Chartered Global Management Accountant (CGMA) Corporate Finance, Treasury, and Financial Strategy Syllabus

Corporate Finance, Treasury, and Financial Strategy syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Corporate Finance, Treasury, and Financial Strategy in Chartered Global Management Accountant (CGMA), not a summary of it.

1. 1

   Financial Management Objectives and Environment

   3 topics

   • Goals of Financial Management
     • Shareholder wealth maximization versus stakeholder views
     • Agency problems and managerial incentives
   • The Financial Markets and Economic Environment
     • Capital markets and financial intermediaries
     • Efficient market hypothesis
   • The Three Financial Strategy Decisions
     • Investment, financing, and dividend decisions
2. 2

   Investment Appraisal and Capital Budgeting

   4 topics

   • Discounted Cash Flow Techniques
     • Net present value and the time value of money
     • Internal rate of return and modified IRR
     • Discounted payback and profitability index
   • Non-Discounting Methods
     • Payback period and accounting rate of return
   • Adjusting Appraisal for Real-World Factors
     • Taxation and capital allowances in NPV
     • Inflation: money versus real cash flows
     • Capital rationing and asset replacement
   • Risk and Uncertainty in Appraisal
     • Sensitivity, scenario, and simulation analysis
     • Real options thinking
3. 3

   Cost of Capital and Capital Structure

   4 topics

   • Cost of Individual Capital Components
     • Cost of equity using CAPM and dividend growth model
     • Cost of debt and preference shares
   • Weighted Average Cost of Capital
     • WACC calculation and use as discount rate
     • Project-specific and geared/ungeared betas
   • Capital Structure Theory
     • Traditional view and Modigliani-Miller propositions
     • Trade-off theory and pecking order theory
   • Dividend Policy and Distribution
4. 4

   Financing and Treasury Management

   3 topics

   • Sources of Finance
     • Equity finance and rights issues
     • Debt finance, bonds, and convertibles
     • Venture capital and private equity
   • Working Capital Management
     • Cash, inventory, receivables, and payables management
     • The working capital cycle and financing strategies
   • Treasury Function and Cash Management
5. 5

   Corporate Restructuring and Risk Hedging

   4 topics

   • Business Valuation
     • Asset-based and earnings-based valuation
     • Dividend valuation and free cash flow models
   • Mergers, Acquisitions, and Reconstructions
     • Acquisition rationale and synergy valuation
     • Defensive tactics and divestments
   • Foreign Exchange Risk Management
     • Transaction, translation, and economic exposure
     • Forwards, futures, options, and money market hedges
   • Interest Rate Risk Management

Corporate Finance, Treasury, and Financial Strategy flashcards for Chartered Global Management Accountant (CGMA)

25 of 61 cards from the Corporate Finance, Treasury, and Financial Strategy deck — real questions with worked answers.

1. What is the primary goal of financial management in a publicly traded company?

   The maximization of shareholder wealth, typically measured by the long-term market value of the firm's equity (share price), rather than short-term accounting profit.

2. Distinguish between profit maximization and shareholder wealth maximization as financial objectives.

   Profit maximization ignores the timing of returns, the risk of returns, and the distinction between accounting profit and cash flow. Wealth maximization accounts for the time value of money, risk, and uses cash flows, making it the superior objective.

3. What is the agency problem in financial management, and how can it be mitigated?

   It is the conflict of interest between managers (agents) and shareholders (principals) where managers may pursue their own goals. Mitigations include performance-based pay, share options, monitoring, the threat of takeover, and strong corporate governance.

4. For not-for-profit organizations, what objective replaces shareholder wealth maximization?

   Value for money, often expressed through the 3 Es: Economy (minimizing input costs), Efficiency (maximizing output per input), and Effectiveness (achieving the intended objectives/outcomes).

5. What are the three core decisions of financial strategy?

   The investment decision (which projects/assets to invest in), the financing decision (how to raise the funds — debt vs. equity), and the dividend decision (how much profit to distribute vs. retain).

6. What is the role of financial intermediaries in the financial markets?

   They channel funds from surplus units (savers) to deficit units (borrowers), providing maturity transformation, risk transformation, aggregation of small savings, and reduced transaction/search costs.

7. State the three forms of the Efficient Market Hypothesis (EMH).

   Weak form: prices reflect all past price/historical information. Semi-strong form: prices reflect all publicly available information. Strong form: prices reflect all information, public and private (insider).

