CS CS Financial Strategy & Resource Allocation 1 — Questions and Answers
Question 1: Which financial metric best measures a strategy's ability to create shareholder value above its cost of capital?
- Economic Value Added (EVA) (Correct answer)
- Gross profit margin
- Accounts receivable turnover
- Current ratio
Correct answer: Economic Value Added (EVA)
EVA measures net operating profit after taxes minus the capital charge, indicating true economic profit beyond the cost of capital.
Question 2: A certified strategist reviewing capital allocation should prioritize projects based on which primary criterion?
- Project size
- Risk-adjusted return on investment (Correct answer)
- Employee headcount impact
- Geographic location
Correct answer: Risk-adjusted return on investment
Risk-adjusted ROI accounts for both expected returns and the probability of achieving them, enabling sound capital allocation decisions.
Question 3: What does a company's Weighted Average Cost of Capital (WACC) represent in strategic financial planning?
- The average salary of capital staff
- The minimum return required to satisfy all capital providers (Correct answer)
- Total debt divided by total equity
- Annual depreciation of fixed assets
Correct answer: The minimum return required to satisfy all capital providers
WACC is the blended rate a company must earn on its investments to satisfy both debt holders and equity shareholders.
Question 4: In zero-based budgeting, departments must justify every expense from which starting point?
- Last year's approved budget
- Industry average spend
- Zero, regardless of prior budgets (Correct answer)
- Executive-set targets
Correct answer: Zero, regardless of prior budgets
Zero-based budgeting requires every line item to be justified anew each cycle rather than incremented from a prior baseline.
Question 5: Which ratio most directly signals whether a firm can fund its strategic initiatives from internal cash flow?
- Debt-to-equity ratio
- Free cash flow to revenue ratio (Correct answer)
- Price-to-earnings ratio
- Quick ratio
Correct answer: Free cash flow to revenue ratio
Free cash flow to revenue shows the proportion of sales converted to discretionary cash available for strategic reinvestment.
Question 6: A strategist uses sensitivity analysis in financial planning primarily to:
- Set employee performance targets
- Understand how changes in key assumptions affect outcomes (Correct answer)
- Calculate tax liabilities
- Determine inventory reorder points
Correct answer: Understand how changes in key assumptions affect outcomes
Sensitivity analysis tests how variations in critical variables such as price or volume affect projected financial results, informing contingency planning.
CS CS Financial Strategy & Resource Allocation 1
Which financial metric best measures a strategy's ability to create shareholder value above its cost of capital?