CFC Financial Management & Strategy 3

Question 1

A company's operating leverage is high when:

Accepted Answer

Fixed costs are a large proportion of total costs

Answer

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

Question 2

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

Accepted Answer

Free cash flow margin

Answer

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

Question 3

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

Accepted Answer

After-tax cost of debt

Answer

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

Question 4

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

Accepted Answer

Slower customer collections or looser credit terms

Answer

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

Question 5

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

Accepted Answer

Cash flows beyond the explicit forecast period

Answer

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

(CFC) Certified Financial Controller Practice Test