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Financial Analysis & Decision Making Flashcards

7 cards from real CSM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Financial Analysis & Decision Making flashcards as text

  1. Which working capital strategy accepts higher risk in exchange for lower financing costs?

    Answer: Aggressive strategy using more short-term financing

    An aggressive working capital strategy relies heavily on cheaper short-term financing, which increases refinancing and interest rate risk.

  2. The Du Pont framework decomposes Return on Equity (ROE) into which three components?

    Answer: Net profit margin, asset turnover, equity multiplier

    Du Pont analysis: ROE = Net Profit Margin × Asset Turnover × Equity Multiplier, separating profitability, efficiency, and leverage drivers.

  3. A company is evaluating two mutually exclusive projects with different lives. The most appropriate comparison method is:

    Answer: Equivalent Annual Annuity (EAA) method

    The EAA method converts each project's NPV into an annual equivalent, enabling fair comparison of projects with different time horizons.

  4. In zero-based budgeting (ZBB), each budget cycle requires managers to:

    Answer: Justify every expenditure from scratch, not from prior-year baselines

    ZBB eliminates the assumption that prior spending was justified, requiring each activity to prove its value in the current period.

  5. A firm's degree of combined leverage (DCL) equals 4.0. If sales increase by 10%, EPS will increase by approximately:

    Answer: 40%

    DCL multiplies the percentage change in sales to get the percentage change in EPS: 10% × 4.0 = 40%.

  6. Which scenario best illustrates the concept of 'financial synergy' in a merger?

    Answer: The combined firm accesses lower-cost capital due to reduced risk and greater size

    Financial synergy refers to benefits from improved access to capital markets, lower borrowing costs, or better credit ratings post-merger.

  7. A strategic manager uses Monte Carlo simulation in financial modeling primarily to:

    Answer: Understand the probability distribution of outcomes across thousands of scenarios

    Monte Carlo simulation runs thousands of random scenarios using input distributions, producing a probability distribution of possible outcomes rather than a single-point estimate.