CA Final PAPER 2: ADVANCED FINANCIAL MANAGEMENT Syllabus

PAPER 2: ADVANCED FINANCIAL MANAGEMENT syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for PAPER 2: ADVANCED FINANCIAL MANAGEMENT in CA Final, not a summary of it.

1. 1

   Financial Policy and Corporate Strategy

   4 topics

   • Advanced role of CFO in various matters including Value Creation
   • Strategic decision making framework
   • Interface of Financial Policy and strategic management
   • Balancing financial goals vis-à-vis sustainable growth
2. 2

   Risk Management

   4 topics

   • Identification of types of Risk faced by an organisation
   • Evaluation of Financial Risks
   • Value at Risk (VAR)
   • Evaluation of appropriate method for the identification and management of financial risk
3. 3

   Advanced Capital Budgeting Decisions

   6 topics

   • Current trends in Capital Budgeting
     • Impact of Inflation on Capital Budgeting Decisions
     • Impact of change in technology on Capital Budgeting
     • Impact of change in Government Policies on Capital Budgeting
   • Dealing with Risk in Investment Decisions
   • Internal and External Factors affecting capital budgeting decision
   • Methods of incorporating risk in Capital Budgeting
   • Adjusted Present Value
   • Optimum Replacement Cycle
4. 4

   Security Analysis

   2 topics

   • Fundamental Analysis
   • Technical Analysis
     • Meaning
     • Assumptions
     • Theories and Principles
     • Charting Techniques - Basics
     • Efficient Market Hypothesis (EMH) Analysis Equity Research and tools available
5. 5

   Security Valuation

   10 topics

   • Theory of Valuation
   • Return Concepts
   • Equity Risk Premium
   • Required Return on Equity
   • Discount Rate Selection in Relation to Cash Flows
   • Approaches to Valuation of Equity Shares
   • Valuation of Preference Shares
   • Valuation of Debentures/ Bonds
   • Role and Responsibilities of Valuers
   • Precautions need to be taken by a Valuer before accepting any valuation assignment
6. 6

   Portfolio Management

   9 topics

   • Portfolio Analysis
   • Portfolio Selection
   • Capital Market Theory
   • Portfolio Revision
   • Portfolio Evaluation
   • Asset Allocation
   • Fixed Income Portfolio
   • Risk Analysis of Investment in Distressed Securities
   • Alternative Investment Avenues
     • Real Estate
     • Gold
     • Private Equity
     • REITs
     • Hedge Funds
     • ETFs
     • Mutual Funds
     • Commodities
7. 7

   Securitization

   11 topics

   • Introduction
   • Concept and Definition
   • Benefits of Securitization
   • Participants in Securitization
   • Mechanism of Securitization
   • Problems in Securitization
   • Securitization Instruments
   • Pricing of Securitization Instruments
   • Risks in Securitization
   • Tokenization
   • Securitization in India
8. 8

   Mutual Funds

   7 topics

   • Meaning
   • Types
   • Advantages and Disadvantages of Mutual Funds
   • Evaluation of Mutual Funds
   • Role of Fund Manager in Mutual Funds
   • Hedge Funds
   • Role of FIIs in Mutual Funds
9. 9

   Derivatives Analysis and Valuation

   12 topics

   • Introduction to Forwards, Futures and Options
   • Futures Market
   • Pricing of Forwards and Futures
   • Hedging using Futures
   • Options
     • Option Pricing
     • Option Greeks
     • Exotic Options
   • Credit Derivatives
   • Real Options
   • Derivative Mishaps and Lessons
   • Swaps
   • Commodity Derivatives
   • Weather Derivatives
   • Electricity Derivatives
10. 10

    Foreign Exchange Exposure and Risk Management

    6 topics

    • Factors affecting foreign exchange rate
    • Role of SWIFT in Foreign Exchange
    • National and International Payment Gateways
    • Exchange rate determination
    • Foreign currency market
    • Management of Foreign Exchange Risk
11. 11

