CTP Financial Planning and Analysis 5 — Questions and Answers
Question 1: A company is preparing its annual operating plan. Which starting point best ensures the budget is aligned with strategic objectives?
- Prior year actuals plus an inflation adjustment
- Strategic plan targets and key performance indicators (Correct answer)
- Industry average benchmarks for comparable companies
- Management's subjective estimates of department needs
Correct answer: Strategic plan targets and key performance indicators
Anchoring the operating plan to strategic targets and KPIs ensures resource allocation directly supports the company's long-term goals.
Question 2: In treasury financial planning, what does 'cash flow at risk (CFaR)' measure?
- The maximum loss on a derivatives portfolio at a given confidence level
- The potential shortfall in cash flow below a target level due to risk factors at a given confidence level (Correct answer)
- The probability of a firm becoming insolvent within one year
- The variance of daily cash balances across bank accounts
Correct answer: The potential shortfall in cash flow below a target level due to risk factors at a given confidence level
CFaR quantifies the worst-case cash flow shortfall at a specified confidence level (e.g., 95%) caused by adverse movements in market risk factors.
Question 3: A company's days sales outstanding (DSO) increases from 35 to 50 days while revenue stays flat. What is the direct financial planning implication?
- Cash collections will improve, reducing borrowing needs
- More working capital will be needed to fund the higher receivables balance (Correct answer)
- Operating expenses will increase proportionally
- The company's credit rating will automatically improve
Correct answer: More working capital will be needed to fund the higher receivables balance
Higher DSO means cash is collected more slowly, increasing the accounts receivable balance and requiring more working capital financing.
Question 4: Which financial planning KPI measures the accuracy of a company's forecasting process?
- Return on invested capital (ROIC)
- Forecast accuracy rate (actual vs. forecast variance %) (Correct answer)
- Operating cash flow margin
- Revenue per employee
Correct answer: Forecast accuracy rate (actual vs. forecast variance %)
Forecast accuracy rate tracks the average percentage deviation between forecasted and actual results, indicating the reliability of the planning process.
Question 5: When performing a DuPont analysis, which decomposition correctly breaks down return on equity (ROE)?
- ROE = Net margin × Asset turnover × Equity multiplier (Correct answer)
- ROE = Gross margin × Operating leverage × Debt ratio
- ROE = EBITDA margin × Revenue growth × Interest coverage
- ROE = Operating margin × Working capital ratio × Leverage ratio
Correct answer: ROE = Net margin × Asset turnover × Equity multiplier
The three-factor DuPont formula decomposes ROE into profitability (net margin), efficiency (asset turnover), and leverage (equity multiplier).
Question 6: A subsidiary generates €10M in earnings. The USD/EUR rate was 1.10 when budgeted but is 1.05 at year-end. What is the currency translation impact on USD earnings?
- $500,000 favorable
- $500,000 unfavorable (Correct answer)
- $10,500,000 total USD earnings
- $1,000,000 unfavorable
Correct answer: $500,000 unfavorable
€10M × (1.05 − 1.10) = −$500,000; the weaker euro reduces USD earnings by $500,000, an unfavorable translation variance.
Question 7: In financial planning, which term describes costs that have already been incurred and cannot be recovered regardless of future decisions?
- Opportunity costs
- Sunk costs (Correct answer)
- Incremental costs
- Avoidable costs
Correct answer: Sunk costs
Sunk costs are past expenditures that cannot be reversed and should be excluded from forward-looking capital allocation and decision-making.
CTP Financial Planning and Analysis 5
A company is preparing its annual operating plan.
Which starting point best ensures the budget is aligned with strategic objectives?