ICAP CFAP CFAP-4: Strategic Business Finance Syllabus

CFAP-4: Strategic Business Finance syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for CFAP-4: Strategic Business Finance in ICAP CFAP, not a summary of it.

1. 1

   Business Appraisals and Valuation

   4 topics

   • Business Valuation Techniques
   • Acquisitions, Mergers, Demergers, Spin-offs and Spin-outs
   • Project and Strategy Appraisal
   • Debt Valuation Techniques
2. 2

   Shareholder Value and Capital Structure

   2 topics

   • Shareholder Value, Dividend and Investment Decisions
   • Capital Structure Theory
3. 3

   Cost of Capital

   3 topics

   • Weighted Average Cost of Capital (WACC)
   • Capital Asset Pricing Model (CAPM)
   • Arbitrage Pricing Theory (APT)
4. 4

   Capital and Its Sources

   3 topics

   • Raising Capital — Qualitative and Quantitative Evaluation of Sources
   • Capital Budgeting and Capital Rationing
   • Portfolio Selection
5. 5

   Financial Risk Management

   4 topics

   • Interest Rate Risk Hedging
   • Foreign Exchange Risk Hedging
   • Commodity and Security Risk — Forwards and Futures
   • Assessing and Managing Liquidity and Credit Risk

CFAP-4: Strategic Business Finance flashcards for ICAP CFAP

19 of 72 cards from the CFAP-4: Strategic Business Finance deck — real questions with worked answers.

1. What are the three main approaches to business valuation?

   (1) Asset-based (net assets) valuation; (2) Income/earnings-based valuation (e.g. P/E, earnings yield, dividend valuation, DCF/free cash flow); (3) Market-based valuation using comparable multiples.

2. How is the Net Asset Value (NAV) per share of a company calculated on a going-concern basis?

   NAV per share = (Total assets at fair value − Total liabilities − Preference share capital) / Number of ordinary shares. It values equity at the realisable/replacement value of net assets.

3. State the P/E ratio (earnings multiple) valuation formula for the equity value of a company.

   Equity value = P/E ratio x Profit after tax (earnings attributable to ordinary shareholders). For an unlisted target, an appropriate listed-company P/E is usually discounted (often by ~25-33%) for lower marketability/risk.

4. What is the earnings yield valuation method and its formula?

   Earnings yield = EPS / Market price per share (the reciprocal of the P/E ratio). Value of equity = Total earnings / Earnings yield. It is used to value a company by capitalising its earnings.

5. State the Dividend Valuation Model (Gordon growth model) for the value of a share with constant dividend growth.

   P0 = D0(1+g) / (Ke − g) = D1 / (Ke − g), where D1 is next year's dividend, Ke is the cost of equity and g is the constant dividend growth rate (Ke > g).

6. In the dividend growth model, what are the two standard methods of estimating the growth rate g?

   (1) Gordon's growth model: g = b x r, where b = earnings retention ratio and r = return on reinvested funds (ROE); (2) Extrapolation from historical dividends: g = (D0/Dn)^(1/n) − 1 over n years.

7. How is a business valued using the Free Cash Flow to Firm (FCFF) / DCF approach?

   Discount projected FCFF at the WACC to get Enterprise Value, then Equity Value = Enterprise Value − Net debt − preference/minority claims. FCFF = EBIT(1−t) + Depreciation − Capex − Increase in working capital.

8. Distinguish Free Cash Flow to Firm (FCFF) from Free Cash Flow to Equity (FCFE).

   FCFF is cash available to all providers (debt + equity), discounted at WACC to give firm value. FCFE = FCFF − interest(1−t) − net debt repayments (+ new debt); it is cash available to equity holders only and is discounted at the cost of equity to give equity value directly.

9. What is a synergy in the context of mergers and acquisitions?

   Synergy is the value created when the combined entity is worth more than the sum of the two separate firms (often '2+2=5'). Types include revenue synergy, cost synergy, and financial synergy (e.g. lower combined cost of capital, tax benefits).

10. Distinguish a merger, an acquisition and a takeover.

    A merger combines two firms (often of similar size) into one new entity by mutual agreement. An acquisition is one firm buying a controlling interest in another, which continues to exist as a subsidiary. A takeover is an acquisition, often used to denote a hostile or contested one.

11. Define a demerger and distinguish a spin-off from a spin-out (carve-out).

    A demerger splits a company into two or more separate entities. A spin-off (spin-out) distributes shares of a subsidiary to existing shareholders pro-rata, creating an independent listed company with no cash raised. An equity carve-out is an IPO of part of a subsidiary's shares to outside investors, raising cash while the parent retains control.

12. What is the difference between horizontal, vertical and conglomerate integration?

    Horizontal: combining firms at the same stage of the same industry (competitors). Vertical: combining with a supplier (backward) or customer/distributor (forward). Conglomerate: combining firms in unrelated businesses, mainly for diversification.

13. What is a Management Buy-Out (MBO) versus a Management Buy-In (MBI)?

    In an MBO, the existing management team buys the business (or a division) they currently run, usually with external/private-equity and debt finance. In an MBI, an external management team buys into and takes over running a company.

14. How is the maximum price a bidder should pay for a target estimated?

    Maximum price = Stand-alone value of the target + Present value of synergies/benefits expected from the combination. Paying up to (but ideally below) this preserves value for the acquirer's shareholders.

15. In a share-for-share exchange, what determines whether the bidder's existing shareholders gain or lose?

    They gain if the value of the combined firm per existing share exceeds the bidder's pre-bid share price — i.e. if total synergy value exceeds the premium (extra shares/value) given to target shareholders.

16. List common takeover defences used by a target's management.

    Poison pill, white knight (friendly rival bidder), crown jewels (selling key assets), golden parachutes, share buybacks/revaluation, Pac-Man defence (counter-bid), and appealing to shareholders/regulators with a defence document.

17. State the formula for the Net Present Value (NPV) of a project.

    NPV = Σ [Ct / (1+r)^t] − Initial investment, where Ct is the net cash flow in period t and r is the discount rate (cost of capital). Accept if NPV > 0.

18. Define the Internal Rate of Return (IRR) and the decision rule.

    IRR is the discount rate at which a project's NPV equals zero. Decision rule: accept if IRR > cost of capital (hurdle rate). It can be estimated by linear interpolation between two NPVs of opposite sign.

19. Why can NPV and IRR give conflicting rankings for mutually exclusive projects, and which is preferred?

    Conflicts arise from differences in project scale, cash-flow timing, or reinvestment-rate assumptions (IRR assumes reinvestment at IRR; NPV at cost of capital). NPV is preferred because it measures absolute value added and is consistent with shareholder wealth maximisation.

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