CMC Financial Analysis & Business Performance 3 — Questions and Answers
Question 1: Which of the following best describes the difference between operating cash flow and free cash flow (FCF)?
- FCF adds back depreciation to operating cash flow
- FCF subtracts capital expenditures from operating cash flow (Correct answer)
- FCF excludes working capital changes from operating cash flow
- FCF adds interest payments back to operating cash flow
Correct answer: FCF subtracts capital expenditures from operating cash flow
Free Cash Flow = Operating Cash Flow − Capital Expenditures, representing cash available after maintaining or expanding the asset base.
Question 2: A company's current ratio is 2.5 but its quick ratio is 0.8. What does this disparity most likely indicate?
- The company has very low accounts receivable
- A large portion of current assets is tied up in inventory (Correct answer)
- The company carries excessive cash on its balance sheet
- Long-term debt is being misclassified as current liabilities
Correct answer: A large portion of current assets is tied up in inventory
A high current ratio with a low quick ratio indicates significant inventory in current assets, since inventory is excluded from the quick ratio calculation.
Question 3: An analyst values a company using EV/EBITDA at 8x and calculates an enterprise value of $40M. If the company has $5M in net debt, what is the implied equity value?
- $45M
- $35M (Correct answer)
- $40M
- $32M
Correct answer: $35M
Equity Value = Enterprise Value − Net Debt = $40M − $5M = $35M.
Question 4: In scenario analysis for a capital investment, the consultant should weight scenarios by probability to compute:
- The internal rate of return under the base case only
- The expected net present value (NPV) across scenarios (Correct answer)
- The payback period under the worst case
- The accounting rate of return under the best case
Correct answer: The expected net present value (NPV) across scenarios
Probability-weighted NPV across scenarios provides the expected value of an investment, accounting for uncertainty in outcomes.
Question 5: A firm's revenue grew 20% but EBIT grew only 5%. Which metric would best explain this underperformance?
- Revenue per employee
- Operating leverage and cost structure analysis (Correct answer)
- Dividend payout ratio
- Weighted average cost of capital (WACC)
Correct answer: Operating leverage and cost structure analysis
Analyzing operating leverage and cost structure reveals whether fixed or variable costs are growing faster than revenue, explaining the EBIT-to-revenue gap.
Question 6: A company has Days Payable Outstanding (DPO) of 60 days, DSO of 45 days, and Days Inventory Outstanding (DIO) of 30 days. What is its Cash Conversion Cycle (CCC)?
- 135 days
- 15 days (Correct answer)
- 75 days
- 45 days
Correct answer: 15 days
CCC = DIO + DSO − DPO = 30 + 45 − 60 = 15 days, meaning the company cycles cash relatively quickly.
Question 7: When a CMC uses a balanced scorecard to assess business performance, which of the following perspectives is NOT one of the four standard dimensions?
- Customer perspective
- Internal process perspective
- Competitive positioning perspective (Correct answer)
- Learning and growth perspective
Correct answer: Competitive positioning perspective
The four BSC perspectives are Financial, Customer, Internal Process, and Learning & Growth; competitive positioning is not a standard dimension.
CMC Financial Analysis & Business Performance 3
Which of the following best describes the difference between operating cash flow and free cash flow (FCF)?