CFM Strategic Finance & Decision Making Flashcards

What is the purpose of Economic Value Added (EVA) as a performance metric?

Answer: To measure profit after deducting the full cost of capital employed, indicating true economic profit

EVA = Net Operating Profit After Tax - (Invested Capital × WACC), showing whether a business generates returns above its cost of capital, creating or destroying shareholder value.

In a Balanced Scorecard framework, which perspective focuses on internal processes that drive customer satisfaction?

Answer: Internal business process perspective

The internal business process perspective identifies critical processes the company must excel at to deliver value to customers and achieve financial goals.

Which of the following best describes the concept of 'opportunity cost'?

Answer: The value of the next best alternative foregone when making a decision

Opportunity cost is the benefit sacrificed by choosing one option over the next best alternative, and must be considered in rational economic decision-making.

What is the primary goal of shareholder wealth maximization in corporate finance?

Answer: Maximizing the long-term market value of the firm's common equity

Shareholder wealth maximization focuses on increasing the long-term stock price by making decisions that create value, considering both risk and return over time.

A company's fixed costs are $200,000, selling price is $50/unit, and variable cost is $30/unit. What is the margin of safety if current sales are 15,000 units?

Answer: 5,000 units

Break-even = $200,000 / ($50 - $30) = 10,000 units; Margin of Safety = 15,000 - 10,000 = 5,000 units above break-even.

What does a high degree of operating leverage indicate?

Answer: A large proportion of fixed costs relative to variable costs, amplifying profit changes with revenue swings

High operating leverage means fixed costs dominate the cost structure, so small revenue changes produce magnified swings in operating income — both upside and downside.