CS (Company Secretary) Financial and Strategic Management Syllabus

Define the debt-equity ratio and give its formula.

It measures financial leverage. Debt-Equity Ratio = Long-term Debt / Shareholders' Funds (Equity). A common benchmark is 2:1.

What is the formula for Return on Equity (ROE)?

ROE = (Net Profit after Tax - Preference Dividend) / Average Shareholders' Equity x 100.

State the DuPont identity for Return on Equity.

ROE = Net Profit Margin x Asset Turnover x Equity Multiplier = (Net Profit/Sales) x (Sales/Total Assets) x (Total Assets/Equity).

What is the interest coverage ratio and its formula?

It measures ability to pay interest. Interest Coverage Ratio = EBIT / Interest Expense. A higher ratio indicates greater debt-servicing safety.

What is capital budgeting?

The process of planning, evaluating, and selecting long-term investment projects whose returns are expected over more than one year, to maximize shareholder wealth.

What is the formula for Net Present Value (NPV) and its decision rule?

NPV = Sum of (Cash Inflows / (1+r)^t) - Initial Investment. Accept the project if NPV > 0; reject if NPV < 0.

Define the Internal Rate of Return (IRR) and its acceptance rule.

IRR is the discount rate at which NPV equals zero. Accept the project if IRR is greater than the cost of capital (hurdle rate).

What is the payback period and one major limitation of it?

Payback period is the time required to recover the initial investment from cash inflows. Its major limitation is that it ignores the time value of money and cash flows occurring after the payback point.

What is the profitability index (PI) and its decision rule?

PI = Present Value of Future Cash Inflows / Initial Investment. Accept the project if PI > 1.

Why can NPV and IRR give conflicting rankings for mutually exclusive projects?

Because of differences in the scale of investment, timing of cash flows, and the reinvestment rate assumption (NPV assumes reinvestment at the cost of capital; IRR assumes reinvestment at IRR). NPV is generally preferred.

What is the cost of capital?

The minimum rate of return a firm must earn on its investments to satisfy its investors (debt holders and shareholders) and maintain its market value; it is the firm's hurdle rate.

How is the after-tax cost of debt calculated?

After-tax Cost of Debt = Kd x (1 - Tax Rate), where Kd is the before-tax interest rate. Interest is tax-deductible, so debt is cheaper after tax.

What is the formula for the cost of equity using the dividend growth (Gordon) model?

Ke = (D1 / P0) + g, where D1 is the expected dividend, P0 is the current market price, and g is the constant growth rate of dividends.

What is the cost of equity under the Capital Asset Pricing Model (CAPM)?

Ke = Rf + Beta x (Rm - Rf), where Rf is the risk-free rate, Rm is the market return, and (Rm - Rf) is the market risk premium.

Define WACC and give its formula.

Weighted Average Cost of Capital is the overall cost of a firm's financing weighted by the proportion of each source. WACC = (We x Ke) + (Wd x Kd(1-t)) + (Wp x Kp), using market or book value weights.

What does the Net Income (NI) approach to capital structure conclude?

That a firm can increase its total value and reduce its overall cost of capital by increasing the proportion of (cheaper) debt; capital structure is relevant.

What is the key conclusion of the Modigliani-Miller (MM) hypothesis without taxes?

In a perfect market without taxes, capital structure is irrelevant; the value of a firm depends only on its operating earnings and business risk, not on its debt-equity mix.

Define operating leverage and its formula.

Operating leverage measures the effect of fixed operating costs on EBIT. Degree of Operating Leverage (DOL) = Contribution / EBIT (or % change in EBIT / % change in Sales).

Define financial leverage and its formula.

Financial leverage measures the effect of fixed financial costs on EPS. Degree of Financial Leverage (DFL) = EBIT / (EBIT - Interest), or % change in EPS / % change in EBIT.

What is combined leverage and how is it computed?

Combined leverage measures the total effect of fixed operating and financial costs on EPS. Degree of Combined Leverage (DCL) = DOL x DFL = Contribution / (EBIT - Interest).

Define working capital and distinguish gross from net working capital.

Working capital is the capital used for day-to-day operations. Gross working capital = total current assets; Net working capital = current assets minus current liabilities.

What is the operating (working capital) cycle?