    International Financial Management

    5 topics

    • International Capital Budgeting
      • Offshore Investment Strategies vis-à-vis Domestic Capital Budgeting
      • Project vis-à-vis Parent Cash Flows
      • Discounting Rate and Adjusting Cash Flows
      • Adjusted Present Value
    • Raising funds from International Sources
    • Sovereign Funds
    • International Financial Centre (GIFT City)
    • International Working Capital Management
      • Multinational Cash Management
      • Objectives of Effective Cash Management
      • Optimization of Cash Flows/ Needs
      • Multinational Receivable Management
      • Multinational Inventory Management
12. 12

    Interest Rate Risk Management

    3 topics

    • Benchmark Rates
    • Interest Rate Risk
    • Hedging Interest Rate Risk
      • Traditional Methods
      • Modern Methods including Interest Rate Derivatives
13. 13

    Business Valuation

    8 topics

    • Conceptual Framework of Valuation
    • Approaches/ Methods of Valuation
      • Assets Based Valuation Model
      • Earning Based Models
      • Cash Flow Based Models
      • Measuring Cost of Equity
      • Relative Valuation
      • Other Approaches to Value Measurement
      • Arriving at Fair Value
    • Going concern and Non Going concern valuation
    • Valuation of Distressed Companies
    • Valuation of Start ups
    • Valuation of Digital Platforms
    • Valuation of Professional/ Consultancy Firms
    • Impact of ESG on valuation
14. 14

    Mergers, Acquisitions and Corporate Restructuring

    9 topics

    • Conceptual Framework
    • Rationale
    • Forms
    • Mergers and Acquisitions
      • Financial Framework
      • Takeover Defensive Tactics
      • Reverse Merger
    • Divestitures
      • Partial Sell off
      • Demerger
      • Equity Carve outs
    • Ownership Restructuring
      • Going Private
      • Management/ Leveraged Buyouts
    • Unlocking the value through Mergers & Acquisitions and Business Restructuring
    • Cross Border Mergers
    • Special Purpose Acquisition Companies (SPACs)
15. 15

    Startup Finance

    5 topics

    • Introduction including Pitch Presentation
    • Concept of Unicorn
    • Startup Initiative of GOI
    • Sources of Funding
    • Succession planning in Business

PAPER 2: ADVANCED FINANCIAL MANAGEMENT flashcards for CA Final

23 of 51 cards from the PAPER 2: ADVANCED FINANCIAL MANAGEMENT deck — real questions with worked answers.

1. In the context of the advanced role of the CFO, what is Value Creation and what condition must be met for it to occur?

   Value creation is generating returns that exceed the cost of capital, increasing shareholder wealth. It occurs only when the Return on Invested Capital (ROIC) is greater than the Weighted Average Cost of Capital (WACC).

2. What is the interface between Financial Policy and Strategic Management?

   Financial policy must align with and support corporate strategy. Strategic decisions (expansion, diversification, M&A) require financing decisions, and the firm's financial position/policy determines which strategies are feasible. Financial policy provides the resources and constraints within which strategy is executed.

3. State the sustainable growth rate (SGR) formula used to balance financial goals against sustainable growth.

   SGR = Return on Equity (ROE) × Retention Ratio (b), where Retention Ratio = 1 − Dividend Payout Ratio. It is the maximum growth a firm can sustain without raising new external equity while keeping financial leverage constant.

4. List the main types of risk faced by an organisation.

   Strategic risk, Compliance/Regulatory risk, Operational risk, Financial risk, and other risks such as Reputational and Market risk. Financial risk is further split into Credit, Liquidity, Interest rate, Currency/Exchange rate, and Counterparty risk.

5. Define Value at Risk (VAR).

   VAR is the maximum potential loss in the value of a portfolio/asset over a defined time horizon at a given confidence level (e.g., 95% or 99%), under normal market conditions. It answers: 'What is the most I can lose with X% confidence over N days?'

6. What are the three main methods of computing Value at Risk (VAR)?

   1) Historical simulation method, 2) Variance-Covariance (parametric/analytical) method, and 3) Monte Carlo simulation method.

7. Under the parametric (variance-covariance) method, how is VAR for a single asset calculated?

   VAR = Z × σ × Portfolio Value, where Z is the z-score for the chosen confidence level (1.645 for 95%, 2.33 for 99%) and σ is the standard deviation of returns over the holding period.

