Financial Analysis & Planning Flashcards

When evaluating two mutually exclusive projects with different useful lives, the most appropriate comparison technique is:

Answer: Equivalent Annual Annuity (EAA)

The Equivalent Annual Annuity converts each project's NPV into an annual figure, enabling fair comparison of projects with unequal lives.

A company's Days Sales Outstanding (DSO) increased from 35 to 52 days. This most likely indicates:

Answer: Customers are taking longer to pay

Rising DSO means it takes longer on average to collect receivables, signaling potential collection problems or more lenient credit terms.

Which of the following best describes 'economic value added' (EVA)?

Answer: Net operating profit after tax minus the cost of invested capital

EVA = NOPAT − (WACC × Invested Capital), measuring how much profit remains after covering the cost of all capital employed.

Under a scenario planning approach, a 'worst-case scenario' financial plan typically assumes:

Answer: The most pessimistic but plausible combination of variables

A worst-case scenario combines unfavorable yet realistic assumptions to stress-test the financial plan's resilience.

The DuPont analysis decomposes Return on Equity (ROE) into which three components?

Answer: Net profit margin, asset turnover, and equity multiplier

The classic DuPont formula is ROE = Net Profit Margin × Asset Turnover × Equity Multiplier, isolating profitability, efficiency, and leverage drivers.

A company issues $5 million in bonds at a coupon rate of 6% when market rates are 8%. The bonds will be issued at:

Answer: A discount

When the coupon rate is below the market interest rate, investors pay less than face value (a discount) to achieve the higher market yield.

Which ratio is most useful for assessing a company's ability to service its debt from operating earnings?

Answer: Interest coverage ratio

The interest coverage ratio (EBIT ÷ Interest Expense) indicates how many times operating earnings can cover interest obligations.