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CHFP practice questions

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Question 1Business acumen

A financial planner is reviewing how a bank evaluates a small business loan application. Which document is the primary source for assessing the borrower's operating, investing, and financing cash flows over the past three years?

  1. The statement of cash flows Correct answer.
  2. The balance sheet
  3. The loan amortization schedule
  4. The sales forecast

Explanation

The statement of cash flows classifies receipts and payments into operating, investing, and financing activities, which is exactly the three-year cash flow history a lender needs. The balance sheet shows a point-in-time position, while forecasts and amortization schedules are forward-looking tools.

Question 2Business acumen

A client's business earns revenue of 2,000,000 and has variable costs equal to 60% of revenue. Fixed costs total 500,000. What is the degree of operating leverage at this sales level?

  1. 1.25
  2. 1.67 Correct answer.
  3. 2.50
  4. 4.00

Explanation

Contribution margin is 2,000,000 × (1 − 0.60) = 800,000, and operating income is 800,000 − 500,000 = 300,000. Degree of operating leverage equals contribution margin divided by operating income, or 800,000 / 300,000 ≈ 1.67.

Question 3Business acumen

Under a defined-contribution retirement plan, which risk is borne primarily by the plan participant rather than the employer?

  1. Compliance risk under ERISA reporting rules
  2. Risk of fiduciary breach in plan administration
  3. Risk that payroll deductions are remitted late
  4. Investment return risk during accumulation Correct answer.

Explanation

In a defined-contribution plan the benefit depends on contributions plus investment performance, so the participant bears investment return risk. Compliance, fiduciary, and remittance risks remain with the plan sponsor or administrator.

Question 4Business acumen

An individual has gross income of 120,000, adjustments to income of 10,000, the standard deduction of 14,600, and no itemized deductions or credits. What is taxable income?

  1. 105,400
  2. 110,000
  3. 95,400 Correct answer.
  4. 120,000

Explanation

Taxable income equals gross income minus adjustments, yielding adjusted gross income of 110,000, then minus the standard deduction of 14,600, giving 95,400. Credits reduce tax liability rather than taxable income.

Question 5Business acumen

A client holds a bond with a modified duration of 6 and a convexity of 40. If yields fall by 100 basis points, which estimate of the percentage price change is most accurate?

  1. About +6.0%
  2. About +5.8%
  3. About +2.0%
  4. About +6.2% Correct answer.

Explanation

Duration alone predicts +6.0% for a 1% yield decline, and the convexity adjustment adds 0.5 × 40 × (0.01)² = 0.002, or 0.2%. The combined estimate is therefore about +6.2%.

Question 6Business acumen

A company's current ratio is 2.0 and its quick ratio is 0.9. Which condition best explains the wide gap between the two ratios?

  1. Cash balances exceed current liabilities
  2. Accounts payable are unusually large
  3. The firm carries substantial long-term debt
  4. Inventory represents a large share of current assets Correct answer.

Explanation

The quick ratio removes inventory from current assets, so a large inventory position depresses the quick ratio relative to the current ratio. Long-term debt and payables levels do not create this specific gap.

Question 7Business acumen

Which action by a financial planner is most consistent with the fiduciary duty of loyalty when the planner's compensation varies by product?

  1. Selecting products only from a single carrier to simplify administration
  2. Disclosing the compensation conflict and documenting why the recommendation serves the client Correct answer.
  3. Deferring all product selection to the client without advice
  4. Recommending the product with the highest commission to maximize service quality

Explanation

Loyalty requires the planner to place client interests first and to disclose and manage conflicts of interest. Recommending based on compensation or restricting choice for administrative convenience subordinates client interests.

Question 8Business acumen

A firm has annual credit sales of 3,650,000 and an average accounts receivable balance of 500,000. Using a 365-day year, what is the average collection period?

  1. 73 days
  2. 50 days Correct answer.
  3. 120 days
  4. 30 days

Explanation

Receivables turnover is 3,650,000 / 500,000 = 7.3 times per year. The average collection period is 365 / 7.3 = 50 days.

