Financial Modeling Practice Questions

A retiree is deciding how much to withdraw from their retirement savings each year. Which factor is typically the most significant in determining whether their funds will last through retirement?

• Daily stock market movements

• The interest rate on a personal credit card

• Fluctuations in local property tax rates

• The retiree’s monthly living expenses compared to their annual withdrawal

In a retirement model, what is the primary reason inflation must be incorporated into long-term projections?

• To adjust future investment returns for tax implications

• To account for changes in asset allocation preferences over time

• To ensure that future expenses are realistically represented in today’s dollars

• To maximize the contribution limits of retirement accounts

A practical reason to build a custom retirement dashboard (e.g., using Streamlit) is to:

• Guarantee no variance from actual results

• Automate trades on an investor’s behalf

• Allow rapid scenario testing of different retirement ages and spending rates

• Eliminate all uncertainties related to healthcare expenses

In the Capital Asset Pricing Model (CAPM), the asset’s beta primarily measures:

• The systematic risk of the asset relative to the market

• The total risk of the entire market

• The unsystematic risk specific to that asset

• How many data points are required for Monte Carlo simulation

When integrating Monte Carlo simulation into portfolio decisions, a primary benefit is:

• It removes the need to consider real market conditions

• It provides a fixed outcome each time

• It allows modeling a range of potential outcomes based on random draws from defined distributions

• It disregards correlation altogether

The concept of the risk-free rate in portfolio theory is typically used to:

• Set a baseline return for measuring excess returns (alpha)

• Eliminate all portfolio volatility

• Justify investing solely in T-Bills

• Predict currency exchange rate fluctuations

When constructing a 3-statement model, one critical linking point is ensuring:

• The annual marketing budget matches the income statement’s net income

• The depreciation expense is ignored in the balance sheet

• The cash flow statement’s ending cash balance matches the balance sheet cash account

• The interest rate is fixed for the entire forecast period

In a typical LBO, private equity firms rely on cash flow primarily to:

• Pay large dividends to employees in the target company

• Service and pay down the acquisition debt

• Make philanthropic contributions during the hold period

• Fund new venture investments in other businesses

In venture capital modeling, a high projected burn rate usually indicates:

• Immediate profitability

• Large net inflows of cash from daily operations

• The startup is spending cash faster than it is generating revenue

• No requirement for external funding

In a DCF analysis using unlevered free cash flow, the discount rate of choice is generally:

• The firm’s cost of equity

• The risk-free rate only

• The firm’s weighted average cost of capital (WACC)

• The industry’s average hurdle rate