BMO Advanced Techniques & Methods 2

Question 1

A BMO analyst uses a discounted cash flow (DCF) model to value a company. If the discount rate increases from 8% to 10%, what happens to the present value of future cash flows?

Accepted Answer

It decreases, because higher rates reduce present value

Answer

A higher discount rate reduces the present value of future cash flows because you are penalizing future earnings more heavily.

Question 2

When performing a sensitivity analysis on a loan portfolio, a BMO risk manager varies interest rates and default probabilities simultaneously. This approach is best described as:

Accepted Answer

Multivariable sensitivity analysis

Answer

Varying multiple inputs simultaneously to observe their combined effect on an output is multivariable sensitivity analysis.

Question 3

A BMO portfolio manager applies the Capital Asset Pricing Model (CAPM). A stock has a beta of 1.4, the risk-free rate is 3%, and the market return is 8%. What is the expected return?

Accepted Answer

11.2%

Answer

CAPM: Expected Return = 3% + 1.4 × (8% − 3%) = 3% + 7% = 10%... wait: 3 + 1.4×5 = 3 + 7 = 10%. The correct answer is 10.0%.

Question 4

BMO's credit team uses the Z-score model to assess corporate bankruptcy risk. A company with a Z-score of 1.5 falls into which zone?

Accepted Answer

Distress zone — high bankruptcy risk

Answer

In Altman's Z-score model, a score below 1.81 indicates the distress zone with high bankruptcy risk.

Question 5

A BMO investment banker structures a leveraged buyout (LBO). Which metric is most commonly used to assess the deal's debt repayment capacity?

Accepted Answer

Debt-to-EBITDA ratio

Answer

Debt-to-EBITDA measures how many years of earnings before interest, taxes, depreciation, and amortization are needed to repay debt, making it the key LBO leverage metric.

(BMO) Bank of Montreal Assessment Practice Test

(BMO) Bank of Montreal Assessment Practice Test

BMO Advanced Techniques & Methods 2