Question 9Business acumen

An investor buys a stock at 50 and sells it one year later at 57 after receiving a 2 dividend. What is the total holding period return?

  1. 14%
  2. 16%
  3. 20%
  4. 18% Correct answer.

Explanation

Total return combines the 7 capital gain and the 2 dividend for 9, divided by the 50 initial price, giving 18%. Ignoring the dividend understates the return.

Question 10Business acumen

A retiree needs 60,000 per year, received at the start of each year, for 20 years. Assuming a 5% discount rate, which annuity type should be used to value this stream?

  1. A growing annuity
  2. A perpetuity
  3. An annuity due Correct answer.
  4. An ordinary annuity due

Explanation

Payments received at the beginning of each period define an annuity due, which equals an ordinary annuity multiplied by (1 + r). A perpetuity has no fixed term and a growing annuity involves changing payment amounts.

Question 11Business acumen

A portfolio is 60% invested in an asset with expected return 10% and 40% in an asset with expected return 4%. What is the portfolio's expected return?

  1. 6.4%
  2. 7.0%
  3. 7.6% Correct answer.
  4. 8.0%

Explanation

Portfolio expected return is the weighted average: 0.60 × 10% + 0.40 × 4% = 6.0% + 1.6% = 7.6%. Correlation affects risk, not the expected return of a weighted portfolio.

Question 12Business acumen

A small business owner wants to protect the firm's ability to continue if the owner dies suddenly. Which arrangement most directly funds a buyout of the owner's interest by the remaining owners?

  1. A group term life plan covering all employees
  2. A personal disability income policy on the owner
  3. A buy-sell agreement funded by life insurance on each owner Correct answer.
  4. A key person life insurance policy owned by the business

Explanation

A funded buy-sell agreement obligates surviving owners to purchase a deceased owner's interest and uses life insurance proceeds to provide the cash. Key person coverage compensates the business for lost value rather than transferring ownership.

Question 13Business acumen

Which of the following best describes the role of a business's balance sheet in financial planning for an owner?

  1. It projects future cash receipts and disbursements
  2. It records only tax-deductible expenses
  3. It shows the owner's equity position and liquidity at a point in time Correct answer.
  4. It measures profitability over the accounting period

Explanation

The balance sheet presents assets, liabilities, and equity as of a specific date, revealing liquidity and the owner's residual equity. Profitability over time is captured by the income statement, and cash projections belong to a cash budget.

Question 14Business acumen

An insured has a homeowners policy with a 1,000 deductible and a claim of 12,000 for covered damage. Ignoring any coinsurance or policy limits, what does the insurer pay?

  1. 11,000 Correct answer.
  2. 13,000
  3. 12,000
  4. 10,000

Explanation

The deductible is subtracted from the covered loss, so the insurer pays 12,000 − 1,000 = 11,000. The deductible is the insured's retained share of the loss.

Question 15Business acumen

A company reports net income of 500,000, depreciation of 80,000, an increase in accounts receivable of 30,000, and an increase in accounts payable of 20,000. What is cash flow from operations under the indirect method?

  1. 530,000
  2. 570,000 Correct answer.
  3. 490,000
  4. 630,000

Explanation

Start with net income 500,000, add back non-cash depreciation 80,000, subtract the receivables increase 30,000, and add the payables increase 20,000, giving 570,000. Increases in current assets use cash while increases in current liabilities provide cash.

Question 16Business acumen

A client is in the 24% marginal tax bracket and holds a municipal bond yielding 3.5%. What taxable yield would produce the same after-tax return?

  1. 4.86%
  2. 5.12%
  3. 4.34%
  4. 4.61% Correct answer.

Explanation

The equivalent taxable yield equals the tax-exempt yield divided by (1 − marginal rate), or 3.5% / 0.76 ≈ 4.61%. Municipal interest is generally exempt from federal tax, so a taxable bond must beat this yield to be preferable.

Question 17Business acumen

Which financial ratio best helps a lender judge whether a business can cover its interest payments from operating earnings?

  1. The debt-to-equity ratio
  2. The inventory turnover ratio
  3. The dividend payout ratio
  4. The times interest earned ratio Correct answer.

