Financial Analysis Techniques (Katas)

7 questions

Question 1 of 7

The cash reserve ratio of a bank is most likely defined as:

Reserves held at the central bank divided by specified deposit liabilities.
Approved readily marketable securities divided by total assets.
Components of capital divided by risk-weighted assets.

Explanation

First Principles Thinking: monetary reserve requirement

A is correct. The CFA Curriculum defines the monetary reserve requirement, or cash reserve ratio, as reserves held at the central bank divided by specified deposit liabilities. It indicates banking liquidity and reflects monetary and regulatory requirements.

B describes a liquid asset requirement, not the cash reserve ratio.

C describes capital adequacy, which measures solvency against risk exposure rather than cash reserves against deposits.

Question 2 of 7

Under industry-specific ratios, the coefficient of variation of revenues is most likely calculated as:

Average revenue divided by the standard deviation of revenue.
Standard deviation of revenue divided by average revenue.
Standard deviation of revenue divided by total revenue growth.

Explanation

First Principles Thinking: measuring relative variability of revenues

B is correct. The CFA Curriculum defines the coefficient of variation of revenues as the standard deviation of revenue over the average revenue. The idea is to scale dispersion by the typical level so that firms of different size can be compared. Higher values signal greater business risk.

A inverts the ratio; the numerator and denominator are reversed, which would no longer represent scaled dispersion.

C replaces average revenue with revenue growth, which is unrelated to the definition in the curriculum.

Question 3 of 7

A retailer earns revenue of USD 20 million using 2,000 square meters of retail space. Its sales per square meter is closest to:

USD 1,000.
USD 10,000.
USD 100,000.

Explanation

First Principles Thinking: productivity per unit of selling space

B is correct. Sales per square meter equals revenue divided by total retail space. Dividing USD 20,000,000 by 2,000 square meters gives USD 10,000 per square meter.

A results from dividing by 20,000 square meters, which is not given.

C results from dividing by 200 square meters, inconsistent with the stated 2,000.

Question 4 of 7

A service firm with total revenue of USD 50 million and 500 employees has a revenue per employee closest to:

USD 10,000.
USD 100,000.
USD 1,000,000.

Explanation

First Principles Thinking: productivity of human capital

B is correct. Revenue per employee equals revenue divided by the total number of employees. USD 50,000,000 divided by 500 employees equals USD 100,000 per employee, a key productivity metric for service businesses.

A is off by a factor of 10, as if 5,000 employees were used.

C is off by a factor of 10, as if only 50 employees were used.

Question 5 of 7

Retailers most likely report same-store sales to:

Separate growth from existing stores from growth due to opening new stores.
Measure revenue generated per square meter of retail space.
Estimate the coefficient of variation of retail revenues.

Explanation

First Principles Thinking: isolating organic store performance

A is correct. Same-store (comparable store) sales are reported by retailers to distinguish revenue growth coming from stores open in both periods from growth driven by opening new stores. This lets analysts evaluate true operating performance of existing outlets.

B describes sales per square meter, a different retail ratio tied to space productivity.

C describes a business-risk measure, unrelated to retail location growth.

Question 6 of 7

A hotel has 200 rooms available and sells 150 rooms on a given night. Its occupancy rate is closest to:

50%.
67%.
75%.

Explanation

First Principles Thinking: utilization of room capacity

C is correct. Occupancy rate equals the number of rooms sold divided by the number of rooms available. Here, 150 / 200 = 0.75, or 75%, which measures how intensively available room capacity is used.

A is the result of an incorrect denominator of 300 rooms available.

B inverts the relationship by dividing available by sold-equivalent logic, which is not the defined ratio.

Question 7 of 7

For a bank, net interest margin is most likely computed as:

Net interest income divided by total interest-earning assets.
Net interest income divided by total deposit liabilities.
Total interest income divided by total assets.

Explanation

First Principles Thinking: return earned on interest-earning assets

A is correct. The CFA Curriculum defines net interest margin as net interest income divided by total interest-earning assets. This isolates the spread earned on the asset base that actually generates interest, which is the most relevant scaling base for banks.

B uses deposit liabilities, which relates to funding, not the yield on earning assets.

C uses gross interest income and total assets, ignoring interest expense and non-earning assets.

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