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Financial Management & Budgeting Flashcards

7 cards from real CME practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Financial Management & Budgeting flashcards as text

  1. A company has fixed costs of $500,000, a selling price of $50 per unit, and variable costs of $30 per unit. What is the break-even point in units?

    Answer: 25,000 units

    Break-even = Fixed costs / Contribution margin = $500,000 / ($50 − $30) = 25,000 units.

  2. The 'master budget' in an organization typically begins with which component?

    Answer: The sales forecast

    The master budget starts with the sales forecast because all other operational budgets—production, purchasing, labor—flow from projected sales volumes.

  3. A CFO wants to reduce the company's cost of capital. Which action would most directly achieve this?

    Answer: Replacing high-cost debt with lower-rate debt

    Refinancing high-cost debt with lower-rate instruments directly reduces the after-tax cost of debt, lowering the overall WACC.

  4. In sensitivity analysis for capital budgeting, what is the primary purpose of changing one variable at a time while holding others constant?

    Answer: To identify which variable most affects project NPV

    Sensitivity analysis isolates the impact of each variable on NPV so managers can identify and focus on the most critical assumptions.

  5. A company's debt-to-equity ratio rises from 0.5 to 2.0. What is the most likely effect on financial risk?

    Answer: Financial risk increases because fixed interest obligations are higher relative to equity

    Higher leverage means larger mandatory interest payments relative to equity, increasing the risk of financial distress if earnings fall.

  6. Which budgeting method is most appropriate when output levels are uncertain and costs must be adjusted for actual activity?

    Answer: Flexible budget

    A flexible budget adjusts cost allowances to reflect actual activity levels, enabling meaningful variance analysis when volume differs from plan.

  7. Which of the following best describes 'capital rationing' in financial management?

    Answer: Allocating a limited capital budget among competing investment projects

    Capital rationing occurs when a firm has more positive-NPV projects than available funds, requiring prioritization among investments.