Explanation

Times interest earned divides earnings before interest and taxes by interest expense, directly measuring the cushion available to service interest. Debt-to-equity shows leverage but not the earnings coverage of interest.

Question 18Business acumen

A business owner wants to reduce exposure to a single customer that represents 40% of revenue. Which action is the most direct business risk management response?

  1. Purchase additional property insurance on the plant
  2. Extend longer payment terms to the large customer
  3. Diversify the customer base by developing new accounts Correct answer.
  4. Increase the line of credit at the bank

Explanation

Concentration risk from one dominant customer is addressed by broadening the revenue base so no single account can impair the business. Insurance, credit lines, and payment terms address different risks such as property loss, liquidity, and receivables.

Question 19Business acumen

A company issues a 1,000 par bond with a 6% annual coupon when market rates for similar bonds are 7%. The bond will most likely trade at which price?

  1. A premium above par
  2. Exactly par
  3. A price determined only by its maturity date
  4. A discount below par Correct answer.

Explanation

When the coupon rate is below the prevailing market yield, investors pay less than par so the bond's yield matches the market. A premium arises when the coupon exceeds market rates.

Question 20Business acumen

A client with 200,000 of investable assets wants a portfolio with an expected return of 8%. Asset A has an expected return of 6% and asset B of 11%. Ignoring risk, what weight in asset B is required?

  1. 50%
  2. 40% Correct answer.
  3. 20%
  4. 30%

Explanation

Solve 0.06(1 − w) + 0.11w = 0.08, which simplifies to 0.06 + 0.05w = 0.08, so w = 0.40. The remaining 60% goes to asset A.

Question 21Business acumen

Which statement accurately describes the difference between a traditional deductible IRA and a Roth IRA for a taxpayer who qualifies for both?

  1. Roth contributions are always deductible, while traditional withdrawals are tax-free
  2. Traditional contributions may be deductible now, while Roth qualified withdrawals are tax-free Correct answer.
  3. Traditional IRAs have no contribution limits while Roth IRAs do
  4. Both plans require minimum distributions beginning at age 59½

Explanation

Traditional IRA contributions may be deductible and withdrawals are taxed as ordinary income, whereas Roth contributions are made with after-tax dollars and qualified withdrawals are tax-free. Both types share annual contribution limits.

Question 22Business acumen

A firm's gross profit margin is 40% and its net profit margin is 8%. Which factor most likely explains the difference?

  1. A high inventory turnover rate
  2. A large cash balance relative to sales
  3. Rapid growth in accounts receivable
  4. High operating expenses and interest costs Correct answer.

Explanation

Gross margin reflects revenue after cost of goods sold, while net margin deducts operating expenses, interest, and taxes. The 32-point gap therefore points to substantial operating and financing costs.

Question 23Business acumen

A client asks how inflation affects a fixed-rate mortgage held by the borrower. Which statement is most accurate?

  1. Inflation reduces the real burden of fixed nominal payments over time Correct answer.
  2. Inflation increases the nominal interest rate on the existing loan
  3. Inflation raises the real value of the outstanding principal
  4. Inflation has no effect on the borrower's real cost

Explanation

With a fixed nominal payment stream, higher inflation lowers the present value of those payments in real terms, benefiting the borrower. The contract rate is fixed and does not reset with inflation.

Question 24Business acumen

A business is evaluating a project costing 100,000 that generates annual after-tax cash inflows of 30,000 for five years. At a 10% discount rate, the annuity factor for five years is 3.791. What is the net present value?

  1. 13,730 Correct answer.
  2. 50,000
  3. 30,000
  4. 113,730

Explanation

The present value of inflows is 30,000 × 3.791 = 113,730, and subtracting the 100,000 outlay gives an NPV of 13,730. A positive NPV indicates the project earns more than the 10% required return.

Question 25Business acumen

An employer offers a 401(k) with a 50% match on employee deferrals up to 6% of salary. An employee earning 80,000 defers 4% of salary. What is the employer contribution?

  1. 3,200
  2. 2,400
  3. 4,800
  4. 1,600 Correct answer.

