CFM CFM Strategic Finance & Decision Making 1 — Questions and Answers
Question 1: What is the purpose of Economic Value Added (EVA) as a performance metric?
- To measure revenue growth rate relative to competitors
- To measure profit after deducting the full cost of capital employed, indicating true economic profit (Correct answer)
- To calculate the payback period for capital projects
- To track market share changes over time
Correct 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.
Question 2: In a Balanced Scorecard framework, which perspective focuses on internal processes that drive customer satisfaction?
- Financial perspective
- Customer perspective
- Internal business process perspective (Correct answer)
- Learning and growth perspective
Correct 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.
Question 3: Which of the following best describes the concept of 'opportunity cost'?
- The cost of raw materials in a production process
- The value of the next best alternative foregone when making a decision (Correct answer)
- A sunk cost that cannot be recovered
- A fixed overhead cost allocated to production
Correct 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.
Question 4: What is the primary goal of shareholder wealth maximization in corporate finance?
- Maximizing current-period accounting profits
- Maximizing the long-term market value of the firm's common equity (Correct answer)
- Minimizing all financial risks regardless of return trade-offs
- Paying the highest possible dividends each quarter
Correct 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.
Question 5: 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?
- 5,000 units (Correct answer)
- 3,000 units
- 10,000 units
- 2,000 units
Correct 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.
Question 6: What does a high degree of operating leverage indicate?
- The company relies heavily on debt financing
- A large proportion of fixed costs relative to variable costs, amplifying profit changes with revenue swings (Correct answer)
- The company outsources most of its production
- Revenue growth consistently exceeds industry averages
Correct 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.
CFM CFM Strategic Finance & Decision Making 1
What is the purpose of Economic Value Added (EVA) as a performance metric?