Financial Management & Strategy Flashcards

A company's operating leverage is high when:

Answer: Fixed costs are a large proportion of total costs

High operating leverage means a large share of fixed costs, so small revenue changes produce amplified swings in operating income.

Which ratio best measures how efficiently a company converts sales into free cash flow?

Answer: Free cash flow margin

Free cash flow margin (FCF ÷ Revenue) shows the proportion of each revenue dollar that becomes free cash available to investors.

When a financial controller evaluates a lease-versus-buy decision, the appropriate discount rate for the lease cash flows is typically the:

Answer: After-tax cost of debt

Lease payments are debt-like, contractual cash flows, so they are discounted at the firm's after-tax cost of debt.

A company's Days Sales Outstanding (DSO) increased from 32 to 48 days. This most likely indicates:

Answer: Slower customer collections or looser credit terms

Rising DSO signals customers are taking longer to pay, pointing to collection problems or deliberately extended credit policies.

In a discounted cash flow valuation, the terminal value typically captures:

Answer: Cash flows beyond the explicit forecast period

Terminal value represents the present value of all cash flows expected after the discrete forecast horizon, often using a perpetuity growth model.

Which financial instrument allows a company to lock in a future interest rate to hedge against rising borrowing costs?

Answer: Interest rate swap

An interest rate swap exchanges floating-rate payments for fixed-rate payments, effectively locking in a borrowing rate.

A strategic acquisition is evaluated using synergies. If synergies fail to materialize, the acquirer most likely:

Answer: Overpaid for the target, destroying shareholder value

When anticipated synergies do not occur, the premium paid over intrinsic value represents a transfer of wealth from acquirer shareholders to target shareholders.