CTP Financial Planning and Analysis 4 — Questions and Answers
Question 1: Which variance analysis framework separates total budget variance into price, efficiency, and volume components?
- DuPont analysis
- Three-way variance analysis (Correct answer)
- Horizontal analysis
- Common-size analysis
Correct answer: Three-way variance analysis
Three-way variance analysis decomposes total cost variance into price (rate), efficiency (usage), and volume (capacity) variances.
Question 2: A financial plan assumes 6% annual revenue growth. At what level of revenue growth would the company reach its break-even point two years earlier than planned?
- This requires sensitivity analysis on the growth rate assumption (Correct answer)
- Precisely 12% growth to compress two years into one
- Any growth above 6% automatically accelerates break-even
- Break-even timing is independent of revenue growth rate
Correct answer: This requires sensitivity analysis on the growth rate assumption
Sensitivity analysis is the proper tool to model which revenue growth rate achieves break-even two years ahead of the base plan.
Question 3: Which ratio measures a company's ability to service total debt obligations from operating earnings, commonly used in treasury covenant compliance?
- Current ratio
- Debt-to-equity ratio
- Debt service coverage ratio (DSCR) (Correct answer)
- Interest coverage ratio
Correct answer: Debt service coverage ratio (DSCR)
DSCR = EBITDA / (Principal + Interest payments) and measures whether operating earnings sufficiently cover all debt obligations.
Question 4: In activity-based costing (ABC) applied to financial planning, overhead costs are assigned based on:
- Direct labor hours consumed by each product
- Activities that drive resource consumption (Correct answer)
- A single plant-wide overhead rate
- Revenue generated by each product line
Correct answer: Activities that drive resource consumption
ABC traces overhead to cost objects by identifying the activities that cause costs and using activity drivers to allocate them more accurately.
Question 5: A treasury professional reviewing a 5-year financial forecast notices free cash flow is negative in years 1-2 but strongly positive in years 3-5. What risk does this pattern present?
- Currency translation risk
- Liquidity and funding risk during the early years (Correct answer)
- Repatriation risk from foreign subsidiaries
- Systematic market risk
Correct answer: Liquidity and funding risk during the early years
Negative early FCF means the company must fund operations through external financing until cash generation turns positive, creating liquidity and refinancing risk.
Question 6: When building a budget model, what is the purpose of a 'plug' or 'balancing item'?
- It forces the income statement to show a profit
- It adjusts one balance sheet account to ensure assets equal liabilities plus equity (Correct answer)
- It eliminates intercompany transactions in consolidation
- It converts accrual earnings to cash flows
Correct answer: It adjusts one balance sheet account to ensure assets equal liabilities plus equity
A plug (often cash or a revolver balance) mathematically balances the balance sheet so that assets always equal liabilities plus equity after all other items are projected.
Question 7: Which approach to capital allocation uses a company's weighted average cost of capital (WACC) as the minimum acceptable rate of return for new investments?
- Payback period method
- Hurdle rate approach (Correct answer)
- Zero-based resource allocation
- Residual income model
Correct answer: Hurdle rate approach
The hurdle rate approach requires new investments to exceed WACC, ensuring projects generate returns above the blended cost of funding.
CTP Financial Planning and Analysis 4
Which variance analysis framework separates total budget variance into price, efficiency, and volume components?