CCM Financial Analysis & Planning 3 — Questions and Answers
Question 1: When evaluating two mutually exclusive projects with different useful lives, the most appropriate comparison technique is:
- Net Present Value (NPV)
- Equivalent Annual Annuity (EAA) (Correct answer)
- Payback period
- Accounting Rate of Return (ARR)
Correct 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.
Question 2: A company's Days Sales Outstanding (DSO) increased from 35 to 52 days. This most likely indicates:
- Improved collection efficiency
- Customers are taking longer to pay (Correct answer)
- Inventory is turning over more slowly
- The company extended its payment terms to suppliers
Correct 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.
Question 3: Which of the following best describes 'economic value added' (EVA)?
- Net income minus dividends paid
- EBIT multiplied by (1 − tax rate)
- Net operating profit after tax minus the cost of invested capital (Correct answer)
- Revenue minus cost of goods sold
Correct 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.
Question 4: Under a scenario planning approach, a 'worst-case scenario' financial plan typically assumes:
- All favorable conditions occur simultaneously
- The most pessimistic but plausible combination of variables (Correct answer)
- Average industry performance benchmarks
- Zero revenue growth for five years
Correct 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.
Question 5: The DuPont analysis decomposes Return on Equity (ROE) into which three components?
- Gross margin, asset turnover, and debt ratio
- Net profit margin, asset turnover, and equity multiplier (Correct answer)
- Operating margin, current ratio, and leverage ratio
- EBITDA margin, capital intensity, and tax rate
Correct 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.
Question 6: A company issues $5 million in bonds at a coupon rate of 6% when market rates are 8%. The bonds will be issued at:
- Par value
- A premium
- A discount (Correct answer)
- Face value plus accrued interest
Correct 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.
Question 7: Which ratio is most useful for assessing a company's ability to service its debt from operating earnings?
- Debt-to-equity ratio
- Interest coverage ratio (Correct answer)
- Current ratio
- Price-to-earnings ratio
Correct answer: Interest coverage ratio
The interest coverage ratio (EBIT ÷ Interest Expense) indicates how many times operating earnings can cover interest obligations.
CCM Financial Analysis & Planning 3
When evaluating two mutually exclusive projects with different useful lives, the most appropriate comparison technique is: