.
  3. 35 days
  4. 15 days

Explanation

The cash conversion cycle equals DIO + DSO - DPO: 40 + 30 - 25 = 45 days. Payables financing reduces the length of the cycle.

Question 21Finance

A buyer acquires a company for $500 million. The transaction is funded with $300 million of debt and $20 million of transaction fees paid at close. Assuming no other sources or uses, how much equity is required?

  1. $240 million
  2. $220 million Correct answer.
  3. $180 million
  4. $200 million

Explanation

Total uses equal the purchase price plus fees: $500 million + $20 million = $520 million. Equity fills the gap after debt: $520 million - $300 million = $220 million.

Question 22Finance

In a financial model, interest on a revolving credit facility depends on the cash balance, while the cash balance depends on interest expense. This relationship most commonly creates:

  1. A sensitivity table
  2. A circular reference Correct answer.
  3. A hard-coded error
  4. A scenario switch

Explanation

Because interest depends on cash and cash depends on interest, the formulas loop back on themselves, creating a circular reference. Models often resolve this with iterative calculation or a circularity breaker.

Question 23Finance

A company is financed with 60% equity, 30% debt, and 10% preferred stock. Costs are 12% for equity, 6% pre-tax for debt, and 8% for preferred. The tax rate is 25%. What is WACC?

  1. 10.20%
  2. 8.90%
  3. 9.80%
  4. 9.35% Correct answer.

Explanation

WACC = 0.60 × 12% + 0.30 × 6% × (1 - 0.25) + 0.10 × 8% = 7.20% + 1.35% + 0.80% = 9.35%. Debt must be adjusted for the tax shield, while preferred dividends are not.

Question 24Finance

A company has EBIT of $200 million, a 25% tax rate, and invested capital of $800 million. What is its return on invested capital (ROIC)?

  1. 25.00%
  2. 21.00%
  3. 18.75% Correct answer.
  4. 15.00%

Explanation

NOPAT equals EBIT × (1 - tax rate) = $200 million × 0.75 = $150 million. ROIC equals NOPAT divided by invested capital: $150 million / $800 million = 18.75%.

Question 25Finance

A company reports net income of $100, depreciation of $20, capital expenditures of $30, an increase in net working capital of $10, and net debt repayment of $15. What is free cash flow to equity (FCFE)?

  1. $95
  2. $50
  3. $80
  4. $65 Correct answer.

Explanation

FCFE = net income + depreciation - capital expenditures - increase in net working capital + net borrowing. Net borrowing is -$15 because debt was repaid, so $100 + $20 - $30 - $10 - $15 = $65.

Question 26Financial Modeling

In a fully integrated three-statement model, which statement is normally built first because it drives the other two?

  1. Income statement Correct answer.
  2. Statement of retained earnings
  3. Balance sheet
  4. Cash flow statement

Explanation

The income statement is built first because net income flows into retained earnings on the balance sheet and is the starting point for the cash flow statement. The balance sheet and cash flow statement are completed afterward and must reconcile to each other.

Question 27Financial Modeling

Which font color convention is most commonly used in financial models to identify hard-coded inputs?

  1. Blue font Correct answer.
  2. Green font
  3. Red font
  4. Black font

Explanation

Blue font is the standard convention for hard-coded inputs, while black font typically denotes formulas and green often flags links to other worksheets. Consistent color coding makes a model easier to audit.

Question 28Financial Modeling

A balance check in a three-statement model compares total assets with which of the following?

  1. Total revenue
  2. Total liabilities plus equity Correct answer.
  3. Total shareholders' equity excluding minority interest
  4. Total working capital

Explanation

The fundamental accounting identity requires total assets to equal total liabilities plus equity. A balance check cell is typically set to zero when this identity holds. Any nonzero value signals a linking or timing error in the model.

Question 29Financial Modeling

On a straight-line depreciation schedule, annual depreciation equals capitalized capital expenditure less salvage value divided by which item?

  1. Remaining useful life
  2. Revenue
  3. Gross book value
  4. Useful life in years Correct answer.

Explanation

Straight-line depreciation spreads the depreciable base, which is cost minus salvage value, evenly over the asset's full useful life. The denominator is therefore the total number of useful years.

Question 30Financial Modeling

Interest expense on a revolver that depends on the revolver balance, which in turn depends on cash flow that is reduced by interest expense, creates which modeling issue?

  1. Circular reference Correct answer.
  2. Sensitivity table
  3. Automatic scenario toggle
  4. Data table

Explanation

When interest depends on the debt balance and the debt balance depends on cash flow after interest, the calculation loops back on itself. This is a circular reference and requires iterative calculation or a circuit breaker to resolve.

