CFM Strategic Finance & Decision Making Flashcards
6 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CFM Strategic Finance & Decision Making flashcards as text
What is 'transfer pricing' in a multinational corporation?
Answer: The price charged for goods or services transferred between divisions or subsidiaries of the same company
Transfer pricing determines the internal price between related entities for goods, services, or IP, and is closely scrutinized by tax authorities to prevent profit shifting.
Which approach to capital allocation prioritizes projects based on their profitability index when capital is rationed?
Answer: Profitability Index ranking
Under capital rationing, ranking projects by Profitability Index (PV of future cash flows / initial investment) maximizes total NPV within the budget constraint.
What is the 'dividend irrelevance theory' proposed by Miller and Modigliani?
Answer: In perfect markets, dividend policy does not affect firm value because investors can create homemade dividends
M&M dividend irrelevance states that in frictionless markets, investors can sell shares to generate cash (homemade dividends), so payout policy does not affect firm value.
What does 'financial leverage' measure?
Answer: The extent to which a firm uses debt financing, amplifying returns and risk to equity holders
Financial leverage refers to using borrowed funds to amplify potential equity returns; higher leverage increases both upside profitability and downside risk for shareholders.
When a CFM evaluates a 'build vs. buy' decision for technology infrastructure, which financial analysis is most appropriate?
Answer: Total cost of ownership (TCO) analysis combined with NPV/IRR of cash flows
TCO analysis captures all costs (acquisition, implementation, maintenance, opportunity costs) over the system's life, and NPV/IRR quantifies the time value of each option's cash flows.
What is the primary purpose of a company's dividend policy?
Answer: To communicate financial health, manage investor expectations, and balance reinvestment needs with shareholder returns
Dividend policy serves as a signaling mechanism about management's confidence in future earnings while balancing the reinvestment needs of growth against returning value to shareholders.