CTP Financial Planning and Analysis 3 — Questions and Answers
Question 1: A company reports EBITDA of $5M, interest expense of $1M, taxes of $0.5M, depreciation of $0.8M, and amortization of $0.2M. What is net income?
- $3.5M
- $3.0M
- $2.5M (Correct answer)
- $4.0M
Correct answer: $2.5M
Net income = EBITDA − D&A − Interest − Taxes = $5M − $1M − $0.5M − $1M = $2.5M.
Question 2: Which working capital metric best predicts near-term liquidity stress in financial planning models?
- Current ratio
- Days payable outstanding
- Cash conversion cycle (CCC) (Correct answer)
- Gross margin percentage
Correct answer: Cash conversion cycle (CCC)
The cash conversion cycle measures how long cash is tied up in operations (DIO + DSO − DPO), directly revealing liquidity pressure timing.
Question 3: A treasury team uses a top-down budgeting approach. What is the primary characteristic of this method?
- Department managers build budgets independently and submit upward
- Senior management sets overall targets that cascade down to operating units (Correct answer)
- Budgets are built from zero each period without reference to prior actuals
- Budgets are adjusted monthly based on actual performance
Correct answer: Senior management sets overall targets that cascade down to operating units
Top-down budgeting starts with executive-level targets and constraints that are then distributed to lower organizational levels.
Question 4: Which cost behavior pattern describes a cost that remains fixed within a relevant range but jumps to a higher level when activity exceeds that range?
- Variable cost
- Step-fixed cost (Correct answer)
- Mixed cost
- Sunk cost
Correct answer: Step-fixed cost
Step-fixed costs (also called step costs) are constant within a capacity range but increase in discrete jumps when activity crosses a threshold.
Question 5: When comparing two mutually exclusive projects with different lives using NPV, which adjustment is most appropriate?
- Add the NPVs of both projects together
- Use the equivalent annual annuity (EAA) method (Correct answer)
- Select the project with more years regardless of NPV
- Discount both projects to the shorter project's end date
Correct answer: Use the equivalent annual annuity (EAA) method
The equivalent annual annuity converts NPV to an annual figure, enabling fair comparison of projects with unequal lifespans.
Question 6: In an integrated financial model, which statement drives changes in the balance sheet's cash position?
- Income statement net income
- Statement of cash flows ending cash balance (Correct answer)
- Balance sheet retained earnings
- Notes payable schedule
Correct answer: Statement of cash flows ending cash balance
The cash flow statement reconciles operating, investing, and financing activities to produce the ending cash balance that plugs into the balance sheet.
Question 7: A company has operating leverage of 3.0. If revenue increases by 10%, by approximately how much will operating income increase?
- 3.3%
- 10%
- 30% (Correct answer)
- 13%
Correct answer: 30%
Operating leverage multiplies the percentage change in revenue: 3.0 × 10% = 30% increase in operating income.
CTP Financial Planning and Analysis 3
A company reports EBITDA of $5M, interest expense of $1M, taxes of $0.5M, depreciation of $0.8M, and amortization of $0.2M.
What is net income?