Question 31Financial Modeling

Compound annual growth rate over n years is calculated by raising the ending-to-beginning value ratio to the power of 1/n and then subtracting which item?

  1. The beginning value
  2. The discount rate
  3. The number of periods
  4. One Correct answer.

Explanation

CAGR is the geometric average annual growth rate, computed as (Ending/Beginning)^(1/n) minus 1. Subtracting one converts the growth multiple into a percentage rate.

Question 32Financial Modeling

In WACC, the cost of debt is multiplied by (1 minus the tax rate) to reflect which item?

  1. The maturity of the debt
  2. The expected recovery rate in a default scenario
  3. The tax deductibility of interest Correct answer.
  4. The default risk premium

Explanation

Interest expense is generally tax-deductible, so the effective cost of debt is reduced by the tax shield. Multiplying the pre-tax cost by (1 minus tax rate) gives the after-tax cost of debt used in WACC.

Question 33Financial Modeling

In a DCF, the Gordon growth terminal value is calculated by dividing the next period's free cash flow by which expression?

  1. Growth rate minus WACC
  2. WACC plus the growth rate
  3. WACC multiplied by the growth rate
  4. WACC minus the growth rate Correct answer.

Explanation

The Gordon growth formula values a growing perpetuity as next-period cash flow divided by the discount rate minus the growth rate. The denominator must be positive, so WACC must exceed the assumed perpetual growth rate.

Question 34Financial Modeling

A company's days sales outstanding rises from 45 to 60 while revenue is unchanged. What is the effect on cash flow?

  1. A cash inflow only if inventory also falls
  2. A cash inflow from lower receivables
  3. A cash outflow from higher receivables Correct answer.
  4. No effect on cash flow

Explanation

Higher DSO means customers are paying more slowly, so accounts receivable increase for the same revenue level. The increase in receivables absorbs cash and appears as a use of cash in the cash flow statement.

Question 35Financial Modeling

A term loan has an opening balance of $100 million, amortizes $10 million per year, and pays 6% interest on the opening balance. What is Year 1 interest expense?

  1. $0.6 million
  2. $5.4 million
  3. $6.6 million
  4. $6.0 million Correct answer.

Explanation

Interest is calculated on the opening balance before scheduled amortization, so $100 million multiplied by 6% equals $6.0 million. Using the closing balance would understate interest in the first year.

Question 36Financial Modeling

A cash sweep repays the term loan with 100% of excess cash flow. If excess cash flow is $20 million and the opening term loan balance is $15 million, what is the closing term loan balance?

  1. $20 million
  2. $35 million
  3. $5 million
  4. $0 Correct answer.

Explanation

Repayment is limited to the lesser of excess cash flow and the outstanding balance, so only $15 million is repaid. The loan is fully retired and the closing balance is zero.

Question 37Financial Modeling

Under the mid-year convention, the discount period applied to the first forecast year is typically which value?

  1. 1.0 years
  2. 0.0 years
  3. 0.5 years Correct answer.
  4. 1.5 years

Explanation

Mid-year convention assumes cash flows arrive evenly through the year, so the first year is discounted as if received halfway through at 0.5 years. Each later period is shifted by one additional year.

Question 38Financial Modeling

A company has 10 million basic shares, 2 million options with a $10 strike price, and a $20 share price. Under the treasury stock method, how many net new shares are created?

  1. 1.0 million Correct answer.
  2. 0.5 million
  3. 0.0 million
  4. 2.0 million

Explanation

Option proceeds of $20 million repurchase 1.0 million shares at $20, leaving 1.0 million net new shares from the 2.0 million options. The treasury stock method assumes proceeds are used to buy back shares at the current price.

Question 39Financial Modeling

A transaction shows total sources of $500 million and total uses of $480 million. Which adjustment balances the sources and uses schedule?

  1. Add $20 million of additional debt
  2. No adjustment is required
  3. Increase the purchase price by $40 million
  4. Reduce sources by $20 million Correct answer.

Explanation

Sources exceed uses by $20 million, so the schedule balances by reducing a funding source by that amount. Adding more debt or increasing the purchase price would widen the imbalance.

Question 40Financial Modeling

A project costs $100 today and returns $60 in Year 1 and $60 in Year 2. At a 10% discount rate, the NPV is closest to which amount?

  1. $20.00
  2. $9.09
  3. -$4.13
  4. $4.13 Correct answer.

Explanation

The present values are $54.55 and $49.59, totaling $104.13. Subtracting the $100 initial outlay gives an NPV of about $4.13.

