CBC Financial Acumen & Business Finance 2 — Questions and Answers
Question 1: A business coach is helping a client evaluate whether to invest in new equipment costing $50,000. The concept of 'Return on Investment (ROI)' is best described as:
- The time required to recover the initial investment
- (Net Profit from Investment / Cost of Investment) × 100 (Correct answer)
- The interest rate paid on borrowed capital
- Total revenue generated by the investment
Correct answer: (Net Profit from Investment / Cost of Investment) × 100
ROI measures the percentage return on an investment by dividing the net profit generated by the investment cost and multiplying by 100.
Question 2: When advising a client on business valuation, which method estimates a company's value based on its potential future earnings, discounted to present value?
- Asset-Based Valuation
- Market Comparable Method
- Discounted Cash Flow (DCF) Analysis (Correct answer)
- Liquidation Value Method
Correct answer: Discounted Cash Flow (DCF) Analysis
Discounted Cash Flow analysis estimates business value by projecting future cash flows and discounting them to their present value using an appropriate discount rate.
Question 3: A client wants to understand their 'debt-to-equity ratio.' This metric primarily indicates:
- How quickly the company collects receivables
- The proportion of business financing from debt versus owner equity (Correct answer)
- The company's ability to pay dividends to shareholders
- How efficiently the company uses its assets to generate sales
Correct answer: The proportion of business financing from debt versus owner equity
The debt-to-equity ratio compares total liabilities to shareholders' equity, revealing the relative proportion of debt versus owner funding used to finance the business.
Question 4: When coaching a client through financial forecasting, which approach involves estimating future revenues based on a percentage of projected sales?
- Zero-based budgeting
- Percentage-of-sales method (Correct answer)
- Incremental budgeting
- Activity-based costing
Correct answer: Percentage-of-sales method
The percentage-of-sales method forecasts financial statement items by applying historical percentage relationships to projected future sales figures.
Question 5: A business coach explains that EBITDA is commonly used to assess a company's operational performance. What does EBITDA stand for?
- Earnings Before Income, Taxes, Depreciation, and Amortization (Correct answer)
- Expenses Before Interest, Taxes, Dividends, and Assets
- Earnings Before Investment, Trade, Debt, and Administration
- Estimated Business Income, Tax, Dividends, and Acquisitions
Correct answer: Earnings Before Income, Taxes, Depreciation, and Amortization
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and is used to evaluate a company's core operating profitability.
Question 6: A client is concerned about pricing their services competitively while remaining profitable. The 'contribution margin' concept helps by showing:
- The total fixed costs a product must cover before generating profit
- The amount each unit sold contributes to covering fixed costs and generating profit (Correct answer)
- The percentage of revenue that becomes net income after all expenses
- The difference between the sale price and the market average price
Correct answer: The amount each unit sold contributes to covering fixed costs and generating profit
Contribution margin (price minus variable cost per unit) shows how much each unit sold contributes to covering fixed costs and ultimately generating profit.
Question 7: When helping a client read a balance sheet, which of the following correctly represents the fundamental accounting equation?
- Revenue = Expenses + Profit
- Assets = Liabilities + Owners' Equity (Correct answer)
- Cash Flow = Net Income + Depreciation
- Gross Profit = Net Sales − Operating Expenses
Correct answer: Assets = Liabilities + Owners' Equity
The fundamental accounting equation states that Assets equal Liabilities plus Owners' Equity, which is the foundation of the balance sheet.
CBC Financial Acumen & Business Finance 2
A business coach is helping a client evaluate whether to invest in new equipment costing $50,000.
The concept of 'Return on Investment (ROI)' is best described as: