CFC Financial Management & Strategy 4

Question 1

A company issues $10 million in bonds at a 6% coupon when its tax rate is 25%. What is the after-tax cost of this debt?

Accepted Answer

4.5%

Answer

After-tax cost of debt = 6% × (1 − 0.25) = 4.5%, reflecting the tax shield on interest payments.

Question 2

Which financial strategy is most consistent with maximizing long-term shareholder value?

Accepted Answer

Investing in all projects with positive NPV

Answer

Accepting all positive-NPV projects directly increases the intrinsic value of the firm, which is the foundation of shareholder wealth maximization.

Question 3

A controller notices that a division's ROIC consistently falls below WACC. This indicates the division is:

Accepted Answer

Destroying economic value

Answer

When ROIC < WACC, each dollar invested earns less than it costs, destroying shareholder value and producing negative EVA.

Question 4

Which scenario best describes a natural hedge in foreign currency risk management?

Accepted Answer

Matching foreign currency revenues with foreign currency expenses in the same currency

Answer

A natural hedge offsets currency risk by matching inflows and outflows in the same foreign currency, eliminating net exposure without derivatives.

Question 5

Under the Gordon Growth Model, a stock's intrinsic value increases if:

Accepted Answer

The dividend growth rate increases, holding all else constant

Answer

In the Gordon Growth Model (P = D1 / (r − g)), a higher growth rate (g) reduces the denominator, increasing the calculated intrinsic value.

(CFC) Certified Financial Controller Practice Test