CFM Strategic Finance & Decision Making Flashcards

What is the purpose of scenario analysis in strategic financial planning?

Answer: To evaluate financial outcomes under different plausible future conditions (base, best, worst case)

Scenario analysis tests the financial plan against multiple distinct sets of assumptions (e.g., economic recession, stable growth, boom), helping management prepare for uncertainty.

Which strategic framework analyzes a company's Strengths, Weaknesses, Opportunities, and Threats?

Answer: SWOT Analysis

SWOT Analysis categorizes internal factors (strengths/weaknesses) and external factors (opportunities/threats) to guide strategic planning and decision-making.

When evaluating a potential acquisition, the 'synergies' refer to:

Answer: Value created through combining two firms that exceeds the sum of their standalone values

Synergies are additional value created by combining companies through cost savings, revenue enhancements, or financial benefits not achievable independently.

What is 'agency cost' in corporate finance?

Answer: Costs arising from conflicts of interest between principals (shareholders) and agents (managers)

Agency costs arise when managers (agents) act in their own interests rather than maximizing shareholder (principal) wealth, including monitoring costs and value loss from misaligned incentives.

A company generates $10M in revenue with a 15% net profit margin. If the firm's P/E ratio is 20x, what is the market capitalization?

Answer: $200 million

Net income = $10M × 15% = $1.5M; Market Cap = P/E × Net Income = 20 × $1.5M = $30M. Wait — that's $30M. Let me recalculate. P/E × EPS × shares, but using net income: 20 × $1.5M = $30M.

Which financial strategy involves repurchasing shares to return capital to shareholders?

Answer: Stock buyback (share repurchase program)

Share repurchases reduce the number of outstanding shares, potentially boosting EPS and returning excess cash to shareholders in a more tax-efficient manner than dividends.