Explanation

The employee defers 4% of 80,000, or 3,200, which is within the 6% match ceiling. The employer matches 50% of that 3,200, contributing 1,600.

Question 26Business acumen

A financial planner is building a business plan for a new advisory practice. Which of the following best describes the purpose of a break-even analysis in this context?

  1. To determine the minimum revenue needed to cover total fixed and variable costs Correct answer.
  2. To calculate the tax liability on projected net income
  3. To project the maximum possible profit under optimistic assumptions
  4. To estimate the market share required to outperform competitors

Explanation

Break-even analysis identifies the sales volume or revenue level at which total revenues equal total costs, meaning profit is zero. It helps a planner understand the minimum performance needed to avoid losses and assess the feasibility of the business model.

Question 27Business acumen

A company has total fixed costs of 120,000, a selling price per unit of 50, and variable cost per unit of 30. What is the break-even point in units?

  1. 6,000 units Correct answer.
  2. 2,400 units
  3. 4,000 units
  4. 1,500 units

Explanation

The break-even point in units equals fixed costs divided by the contribution margin per unit (selling price minus variable cost). Here, contribution margin is 50 - 30 = 20, so 120,000 / 20 = 6,000 units.

Question 28Business acumen

Which of the following is an example of a business's fixed cost?

  1. Sales commissions paid to staff
  2. Shipping costs that vary with units sold
  3. Raw materials used in production
  4. Monthly rent for office space Correct answer.

Explanation

Fixed costs remain constant in total regardless of the level of output or sales within a relevant range. Monthly rent is a classic fixed cost because it does not change with production volume.

Question 29Business acumen

A financial planner is analyzing a client's business, which has a high degree of operating leverage. What does this imply about the business's risk profile?

  1. The business has low fixed costs relative to variable costs
  2. Variable costs constitute the majority of total costs
  3. Profits are relatively insensitive to changes in sales volume
  4. A small decline in sales can lead to a large decline in operating income Correct answer.

Explanation

High operating leverage means fixed costs are a large proportion of total costs, so operating income is very sensitive to sales changes. A small drop in sales can cause a disproportionately large drop in operating income.

Question 30Business acumen

Which of the following best describes the difference between a business's gross profit and net profit?

  1. Gross profit is revenue minus cost of goods sold, while net profit is revenue minus all expenses Correct answer.
  2. Gross profit is calculated after operating expenses, while net profit is calculated before operating expenses
  3. Gross profit includes taxes, while net profit excludes taxes
  4. Gross profit is only relevant for service businesses, while net profit applies to product businesses

Explanation

Gross profit is revenue minus the direct costs of producing goods or services (cost of goods sold). Net profit subtracts all operating expenses, interest, and taxes from revenue, representing the bottom-line profit.

Question 31Business acumen

A company's revenue increases from 500,000 to 550,000, and its operating income increases from 50,000 to 65,000. What is the degree of operating leverage (DOL) at the initial level?

  1. 1.5
  2. 3.0 Correct answer.
  3. 1.2
  4. 2.0

Explanation

DOL = percentage change in operating income / percentage change in sales. Operating income change = (65,000-50,000)/50,000 = 30%; sales change = (550,000-500,000)/500,000 = 10%; DOL = 30%/10% = 3.0.

Question 32Business acumen

Which of the following is a key component of a business's working capital management?

  1. Maximizing long-term debt to finance expansion
  2. Setting the dividend policy for shareholders
  3. Managing the trade-off between liquidity and profitability Correct answer.
  4. Determining the optimal capital structure

Explanation

Working capital management involves managing current assets and current liabilities to ensure sufficient liquidity while not sacrificing profitability. It focuses on the balance between liquidity and profitability.

Question 33Business acumen

A business has current assets of 200,000 and current liabilities of 100,000. If it uses 50,000 of cash to pay off short-term debt, what is the new current ratio?

  1. 2.0
  2. 1.5
  3. 1.0
  4. 3.0 Correct answer.

Explanation

Current ratio = current assets / current liabilities. After using cash, current assets = 200,000 - 50,000 = 150,000; current liabilities = 100,000 - 50,000 = 50,000; new ratio = 150,000/50,000 = 3.0.

