AIFA Quantitative Methods & Financial Modeling Flashcards

A stock has a beta of 1.4, the risk-free rate is 3%, and the equity risk premium is 5%. What is the expected return according to CAPM?

Answer: 10.0%

CAPM: Expected Return = 3% + 1.4 × 5% = 3% + 7.0% = 10.0%.

In a three-statement financial model, which statement serves as the 'bridge' linking the income statement to the balance sheet?

Answer: The cash flow statement

The cash flow statement reconciles net income from the income statement with changes in balance sheet accounts, making it the critical linking statement in three-statement models.

What does a company's debt-to-equity (D/E) ratio measure?

Answer: The proportion of financing from debt versus equity

The D/E ratio measures financial leverage by comparing total debt to shareholders' equity, indicating how much of the company is financed by creditors versus owners.

Which Monte Carlo simulation concept involves running thousands of random scenarios to estimate the probability distribution of a financial outcome?

Answer: Stochastic modeling

Monte Carlo simulation is a form of stochastic modeling that uses random sampling across input distributions to generate a probability distribution of possible outcomes.

A US company reports free cash flow to equity (FCFE) of $8 million, has 4 million shares outstanding, and investors require a 10% return with 3% perpetual growth. What is the estimated intrinsic value per share?

Answer: $28.57

Value = FCFE / (r - g) = $8M / (0.10 - 0.03) = $8M / 0.07 = $114.29M total; per share = $114.29M / 4M = $28.57.

Which of the following best describes 'working capital' in financial modeling?

Answer: Current assets minus current liabilities

Working capital equals current assets minus current liabilities, measuring a company's short-term liquidity and operational efficiency.