CIMA Financial Management and Risk 2

Question 1

What is 'financial leverage' in the context of corporate finance?

Accepted Answer

The use of debt financing to amplify returns on equity

Answer

Financial leverage refers to the use of debt financing; it amplifies potential returns to equity holders but also increases financial risk.

Question 2

In risk management, what does 'hedging' primarily aim to achieve?

Accepted Answer

Reducing or offsetting exposure to financial risk

Answer

Hedging involves taking an offsetting position to reduce or eliminate exposure to a specific financial risk such as currency or interest rate risk.

Question 3

Which of the following best defines 'credit risk' for a business?

Accepted Answer

The risk that a counterparty will fail to meet its financial obligations

Answer

Credit risk is the risk that a counterparty (such as a customer or borrower) will default or fail to meet their contractual financial obligations.

Question 4

What does a company's 'gearing ratio' measure?

Accepted Answer

The proportion of debt to total capital or equity in the capital structure

Answer

The gearing ratio measures the proportion of a company's financing that comes from debt relative to total capital or equity.

Question 5

Which cash flow forecasting technique uses statistical analysis of historical data to predict future cash flows?

Accepted Answer

Time series analysis

Answer

Time series analysis uses historical data patterns (trends, seasonality) to forecast future cash flows using statistical methods.

CIMA - Chartered Institute of Management Accountants Aptitude Test Practice Test