Question 34Business acumen

Which of the following best describes the role of a cash budget in business planning?

  1. To calculate depreciation expense for financial reporting
  2. To project future cash inflows and outflows to ensure adequate liquidity Correct answer.
  3. To evaluate the profitability of a new product line
  4. To determine the company's tax liability

Explanation

A cash budget forecasts cash receipts and disbursements over a period, helping a business anticipate cash shortages or surpluses and manage liquidity. It is a key tool for short-term financial planning.

Question 35Business acumen

A company has annual credit sales of 1,200,000 and an average accounts receivable balance of 200,000. Using a 365-day year, what is the average collection period (days sales outstanding)?

  1. 120 days
  2. 30 days
  3. 90 days
  4. 60 days Correct answer.

Explanation

Average collection period = (Accounts receivable / Credit sales) × 365. Here, (200,000/1,200,000)×365 = 60.8 days, approximately 61 days, so 60 days is the closest option.

Question 36Business acumen

Which of the following is a primary reason a business might hold excess cash balances?

  1. To meet unexpected expenses or emergencies Correct answer.
  2. To reduce the need for trade credit
  3. To maximize returns on investment
  4. To increase the company's tax liability

Explanation

Businesses hold cash for transactional, precautionary, and speculative motives. A key precautionary motive is to have funds available for unexpected expenses or emergencies.

Question 37Business acumen

A financial planner is evaluating a client's business, which has a high inventory turnover ratio compared to industry peers. What does this most likely indicate?

  1. The business is efficient at managing inventory and selling goods quickly Correct answer.
  2. The business is offering generous credit terms to customers
  3. The business is holding excess inventory
  4. The business has weak sales and is accumulating inventory

Explanation

A high inventory turnover ratio means the company sells and replenishes inventory frequently, indicating efficient inventory management. It suggests goods are moving quickly and not sitting idle.

Question 38Business acumen

Which of the following best defines the concept of 'time value of money' in business finance?

  1. Money loses value over time due to inflation
  2. A dollar received today is worth more than a dollar received in the future Correct answer.
  3. The longer you hold an investment, the lower the risk
  4. Future cash flows are always more valuable than present cash flows

Explanation

The time value of money principle states that a dollar available today can be invested to earn a return, making it worth more than the same dollar received in the future. This underlies present value and future value calculations.

Question 39Business acumen

A client is considering an investment that will pay 10,000 in five years. Assuming an annual discount rate of 6%, what is the present value of this future cash flow? (Round to the nearest dollar.)

  1. 13,382
  2. 10,000
  3. 5,000
  4. 7,473 Correct answer.

Explanation

Present value = Future value / (1 + r)^n. Here, 10,000 / (1.06)^5 = 10,000 / 1.3382 ≈ 7,473.

Question 40Business acumen

A company is evaluating two mutually exclusive projects. Project A has a net present value (NPV) of 50,000 and an internal rate of return (IRR) of 12%. Project B has an NPV of 60,000 and an IRR of 10%. The company's cost of capital is 8%. Which project should the company choose and why?

  1. Project A, because it has a higher IRR
  2. Project A, because it has a lower IRR
  3. Project B, because it has a higher NPV Correct answer.
  4. Project B, because it has a lower IRR

Explanation

When choosing between mutually exclusive projects, the NPV method is preferred because it directly measures the increase in shareholder wealth. Project B has the higher NPV, so it should be selected even though its IRR is lower.

Question 41Business acumen

Which of the following is a disadvantage of using the payback period method for capital budgeting?

  1. It considers all cash flows over the project's life
  2. It always leads to the same decision as NPV
  3. It ignores the time value of money Correct answer.
  4. It is difficult to calculate

Explanation

The payback period method simply measures how long it takes to recover the initial investment and ignores the time value of money. It also ignores cash flows after the payback period.

Question 42Business acumen

A firm has a debt-to-equity ratio of 0.5. What is the firm's debt-to-assets ratio?

