Financial Analysis & Decision Making Flashcards
7 cards from real CSM 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 Analysis & Decision Making flashcards as text
The concept of 'agency cost' in corporate finance refers to:
Answer: Costs arising from conflicts of interest between managers and shareholders
Agency costs arise when managers (agents) act in their own interests rather than shareholders' (principals'), including monitoring costs and residual losses.
A company with a P/E ratio of 25x operates in an industry where peers average 15x. This most likely suggests the market expects:
Answer: Higher future earnings growth relative to peers
A premium P/E ratio relative to peers typically reflects market expectations of superior earnings growth or competitive advantages.
In a leveraged buyout (LBO), the primary source of equity returns for the financial sponsor is:
Answer: Debt pay-down, operational improvement, and multiple expansion
LBO returns are driven by paying down acquisition debt (de-leveraging), improving EBITDA margins, and potentially selling at a higher multiple than the entry multiple.
A strategic manager identifies that a division's ROIC (8%) is below WACC (11%). The most value-enhancing strategic response is to:
Answer: Restructure or divest the division to redeploy capital
When ROIC < WACC, the division is destroying value; growing it accelerates value destruction, so restructuring or divesting is the correct capital allocation decision.
Which method is most appropriate for valuing a private company when no comparable public companies exist and cash flows are unpredictable?
Answer: Asset-based valuation (adjusted book value)
When cash flows are unreliable and no comparables exist, asset-based valuation anchors value to the fair market value of underlying assets minus liabilities.
Contribution margin per unit is calculated as:
Answer: Selling price minus variable cost per unit
Contribution margin per unit = Selling Price − Variable Cost per Unit; it measures how much each unit contributes toward covering fixed costs and profit.
A strategic manager evaluating a foreign investment must consider 'translation risk.' This risk refers to:
Answer: The impact of exchange rate changes on consolidated financial statements
Translation (accounting) risk arises when foreign subsidiaries' financial statements are converted to the parent's reporting currency, causing gains or losses due to exchange rate movements.