8. What are the main internal and external factors affecting capital budgeting decisions?

   Internal: project's cash flows, management attitude to risk, financial position, capital availability, technology. External: government/tax policy, inflation, competition, economic conditions, interest rates, and regulatory environment.

9. Name the methods of incorporating risk in capital budgeting.

   Risk-Adjusted Discount Rate (RADR), Certainty Equivalent approach, Sensitivity analysis, Scenario analysis, Simulation analysis, Probability/Expected NPV, Decision tree analysis, and Standard deviation/coefficient of variation of NPV.

10. What is the Certainty Equivalent (CE) approach to risk in capital budgeting?

    Risky expected cash flows are converted into certain (risk-free equivalent) cash flows by multiplying each by a certainty equivalent coefficient (between 0 and 1). These certain flows are then discounted at the risk-free rate to find NPV.

11. What is Adjusted Present Value (APV) and its formula?

    APV separates the value of a project into its all-equity (base) value plus the value of financing side effects. APV = Base-case NPV (financed entirely by equity, discounted at unlevered cost of equity) + PV of financing effects (mainly the tax shield on debt).

12. What is the Optimum Replacement Cycle and how is the decision made?

    It is the asset replacement interval that minimises the Equivalent Annual Cost (EAC). For each possible replacement cycle, the EAC of owning and operating the asset is computed, and the cycle with the lowest EAC is selected as optimum.

13. Distinguish between Fundamental Analysis and Technical Analysis.

    Fundamental analysis estimates a security's intrinsic value using economic, industry and company data (EIC framework) and financial statements. Technical analysis predicts price movements by studying past price and volume patterns, charts and trends, assuming history repeats and prices move in trends.

14. In Fundamental Analysis, what is the EIC framework?

    A top-down approach: Economy analysis (macro factors like GDP, inflation, interest rates) → Industry analysis (industry life cycle, competition) → Company analysis (financials, management, ratios) to determine intrinsic value.

15. What are the three forms of the Efficient Market Hypothesis (EMH)?

    Weak form (prices reflect all past price/volume data — technical analysis useless), Semi-strong form (prices reflect all public information — fundamental analysis useless), and Strong form (prices reflect all public and private/insider information — even insiders can't earn abnormal returns).

16. Define the Holding Period Return (HPR) for a single security.

    HPR = [Dividend/Income received + (Ending Price − Beginning Price)] / Beginning Price. It combines income yield and capital gains yield over the holding period.

17. What is the Equity Risk Premium (ERP)?

    The Equity Risk Premium is the excess return that investing in the equity market provides over a risk-free rate. ERP = Expected market return (Rm) − Risk-free rate (Rf). It compensates investors for taking on the higher risk of equities.

18. How is the Required Return on Equity computed under the CAPM?

    Required Return Ke = Rf + β × (Rm − Rf), where Rf = risk-free rate, β = beta (systematic risk), and (Rm − Rf) = equity risk premium.

19. What is the principle of Discount Rate Selection in relation to cash flows in valuation?

    The discount rate must be consistent with the cash flows: Free Cash Flow to Firm (FCFF) is discounted at WACC; Free Cash Flow to Equity (FCFE) and dividends are discounted at the cost of equity (Ke). Nominal cash flows use nominal rates; real cash flows use real rates.

20. State the Gordon (constant) Dividend Growth Model for valuing equity shares.

    P0 = D1 / (Ke − g), where D1 = expected dividend next year = D0(1+g), Ke = cost of equity, and g = constant growth rate of dividends. Valid only when Ke > g.

21. How is the value of an irredeemable (perpetual) preference share calculated?

    Value = Annual Preference Dividend / Required rate of return on preference shares (Kp). The fixed dividend is treated as a perpetuity.

22. How is the value (price) of a redeemable bond/debenture determined?

    Price = Present value of all future coupon (interest) payments + Present value of redemption (maturity) value, both discounted at the required yield (Kd/YTM). Price = Σ [Coupon/(1+Kd)^t] + Redemption Value/(1+Kd)^n.

23. What is the inverse relationship between bond prices and interest rates?

    Bond prices move inversely to market interest rates. When market yields rise, the price of existing fixed-coupon bonds falls; when yields fall, bond prices rise.

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