Certified Financial Management Specialist C.
Capital Structure
(CFMS) Reviewer
Investor-Supplied Funds: Includes debt,
1. Capital Markets preferred stock, common stock, and
retained earnings.
A. Stock Markets
Optimal Capital Structure: The mix of
Types of Markets:
financing that minimizes the weighted
o Physical Location Exchanges: average cost of capital (WACC) and
Organized, auction-based maximizes intrinsic stock value.
markets where traders meet to
2. Behavioral Finance
exchange securities (e.g., NYSE).
A. Psychological Biases Affecting Investment
o Over-the-Counter (OTC)
Decisions
Markets: Decentralized
networks of brokers and dealers Herd Behavior: Investors follow the
trading securities electronically crowd, leading to bubbles and crashes.
(e.g., NASDAQ).
Anchoring: Attaching
o Dealer Markets: Securities are spending/investing decisions to
bought/sold through dealers irrelevant reference points.
who hold inventory and act as
Mental Accounting: Treating money
market makers.
differently based on subjective
B. Equity Valuation categories.
Methods of Equity Valuation: Emotional Gap: Decisions driven by
emotions like fear or excitement rather
o Comparables Approach:
than logic.
Compares a company’s
valuation to peers. Self-Attribution Bias: Overconfidence in
personal investment knowledge.
o Discounted Cash Flow (DCF):
Values a company based on the B. Behavioral Finance & Investment Strategy
present value of future cash
Market Timing Challenges:
flows.
o Difficult to predict market
o Precedent Transactions: Uses
movements accurately.
past mergers & acquisitions
data to estimate value. o Contradictory information
makes precise timing unlikely.
o Asset-Based Valuation:
Calculates net asset value by C. Behavioral Finance & Capital Markets
subtracting liabilities from total
Efficient Market Hypothesis (EMH):
assets.
Assumes all available information is
o Book-Value Approach: Based on reflected in stock prices.
historical acquisition costs, best
for stable businesses.
Challenges to EMH: Market anomalies, E. Yield Curve
behavioral biases, and irrational
Normal Yield Curve: Upward-sloping,
investor decisions cause inefficiencies.
long-term rates higher than short-term
3. Interest Rates rates.
A. Determinants of Market Interest Rates Inverted Yield Curve: Downward-
sloping, signals potential recession.
*Real Risk-Free Rate (R)**: The return
required in an inflation-free economy. Humped Yield Curve: Intermediate-
term rates higher than both short- and
Inflation Premium (IP): Compensation
long-term rates.
for expected inflation.
F. Inflation & Interest Rates
Default Risk Premium (DRP): Additional
return demanded for credit risk. Rising Interest Rates:
Liquidity Premium (LP): Compensation o Reduces inflation.
for assets that are difficult to sell.
o Lowers stock market
Maturity Risk Premium (MRP): Risk of performance.
fluctuating interest rates over time.
Falling Interest Rates:
B. Interest Rate Risk
o Stimulates economic growth.
Types of Interest Rate Risk:
o Increases consumer spending.
o Reinvestment Risk: Declining
4. Income and Business Taxation
interest rates lead to lower
returns on reinvested funds. A. Corporate Taxation
o Maturity Risk: Long-term Tax on Net Income: Revenue minus
securities are more sensitive to expenses.
interest rate changes.
Corporate Tax Rate: 21% (US federal) +
C. Interest Rate Derivatives state taxes.
Used to Hedge Risks: Interest rate Deductions: Employee salaries,
swaps, futures, and options help benefits, business expenses,
manage exposure to interest rate investments.
fluctuations.
B. Individual Taxation
D. Monetary Policy
Progressive Tax System: Higher incomes
Expansionary Policy: Reduces interest pay higher tax rates.
rates, increases money supply to
stimulate economic growth. Tax Planning Strategies:
Contractionary Policy: Increases o Contributing to retirement
interest rates, slows money supply to accounts.
control inflation. o Using deductions & credits.
o Investing in tax-exempt Types of Models: Discounted cash flow
securities. (DCF), comparable company analysis,
and LBO models.