The time taken to convert cash invested in raw materials into cash received from customers: Raw material period + WIP period + Finished goods period + Debtors (receivables) period - Creditors (payables) period.

Explain the conservative and aggressive approaches to working capital financing.

The conservative approach finances most assets (including some current assets) with long-term funds (low risk, low return); the aggressive approach finances even part of fixed/permanent current assets with short-term funds (high risk, high return).

What is the Economic Order Quantity (EOQ) formula?

EOQ = square root of (2 x Annual Demand x Ordering Cost per order / Carrying Cost per unit). It minimizes total inventory ordering and carrying costs.

What are the three motives for holding cash as identified by Keynes?

The transaction motive (routine payments), the precautionary motive (unforeseen needs), and the speculative motive (to exploit profitable opportunities).

Distinguish between owned capital and borrowed capital as sources of finance.

Owned capital (equity shares, retained earnings) belongs to owners, has no fixed repayment, and carries voting rights; borrowed capital (debentures, loans) is repayable with fixed interest and carries no ownership rights.

What are the key differences between equity shares and preference shares?

Equity shares carry voting rights, fluctuating dividends, and last claim on assets; preference shares carry a fixed dividend, priority in dividend and capital repayment, and generally no voting rights.

What is venture capital financing?

Long-term risk capital provided to new or high-growth, unlisted businesses with strong potential, usually in exchange for an equity stake and active involvement, by investors seeking high returns.

Define strategic management.

The process of formulating, implementing, and evaluating cross-functional decisions and strategies that enable an organization to achieve its long-term objectives and sustainable competitive advantage.

What do the components of a SWOT analysis represent?

Strengths and Weaknesses are internal factors of the organization; Opportunities and Threats are external environmental factors. It is used to match internal capabilities with external conditions.

Name Michael Porter's three generic competitive strategies.

Cost leadership (being the lowest-cost producer), Differentiation (offering unique products), and Focus (targeting a narrow market segment via cost focus or differentiation focus).

What are the five forces in Porter's Five Forces model?

Threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products, and rivalry among existing competitors.

What do the categories of the BCG matrix represent?

Stars (high growth, high share), Cash Cows (low growth, high share), Question Marks/Problem Children (high growth, low share), and Dogs (low growth, low share). It is based on market growth rate and relative market share.

Distinguish cost accounting from management accounting.

Cost accounting focuses on ascertaining, recording, and controlling costs of products/services; management accounting uses financial and cost data to assist management in planning, decision-making, and control, with a broader, future-oriented scope.

What is the formula for the Break-Even Point in units?

BEP (units) = Fixed Costs / Contribution per unit, where Contribution per unit = Selling Price per unit - Variable Cost per unit.

What is the contribution margin and the P/V ratio?

Contribution = Sales - Variable Costs. The Profit-Volume (P/V) ratio = Contribution / Sales x 100, showing the proportion of each sales rupee available to cover fixed costs and profit.

Differentiate marginal costing from absorption costing.

Marginal costing charges only variable costs to products and treats fixed costs as period costs; absorption costing charges both fixed and variable manufacturing costs to products. They differ in inventory valuation and reported profit when stock levels change.

What is a margin of safety in cost accounting?

The excess of actual or budgeted sales over the break-even sales. Margin of Safety = Total Sales - Break-Even Sales, or Profit / P/V ratio. A higher margin indicates lower risk.

What is business valuation and why is it done?

Business valuation is the process of estimating the economic worth of a company or its assets. It is done for mergers and acquisitions, fund-raising, IPOs, taxation, financial reporting, and dispute resolution.

Name the three broad approaches to business valuation.

The Asset-based (net asset) approach, the Income-based approach (e.g., discounted cash flow), and the Market-based (relative/comparable) approach using multiples.

What is the Discounted Cash Flow (DCF) method of valuation?

It values a business as the present value of its expected future free cash flows discounted at an appropriate rate (usually WACC), often adding a terminal value for cash flows beyond the forecast period.

What does an EV/EBITDA multiple measure in valuation?

It compares a company's Enterprise Value to its EBITDA, indicating how many times EBITDA the whole firm is valued at; it is a capital-structure-neutral relative valuation measure useful for comparing companies.