  1. 0.33 Correct answer.
  2. 1.00
  3. 0.67
  4. 0.50

Explanation

Debt-to-assets = Debt / (Debt + Equity). With debt-to-equity of 0.5, let equity = 1, debt = 0.5, so debt-to-assets = 0.5 / 1.5 = 0.33.

Question 43Business acumen

Which of the following statements about financial leverage is most accurate?

  1. It always decreases the volatility of earnings per share
  2. It increases financial risk but can magnify returns to shareholders Correct answer.
  3. It reduces financial risk by lowering fixed costs
  4. It is irrelevant to a company's cost of capital

Explanation

Financial leverage refers to the use of debt financing. While it can amplify returns to shareholders when the return on assets exceeds the cost of debt, it also increases financial risk due to fixed interest obligations.

Question 44Business acumen

A company has a return on equity (ROE) of 15%, a profit margin of 5%, and an equity multiplier of 2.0. What is its total asset turnover?

  1. 2.0
  2. 1.5 Correct answer.
  3. 0.75
  4. 3.0

Explanation

Using the DuPont formula: ROE = Profit margin × Total asset turnover × Equity multiplier. So 15% = 5% × Total asset turnover × 2.0, which gives Total asset turnover = 15% / (5% × 2.0) = 1.5.

Question 45Business acumen

Which of the following best describes the sustainable growth rate (SGR) of a firm?

  1. The maximum rate of growth a firm can achieve without issuing new equity Correct answer.
  2. The growth rate of the overall economy
  3. The minimum growth rate required to satisfy shareholders
  4. The rate at which a firm's dividends grow over time

Explanation

The sustainable growth rate is the maximum rate at which a company can grow its sales, earnings, and assets without having to raise additional equity or increase financial leverage. It is calculated as ROE multiplied by the retention ratio.

Question 46Business acumen

A firm has a net income of 200,000, a dividend payout ratio of 40%, and total equity of 1,000,000. What is its sustainable growth rate?

  1. 8%
  2. 20%
  3. 12% Correct answer.
  4. 6%

Explanation

SGR = ROE × Retention ratio. ROE = 200,000 / 1,000,000 = 20%. Retention ratio = 1 - 0.40 = 0.60. SGR = 20% × 0.60 = 12%.

Question 47Business acumen

Which of the following is a key consideration when a business decides to extend credit to its customers?

  1. The company's dividend policy
  2. The effect on the company's tax rate
  3. The potential increase in sales versus the risk of bad debts Correct answer.
  4. The impact on the company's inventory turnover

Explanation

Extending credit can boost sales but also increases the risk of non-payment (bad debts). A business must weigh the expected benefits against the costs of carrying receivables and potential defaults.

Question 48Business acumen

A company's bonds are currently rated BBB. Which of the following is most likely to occur if the company's credit rating is downgraded to BB?

  1. The bonds will become more attractive to conservative investors
  2. The bonds will be considered investment grade
  3. The cost of borrowing will increase Correct answer.
  4. The cost of borrowing will decrease

Explanation

A downgrade from BBB (investment grade) to BB (below investment grade or 'junk') signals higher default risk. Investors will demand a higher yield to compensate for the increased risk, raising the company's borrowing costs.

Question 49Business acumen

A financial planner is advising a client who owns a small manufacturing business. The client wants to improve the business's cash conversion cycle. Which of the following actions would most likely achieve this?

  1. Reducing the accounts receivable collection period Correct answer.
  2. Increasing inventory levels to avoid stockouts
  3. Negotiating longer payment terms with suppliers
  4. Extending credit terms to customers

Explanation

The cash conversion cycle measures the time between paying for inventory and receiving cash from sales. Shortening the receivables collection period reduces the cycle by speeding up cash inflows.

Question 50Business acumen

Which of the following best describes the concept of 'just-in-time' (JIT) inventory management?

  1. Ordering inventory only as needed in the production process Correct answer.
  2. Maximizing inventory turnover by stocking up during discounts
  3. Using a periodic inventory system rather than perpetual
  4. Maintaining large inventory buffers to meet unexpected demand

Explanation

JIT is an inventory strategy where materials and goods are ordered and received just as they are needed in the production process, minimizing inventory holding costs and waste.