Financial & Risk Management Flashcards

A company's EBITDA margin has improved while its net profit margin has declined. This most likely suggests:

Answer: Improved operational efficiency but higher interest, tax, or depreciation expenses

EBITDA excludes interest, taxes, depreciation, and amortization — an improving EBITDA margin with declining net margin points to rising costs in those excluded categories.

In risk management, the term 'residual risk' refers to:

Answer: The risk remaining after mitigation controls have been implemented

Residual risk is the level of risk that persists after all planned risk treatment and control measures have been applied.

Which of the following best describes systematic risk?

Answer: Market-wide risk that affects all investments and cannot be diversified away

Systematic risk, or market risk, is driven by macroeconomic factors affecting all assets and cannot be eliminated through diversification.

A business uses a rolling 12-month cash flow forecast. What is the primary strategic advantage of this approach?

Answer: It provides continuously updated liquidity visibility enabling proactive financial decisions

Rolling forecasts continuously extend the planning horizon, giving management up-to-date cash flow visibility to anticipate and respond to liquidity needs.

The Altman Z-Score is a financial model primarily used to predict:

Answer: Probability of corporate bankruptcy

The Altman Z-Score combines five financial ratios to produce a score that predicts the likelihood a company will enter bankruptcy within two years.

When evaluating two mutually exclusive projects with different scales, which metric can give a misleading ranking compared to NPV?

Answer: Internal Rate of Return (IRR)

IRR can rank smaller projects above larger ones even when the larger project creates more total value, making NPV the preferred method for mutually exclusive investment decisions.

A company's Board of Directors approves a risk appetite statement. What does this document establish?

Answer: The type and amount of risk the organization is willing to accept in pursuit of its objectives

A risk appetite statement defines the boundaries of acceptable risk-taking, aligning risk management with strategic goals and organizational culture.