C. Tax Planning & Optimization
E. Financial Reporting & Compliance
Tax-Efficient Investing: Long-term
capital gains tax rates are lower than Regulatory Standards: SEC, IRS, GAAP,
short-term. IFRS.
Tax Gain-Loss Harvesting: Offsetting Key Objectives: Transparency, tax
capital gains with losses. compliance, investor decision-making.
5. Financial Analysis & Reporting 6. Banking & Financial Institutions
A. Financial Statements A. Banking Regulation
Balance Sheet: Assets, liabilities, and Purpose: Consumer protection,
shareholders’ equity. financial stability, fraud prevention.
Income Statement: Revenues, Regulatory Agencies:
expenses, and net profit/loss.
o US: FDIC, Federal Reserve, OCC.
Cash Flow Statement: Operating,
o UK: Prudential Regulation
investing, and financing cash flows.
Authority, FCA.
B. Ratio Analysis
B. Risk Management in Banks
Liquidity Ratios: Measures short-term
Types of Risks:
solvency (e.g., current ratio, quick ratio).
o Credit Risk: Risk of loan
Profitability Ratios: Measures earnings
defaults.
efficiency (e.g., net profit margin, ROE).
o Market Risk: Losses due to
Debt Management Ratios: Evaluates
market fluctuations.
leverage and risk (e.g., debt-to-equity).
o Operational Risk: Errors, fraud,
Market Value Ratios: Shows investor
or system failures.
perception (e.g., P/E ratio, dividend
yield). o Liquidity Risk: Insufficient funds
C. Cash Flow Analysis to meet obligations.
Free Cash Flow (FCF): Net operating o Reputational Risk: Public
cash flow minus capital expenditures. perception damage.
Operating Cash Flow Margin: Compares Risk Management Strategies:
cash flow to sales revenue. o Regulatory compliance (Basel
D. Financial Modeling III).
Used For: Business valuation, o Capital adequacy and stress
forecasting, investment decisions. testing.
C. Financial Institutions & Markets 4. Which bias occurs when investors prefer
to invest in familiar companies rather
Types of Financial Institutions:
than diversifying?
o Commercial banks, investment a) Herd Behavior
banks, credit unions, insurance b) Mental Accounting
firms. c) Familiarity Bias
d) Self-Attribution
Financial Markets:
5. Loss aversion refers to:
o Stock Market: Companies raise a) Placing more weight on potential
equity capital. gains than losses
o Bond Market: Debt securities b) Avoiding risky investments at all costs
for corporations/governments. c) Placing greater importance on
avoiding losses than making gains
o Money Market: Short-term d) Preferring long-term investments
liquid investments. over short-term investments
Certified Financial Management Specialist 6. What does the Efficient Market
(CFMS) Quiz Hypothesis (EMH) suggest about stock
prices?
Capital Markets
a) They are always undervalued
1. What is the primary goal of financial b) They reflect all available information
managers in relation to stock prices? c) They are unpredictable and random
a) Minimize stock volatility d) They are determined by government
b) Maximize stock prices policies
c) Reduce company expenses
d) Increase debt levels
Interest Rates
2. Which of the following is NOT a method
of equity valuation? 7. What is the Real Risk-Free Rate of
a) Discounted Cash Flow Interest?
b) Precedent Transactions a) Rate on a security free of all risk
c) Asset-Based Valuation including inflation
d) Inventory Turnover b) Rate on a government bond with zero
yield
3. The optimal capital structure is the mix
c) Rate before considering inflation,
of debt, preferred stock, and common
assuming no risk
equity that:
d) Rate at which banks lend to each
a) Maximizes stock's intrinsic value
other
b) Minimizes net income
c) Eliminates all liabilities 8. An inverted yield curve suggests:
d) Focuses only on common stock a) Long-term interest rates are higher
than short-term rates
b) Interest rates are equal for all
Behavioral Finance maturities
c) Short-term interest rates are higher
than long-term rates c) Quick Ratio
d) Inflation is decreasing d) Earnings per Share
9. What is the primary goal of monetary Certified Financial Management Specialist
policy? (CFMS) - Hard Quiz
a) Increase government spending
Capital Markets
b) Control inflation and economic
stability 1. Which of the following is a key
c) Decrease bank reserves distinction between a dealer market
d) Reduce capital investments and a physical location stock exchange?