8. What is the time value of money?

   The principle that a sum of money available today is worth more than the same sum in the future, because today's money can be invested to earn a return and is also subject to risk and inflation over time.

9. Write the formula for the present value (PV) of a single future cash flow.

   $$PV = \frac{FV}{(1+r)^{n}}$$ where $FV$ is the future value, $r$ is the discount rate per period, and $n$ is the number of periods.

10. Define Net Present Value (NPV) and state the decision rule.

    NPV is the sum of the present values of all project cash flows, including the initial outlay: $$NPV = \sum_{t=0}^{n} \frac{C_{t}}{(1+r)^{t}}$$ Decision rule: accept the project if $NPV > 0$, as it adds to shareholder wealth.

11. What is the Internal Rate of Return (IRR), and what is its decision rule?

    The IRR is the discount rate at which $NPV = 0$. Decision rule: accept the project if $IRR > $ the cost of capital (required return).

12. Give the formula for estimating IRR by linear interpolation.

    $$IRR \approx L + \left[\frac{N_{L}}{N_{L} - N_{H}}\right] \times (H - L)$$ where $L$ and $H$ are the lower and higher discount rates, and $N_{L}$, $N_{H}$ are their respective NPVs.

13. What is the present value of a perpetuity, and of a growing perpetuity?

    Level perpetuity: $$PV = \frac{C}{r}$$ Growing perpetuity (Gordon growth): $$PV = \frac{C_{1}}{r - g}$$ where $g$ is the constant growth rate and $C_{1}$ is the cash flow in period 1.

14. Write the formula for the present value of an ordinary annuity.

    $$PV = C \times \frac{1 - (1+r)^{-n}}{r}$$ where $C$ is the periodic cash flow, $r$ the discount rate, and $n$ the number of periods.

15. Define the payback period and state one advantage and one disadvantage.

    Payback is the time required for cumulative cash inflows to recover the initial investment. Advantage: simple and emphasizes liquidity/risk. Disadvantage: ignores the time value of money and all cash flows after the payback point.

16. What is the discounted payback period, and how does it improve on simple payback?

    It measures the time for the cumulative discounted cash flows to recover the initial outlay. It improves on simple payback by accounting for the time value of money, though it still ignores cash flows beyond the payback point.

17. Define Accounting Rate of Return (ARR / Return on Capital Employed).

    $$ARR = \frac{\text{Average annual accounting profit}}{\text{Average (or initial) investment}} \times 100\%$$ It uses accounting profits rather than cash flows and ignores the time value of money.

18. How is inflation handled consistently in investment appraisal?

    Either discount nominal (money) cash flows at the nominal (money) rate, or discount real cash flows at the real rate. Never mix the two.

19. State the Fisher equation linking nominal, real, and inflation rates.

    $$(1 + i) = (1 + r)(1 + h)$$ where $i$ is the nominal (money) rate, $r$ is the real rate, and $h$ is the inflation rate.

20. How should taxation be incorporated into NPV appraisal?

    Include tax on operating cash flows (often with a one-period lag) and the tax savings from capital allowances/depreciation tax shields. Use after-tax cash flows discounted at an appropriate after-tax cost of capital.

21. What is a tax (depreciation) shield and how is its annual value calculated?

    It is the reduction in tax payable due to deductible capital allowances/depreciation. Annual value $= \text{Capital allowance} \times \text{tax rate}$, i.e. $D \times T_{c}$.

22. In relevant cash flow analysis, how are sunk costs and opportunity costs treated?

    Sunk costs (already incurred, unrecoverable) are excluded as irrelevant. Opportunity costs (benefits forgone from the next best use of a resource) are included as relevant cash flows.

23. Distinguish between risk and uncertainty in investment appraisal.

    Risk: outcomes are unknown but probabilities can be assigned (quantifiable). Uncertainty: outcomes are unknown and probabilities cannot be reliably assigned (unquantifiable).

24. What is sensitivity analysis, and how is the sensitivity margin computed?

    It examines how much a single input variable can change before the NPV becomes zero. $$\text{Sensitivity} = \frac{NPV}{\text{PV of the variable}} \times 100\%$$ A smaller percentage indicates a more critical/risky variable.

25. How is the expected value (EV) of a project's outcome calculated?

    $$EV = \sum p_{i} x_{i}$$ the probability-weighted average of possible outcomes, where $p_{i}$ is the probability and $x_{i}$ the outcome value.

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