Mixed Deck — All CPFM Topics Flashcards

A capital project has an IRR of 12% and the firm's cost of capital is 14%. The project should be:

Answer: Rejected

IRR below the cost of capital means the project destroys value and should be rejected.

Which is a key advantage of passive index investing?

Answer: Lower costs and broad diversification

Passive index investing offers low costs, broad diversification, and tax efficiency.

Life-cycle costing accumulates costs over which span?

Answer: From product design through end-of-life disposal

Life-cycle costing tracks all costs from initial design through disposal of the product.

Strategic financial planning should align with which overarching organizational element?

Answer: The corporate vision and mission

Effective financial strategy must support and align with the organization's vision and mission.

In purchase price allocation following an acquisition, any excess of purchase price over the fair value of net identifiable assets is recorded as:

Answer: Goodwill

Under ASC 805, goodwill is recognized as the excess of the acquisition price over the fair value of the identifiable net assets acquired.

A company's 13-week cash flow forecast is BEST used for which purpose?

Answer: Short-term liquidity planning

A 13-week rolling cash flow forecast is the standard tool for short-term liquidity planning and identifying near-term cash gaps.

A line of credit is best described as a source of:

Answer: Pre-approved short-term borrowing up to a limit

A line of credit provides flexible short-term financing that a firm can draw on up to a preset limit.

A cost that has both a fixed and a variable component is known as a:

Answer: Mixed cost

A mixed cost (or semi-variable cost) is a cost that contains both a fixed element that is incurred even with zero activity and a variable element that increases with the level of activity. A common example is a utility bill with a fixed monthly service fee plus a variable charge based on usage.

Which risk measure addresses the shortcoming of VaR by averaging losses in the tail?

Answer: Conditional VaR (Expected Shortfall)

Conditional VaR, or Expected Shortfall, averages the losses that occur beyond the VaR cutoff.

A high gross profit margin combined with a low net profit margin most likely indicates:

Answer: High operating or overhead expenses

When gross margin is high but net margin is low, operating and overhead costs are eroding profit.

An analyst is valuing a mature, non-cyclical utility company with a long history of paying consistent, gradually increasing dividends. The company has a stable capital structure and limited high-return investment opportunities. Which of the following valuation methods would be most appropriate in this scenario?

Answer: Dividend Discount Model (DDM)

The Dividend Discount Model (DDM) is most suitable for valuing stable, mature companies that pay regular dividends, as these dividends are a direct reflection of the cash flow returned to shareholders. Given the company's consistent dividend history and limited growth projects, dividends serve as a reliable proxy for its value to equity holders.

Trend analysis of multiple ratios over time is primarily used to:

Answer: Identify improving or deteriorating performance

Trend analysis tracks ratios over time to reveal whether performance is improving or worsening.

The internal rate of return (IRR) is the discount rate at which a project's NPV equals:

Answer: Zero

IRR is defined as the rate that makes NPV equal to zero.

When can a food handler who has been diagnosed with jaundice return to work?

Answer: When the regulatory authority approves it

Jaundice is a symptom of Hepatitis A, a highly contagious foodborne illness. A food handler diagnosed with jaundice must be excluded from the operation and cannot return to work until cleared by a medical practitioner and approved by the local regulatory authority. This strict protocol is necessary to prevent the spread of Hepatitis A, which can have severe public health consequences.

When using the Gordon Growth Model (or Perpetuity Growth Method) to calculate the terminal value in a Discounted Cash Flow (DCF) analysis, which of the following is a critical underlying assumption?

Answer: The perpetual growth rate must be less than the discount rate (WACC).

The Gordon Growth Model formula for terminal value is [Final Year FCF * (1 + g)] / (WACC - g). For the formula to be mathematically and economically valid, the discount rate (WACC) must be greater than the perpetual growth rate (g). If g were greater than or equal to WACC, the denominator would be zero or negative, resulting in an infinite or meaningless valuation.

What is a key disadvantage of relying solely on comparable company analysis?

Answer: Market mispricing of peers distorts the valuation

Comps inherit any over- or under-valuation present in the peer group's market prices.

A CFO who accelerates revenue recognition into the current quarter to meet analyst expectations, without a legitimate business reason, is most likely violating:

Answer: Generally Accepted Accounting Principles (GAAP) and potentially SEC fraud regulations

Artificially accelerating revenue recognition without a valid basis violates GAAP and can constitute securities fraud under SEC regulations, exposing the CFO to civil and criminal liability.

A company enters into a revolving credit facility primarily to:

Answer: Provide flexible short-term borrowing access

A revolving credit facility provides flexible, short-term borrowing capacity that can be drawn, repaid, and redrawn as needed.

Which of the following best describes insider trading?

Answer: Buying or selling securities based on material non-public information

Insider trading involves buying or selling a security using material information that is not yet available to the general public, which is illegal under securities law.

In segment performance reporting, controllable margin is used to evaluate:

Answer: A manager's performance

Controllable margin reflects only revenues and costs a segment manager can influence.