CMA Final Strategic Financial Management Syllabus

What is the PESTEL framework used for in strategy formulation?

Scanning the macro-environment across Political, Economic, Social, Technological, Environmental and Legal factors to identify external opportunities and threats.

What is a core competence in corporate strategy?

A unique bundle of skills, knowledge and resources that gives a firm competitive advantage, is hard for rivals to imitate, and provides access to a wide variety of markets (Prahalad & Hamel).

Define 'risk' in financial management.

The variability or uncertainty of actual returns/outcomes around the expected value—the chance that the realised result differs from what was anticipated.

Distinguish between risk and uncertainty.

In risk the probabilities of possible outcomes are known or can be estimated; in uncertainty the outcomes and/or their probabilities cannot be reliably quantified.

Distinguish between systematic and unsystematic risk.

Systematic (market) risk affects the whole market and cannot be diversified away (measured by beta); unsystematic (specific/diversifiable) risk is unique to a firm/industry and can be eliminated through diversification.

Give examples of systematic risk.

Market risk, interest rate risk, purchasing power (inflation) risk, and exchange rate risk—macro factors affecting all securities.

Give examples of unsystematic risk.

Business (operating) risk and financial risk—firm- or industry-specific factors such as management decisions, labour issues, product recalls and capital structure.

What is business risk versus financial risk?

Business risk is the variability in operating earnings (EBIT) due to operating conditions and cost structure; financial risk is the additional variability in earnings to equity holders arising from the use of debt (fixed financial charges).

What is interest rate risk?

The risk that changes in market interest rates will adversely affect the value of fixed-income securities or the firm's borrowing costs and reinvestment income.

What is liquidity risk?

The risk that an asset cannot be sold quickly at or near its fair value, or that a firm cannot meet its short-term obligations as they fall due.

What is credit (default) risk?

The risk that a borrower or counterparty fails to make required payments, causing loss of principal and/or interest to the lender.

What is foreign exchange (currency) risk?

The risk that fluctuations in exchange rates adversely affect the value of a firm's foreign-currency assets, liabilities or cash flows; types include transaction, translation and economic exposure.

What is sensitivity analysis as a risk analysis technique?

A 'what-if' technique that changes one key input variable at a time (e.g., sales, cost, life) to see how sensitive the project's NPV/outcome is to that variable, identifying the most critical variables.

What is scenario analysis in risk evaluation?

Evaluating project outcomes (e.g., NPV) under a few internally consistent combinations of variables—typically pessimistic, most-likely and optimistic scenarios—rather than changing one variable at a time.

What is the certainty equivalent approach to risk?

Risky expected cash flows are converted into their certain (risk-free) equivalents using a certainty-equivalent coefficient (0–1), and these are then discounted at the risk-free rate.

What is the risk-adjusted discount rate (RADR) method?

A method that adds a risk premium to the risk-free rate so that riskier projects are discounted at higher rates; RADR = risk-free rate + risk premium, then NPV is computed using this rate.

What is Monte Carlo simulation in risk analysis?

A computer technique that assigns probability distributions to uncertain input variables and runs many random trials to generate a probability distribution of possible outcomes (e.g., NPV).

What does a decision tree help analyse?

Sequential decisions under uncertainty—it graphically maps decision nodes, chance events with probabilities and outcomes, allowing computation of expected values to choose the optimal path.

How is the standard deviation used to measure risk of returns?

It measures the dispersion of possible returns around the expected return; a higher standard deviation indicates greater variability and hence greater (total) risk.

What is the coefficient of variation and why is it used?

CV = standard deviation / expected return. It measures risk per unit of return, allowing comparison of risk between investments with different expected returns; lower CV is preferred.

What is Value at Risk (VaR)?

A statistical measure estimating the maximum potential loss on a portfolio over a given time horizon at a specified confidence level (e.g., 95% or 99%).

What is hedging as a risk mitigation strategy?

Taking an offsetting position—often using derivatives such as forwards, futures, options or swaps—to reduce or eliminate the risk of adverse price, rate or currency movements.

Name the four common risk-response strategies.

Risk avoidance, risk reduction/mitigation, risk transfer (e.g., insurance, hedging), and risk retention/acceptance.

What is diversification as a risk mitigation strategy?

Spreading investments across different assets, sectors or markets whose returns are not perfectly correlated, so that unsystematic risk is reduced as losses in some are offset by gains in others.

What is fundamental analysis?

A method of evaluating a security's intrinsic value by analysing economic, industry and company factors (financials, management, prospects) to decide whether it is under- or over-valued.

What are the three levels of the E-I-C framework in fundamental analysis?

Economy analysis (macro factors), Industry analysis (industry life cycle, competition), and Company analysis (financials, management, products)—the top-down approach.

State the dividend discount (Gordon) model for the intrinsic value of a share.

P0 = D1 / (Ke - g), where D1 is the expected next-year dividend, Ke is the required return on equity, and g is the constant dividend growth rate (valid when Ke > g).

How is the Price-Earnings (P/E) ratio calculated and interpreted?

P/E = Market price per share / Earnings per share. It shows how much investors pay per rupee of earnings; a high P/E may indicate growth expectations or overvaluation.

What is technical analysis and how does it differ from fundamental analysis?

Technical analysis studies past price and volume data, charts and trends to forecast future price movements, assuming prices reflect all information and move in trends; fundamental analysis instead estimates intrinsic value from economic/financial data.

What does the Dow Theory state about market trends?

It holds that the market moves in three trends—primary (long-term), secondary (intermediate corrections) and minor (day-to-day)—and that a primary trend continues until major indices confirm a reversal.

In technical analysis, what are 'support' and 'resistance' levels?

Support is a price level where buying interest tends to halt a decline; resistance is a level where selling pressure tends to halt a rise. A breakout beyond either signals a likely continued move.

What is the expected return of a two-security portfolio?

E(Rp) = w1·R1 + w2·R2, the weighted average of the individual expected returns, where w1 and w2 are the proportions invested (w1 + w2 = 1).

What role does the correlation coefficient play in portfolio risk?

Portfolio risk falls as the correlation between assets decreases; the lower (more negative) the correlation, the greater the diversification benefit. Maximum benefit occurs at a correlation of -1.

What is the efficient frontier in portfolio theory?

The set of optimal portfolios offering the highest expected return for each level of risk (or the lowest risk for each level of return); rational investors choose portfolios lying on it.

State the Capital Asset Pricing Model (CAPM) equation.

E(Ri) = Rf + βi·(Rm - Rf), where Rf is the risk-free rate, βi is the security's beta, and (Rm - Rf) is the market risk premium.

What does beta (β) measure in CAPM/portfolio theory?

Beta measures a security's systematic (market) risk—its sensitivity to market movements. β = 1 moves with the market, β > 1 is more volatile, β < 1 is less volatile than the market.