Financial & Risk Management Flashcards

A company uses scenario analysis during strategic planning. What is the primary benefit of this technique in risk management?

Answer: It evaluates how different assumptions affect outcomes under multiple future states

Scenario analysis tests financial outcomes under multiple plausible future states (best, base, worst), helping strategists understand risk exposure across conditions.

Which ratio measures how effectively a company generates profit from its assets?

Answer: Return on Assets (ROA)

Return on Assets (ROA) measures net income relative to total assets, showing how efficiently management uses assets to generate profit.

In enterprise risk management (ERM), which framework is most widely adopted to integrate risk management into strategic objectives?

Answer: COSO ERM Framework

The COSO ERM Framework provides a comprehensive approach to identifying, assessing, and managing risk aligned with strategic objectives.

When a company issues new equity shares to raise capital, existing shareholders experience:

Answer: Dilution of their ownership percentage

Issuing new shares increases total shares outstanding, reducing each existing shareholder's proportional ownership — this is called dilution.

A certified business strategist recommends stress testing a firm's financial model. What does stress testing primarily assess?

Answer: Resilience of financial position under extreme adverse scenarios

Stress testing evaluates whether a company can withstand extreme but plausible shocks, such as severe recessions or sudden market disruptions.

A firm's operating leverage is HIGH when:

Answer: Fixed costs make up a large proportion of total costs

High operating leverage means a large fixed cost base, so small changes in sales volume produce amplified changes in operating profit.

Which technique estimates the value of a business by discounting its expected future free cash flows at the appropriate discount rate?

Answer: Discounted Cash Flow (DCF) valuation

DCF valuation converts projected future cash flows into present value using a discount rate that reflects the investment's risk, yielding an intrinsic value estimate.