CSM Financial Analysis & Decision Making 3

Question 1

In a make-or-buy decision, which costs are most relevant to the analysis?

Accepted Answer

Incremental (differential) costs and opportunity costs

Answer

Only incremental costs that differ between alternatives and opportunity costs of foregone options are relevant to make-or-buy decisions.

Question 2

A project has an IRR of 14% and the company's WACC is 11%. The strategic manager should:

Accepted Answer

Accept the project because IRR exceeds WACC

Answer

When IRR exceeds WACC (the hurdle rate), the project generates returns above its cost of capital and should be accepted.

Question 3

Which financial statement best reveals whether a profitable company is generating or consuming cash?

Accepted Answer

Statement of Cash Flows

Answer

A company can show accounting profit yet burn cash due to working capital changes; the cash flow statement reveals actual cash generation.

Question 4

Economic Value Added (EVA) is best defined as:

Accepted Answer

NOPAT minus the dollar cost of all capital employed

Answer

EVA = NOPAT − (WACC × Invested Capital); it measures the economic profit after accounting for the full cost of capital.

Question 5

A company's operating leverage is high when:

Accepted Answer

Fixed costs represent the majority of total costs

Answer

High fixed costs relative to variable costs create high operating leverage, amplifying the impact of revenue changes on operating income.

(CSM) Certified Strategic Manager Practice Test