a) A dealer market operates as an
auction system, while physical
Income and Business Taxation exchanges rely on direct negotiations.
b) A dealer market consists of
10. What is a corporate tax?
individuals who hold inventories,
a) A tax on an individual’s wages and
whereas physical exchanges have a
salaries
centralized trading floor.
b) A tax levied on a corporation’s profits
c) Dealer markets are more regulated
c) A tax on dividends paid to
than physical exchanges.
shareholders
d) Physical exchanges rely exclusively on
d) A tax imposed on company
algorithmic trading, while dealer
employees
markets use manual order execution.
11. Tax planning aims to:
2. Which valuation method is most
a) Evade taxes using loopholes
suitable for a company with minimal
b) Maximize tax liability
growth and a recent acquisition
c) Minimize tax liability legally
history?
d) Eliminate the need to file tax returns
a) Discounted Cash Flow
b) Precedent Transactions
c) Book-Value Approach
Financial Analysis and Reporting d) Comparables Approach
12. The income statement provides 3. The Weighted Average Cost of Capital
information about: (WACC) is minimized when:
a) A company’s assets and liabilities a) The firm's capital structure is
b) Cash inflows and outflows composed entirely of debt.
c) Revenue, expenses, and net profit or b) The firm finds the optimal mix of
loss debt, preferred stock, and common
d) Shareholder equity equity.
13. Which ratio helps determine a c) The firm maximizes its dividend
company's ability to pay short-term payout ratio.
debts? d) The firm maintains an equal ratio of
a) Debt-to-Equity Ratio retained earnings and common stock
b) Return on Equity issuance.
Behavioral Finance 8. The Fisher Effect states that the
nominal interest rate is approximately
4. Which behavioral bias best explains
equal to:
why investors tend to hold onto losing
a) The real interest rate minus inflation.
investments for too long, hoping for a
b) The sum of the real interest rate and
turnaround?
expected inflation.
a) Self-attribution bias
c) The risk-free rate plus the default risk
b) Loss aversion
premium.
c) Anchoring bias
d) The long-term average bond yield.
d) Familiarity bias
9. Which of the following best describes
5. According to the Efficient Market
the reinvestment rate risk?
Hypothesis (EMH), which scenario
a) The risk of an investor being unable
would contradict the theory?
to reinvest cash flows at a comparable
a) A trader consistently earns above-
rate.
average returns by analyzing public
b) The possibility of capital losses due to
financial statements.
fluctuating interest rates.
b) An index fund manager achieves
c) The uncertainty surrounding a bond
returns equal to the market average.
issuer's ability to make payments.
c) A stock price quickly adjusts after
d) The impact of inflation on bond yield
new earnings information is released.
expectations.
d) A random walk pattern in stock prices
is observed. 10. Which monetary policy tool is the most
effective for controlling inflation in an
6. Which of the following is NOT a key
overheating economy?
assumption of behavioral finance?
a) Open Market Operations – Buying
a) Investors consistently act rationally in
government bonds
all financial decisions.
b) Reducing reserve requirements for
b) Emotions and cognitive errors
banks
influence financial markets.
c) Increasing the discount rate
c) Market anomalies can arise due to
d) Expanding short-term money supply
herd behavior.
d) Psychological factors affect asset
pricing and investment choices.
Interest Rates
7. Which factor directly influences the
shape of the yield curve the most?
a) Real GDP growth rate
b) Market liquidity conditions
c) Future expectations of inflation and
interest rates
d) Central bank reserves