Question 41Financial Modeling

A project requires an initial investment of $120 and generates annual cash flow of $30. What is the simple payback period?

  1. 4 years Correct answer.
  2. 3 years
  3. 2 years
  4. 5 years

Explanation

Simple payback divides the initial investment by the constant annual cash flow: $120 divided by $30 equals 4 years. It ignores discounting and any cash flows after the payback point.

Question 42Financial Modeling

In Excel, the formula =INDEX(C2:C100,MATCH("Widget",A2:A100,0)) returns which result?

  1. The last matching value from column C
  2. The row number of the first match in column A
  3. The first matching value from column C Correct answer.
  4. The count of cells equal to "Widget"

Explanation

MATCH locates the first row where column A equals Widget, and INDEX returns the corresponding value from column C. The zero in MATCH specifies an exact match.

Question 43Financial Modeling

A model uses a CHOOSE function driven by an input cell set to 1, 2, or 3 to select Base, Upside, or Downside assumptions. This is an example of which modeling technique?

  1. Pivot table
  2. Data table
  3. Goal seek
  4. Scenario switch Correct answer.

Explanation

A scenario switch lets the user toggle among predefined assumption sets with a single input. CHOOSE is a common function for routing the selected scenario into the model.

Question 44Financial Modeling

A company has revenue of $200, COGS of $80, SG&A of $30, and D&A of $20. What is EBITDA?

  1. $70
  2. $50
  3. $90 Correct answer.
  4. $110

Explanation

EBITDA equals revenue minus operating expenses before depreciation and amortization: $200 minus $80 minus $30 equals $90. D&A is excluded by definition.

Question 45Financial Modeling

Net income is $50, D&A is $10, accounts receivable increase by $5, and accounts payable increase by $3. What is cash flow from operations?

  1. $52
  2. $68
  3. $48
  4. $58 Correct answer.

Explanation

Start with net income, add back D&A, subtract the receivables increase, and add the payables increase: $50 plus $10 minus $5 plus $3 equals $58. Working capital uses and sources are adjusted in the direction of their cash impact.

Question 46Financial Modeling

To resolve circularity caused by a revolver in Excel, which approach is most commonly used?

  1. Remove the revolver from the model
  2. Use iterative calculation with a circuit breaker Correct answer.
  3. Hard-code the interest expense each period
  4. Run a macro that recalculates only the debt schedule each period

Explanation

Iterative calculation allows Excel to converge on the revolver balance and interest expense simultaneously, and a circuit breaker such as a manual interest toggle prevents errors when the loop fails. The model should still be audited to confirm convergence.

Question 47Financial Modeling

A company has $100 of cumulative tax depreciation in excess of book depreciation and a 25% tax rate. What does this create on the balance sheet?

  1. A deferred tax asset of $100
  2. A deferred tax asset of $25
  3. A deferred tax asset that reverses over time
  4. A deferred tax liability of $25 Correct answer.

Explanation

Accelerated tax depreciation lowers taxable income today but creates higher taxable income in future periods, so the company owes future taxes. The temporary difference multiplied by the tax rate produces a $25 deferred tax liability.

Question 48Financial Modeling

An acquirer trades at a P/E of 20, the target trades at a P/E of 10, and the deal is funded entirely with cash carrying a 4% after-tax cost. What is the expected EPS effect for the acquirer?

  1. Neutral
  2. Cannot be determined
  3. Accretive Correct answer.
  4. Dilutive

Explanation

The target's earnings yield is 10%, which exceeds the 4% after-tax cost of the cash used. Because the acquired earnings yield exceeds the financing cost, the transaction is accretive to the acquirer's EPS.

Question 49Financial Modeling

Levered free cash flow to equity is best described as cash flow available after which items?

  1. Before changes in working capital
  2. After capex but before debt service
  3. After debt service and capex Correct answer.
  4. Before interest and after taxes

Explanation

Levered free cash flow is the cash available to equity holders after all operating needs, capital expenditures, and debt service including interest and principal. It is the basis for equity valuation rather than enterprise valuation.

Question 50Financial Modeling

A two-variable data table in Excel is used in financial modeling primarily for which purpose?

  1. Show outputs for combinations of two inputs Correct answer.
  2. Sort a dataset by two separate criteria
  3. Build a pivot table from a large raw dataset
  4. Validate inputs against a drop-down list

Explanation

A two-variable data table recalculates a chosen output across a grid of values for two input assumptions, which is useful for sensitivity analysis. Each cell in the table reflects a different combination of the two inputs.