ICMA Pakistan Strategic Financial Management Syllabus

Strategic 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 Strategic Financial Management in ICMA Pakistan, not a summary of it.

1. 1

   Financial Management Framework

   3 topics

   • Objectives and role of financial management
   • Agency theory and corporate governance
   • Financial strategy formulation
2. 2

   Investment Appraisal

   3 topics

   • Discounted cash flow techniques (NPV, IRR)
   • Capital rationing
   • Adjusted present value and real options
3. 3

   Cost of Capital and Capital Structure

   3 topics

   • Weighted average cost of capital
   • Capital structure theories
   • Dividend policy decisions
4. 4

   Business Valuation

   3 topics

   • Asset-based and earnings-based valuation
   • Discounted cash flow valuation
   • Valuation of debt and intangibles
5. 5

   Mergers, Acquisitions and Restructuring

   3 topics

   • Reasons and types of business combinations
   • Financing acquisitions
   • Corporate reconstruction and divestment
6. 6

   Risk Management

   3 topics

   • Foreign exchange risk and hedging
   • Interest rate risk management
   • Derivatives and swaps
7. 7

   International Financial Management

   2 topics

   • International investment and financing
   • International capital markets

Strategic Financial Management flashcards for ICMA Pakistan

21 of 68 cards from the Strategic Financial Management deck — real questions with worked answers.

1. What is the primary objective of financial management in a corporation?

   To maximize shareholder wealth, measured by the market value of the company's equity (share price), rather than simply maximizing accounting profit.

2. List the three key decisions that fall under the role of financial management.

   1) The investment (capital budgeting) decision, 2) the financing decision (capital structure), and 3) the dividend decision.

3. Why is shareholder wealth maximization preferred over profit maximization as a corporate objective?

   Profit maximization ignores the timing of returns, the risk of returns, and the time value of money, and can be manipulated by accounting policies; wealth maximization accounts for cash flows, timing, and risk.

4. What is agency theory in corporate finance?

   It analyzes the conflict of interest arising when managers (agents) act on behalf of shareholders (principals) but may pursue their own interests rather than maximizing shareholder wealth.

5. What are agency costs?

   Costs incurred to align managers' interests with shareholders' — including monitoring costs, bonding costs, and the residual loss from remaining divergence of interests.

6. Name three mechanisms used to reduce the agency problem between managers and shareholders.

   Managerial remuneration linked to performance (share options/bonuses), monitoring (audits, non-executive directors), and the threat of takeover or removal.

7. What is corporate governance?

   The system of rules, practices, and processes by which a company is directed and controlled, balancing the interests of shareholders, management, and other stakeholders.

8. What is the role of non-executive directors in corporate governance?

   To provide independent oversight, monitor executive management, sit on audit/remuneration/nomination committees, and protect shareholder interests.

9. What is financial strategy and how does it relate to corporate strategy?

   Financial strategy is the funding and financial decision plan that supports the overall corporate strategy, covering how to raise funds, invest them, and return value to shareholders.

10. What are the three main components addressed in financial strategy formulation?

    Investment decisions (which projects/assets), financing decisions (debt vs equity mix), and dividend/distribution decisions.

11. Define Net Present Value (NPV).

    The sum of the present values of all future cash flows of a project discounted at the required rate of return, minus the initial investment. NPV = Σ [Ct / (1+r)^t] − C0.

12. What is the NPV decision rule?

    Accept a project if NPV is positive (greater than zero); reject if negative. Among mutually exclusive projects, choose the one with the highest positive NPV.

13. Define Internal Rate of Return (IRR).

    The discount rate at which the NPV of a project equals zero — i.e., the rate where present value of inflows equals the initial outlay.

14. What is the IRR decision rule?

    Accept a project if its IRR exceeds the required rate of return (cost of capital); reject if it is below.

15. State one major limitation of IRR compared to NPV.

    IRR can give multiple values with non-conventional cash flows and may rank mutually exclusive projects incorrectly; it also assumes reinvestment at the IRR rather than at the cost of capital.

16. What is the modified internal rate of return (MIRR) designed to fix?

    It corrects IRR's unrealistic reinvestment assumption by assuming intermediate cash flows are reinvested at the cost of capital, and it eliminates multiple-IRR problems.

17. What is capital rationing?

    A situation where a firm has insufficient capital to undertake all available positive-NPV projects, requiring selection among them.

18. Distinguish between hard and soft capital rationing.

    Hard rationing is externally imposed by capital markets (limited funds available); soft rationing is internally imposed by management policy (self-imposed budget limits).

19. How are divisible projects ranked under single-period capital rationing?

    By the profitability index (PI = PV of inflows / initial investment); projects are selected in descending PI order until the capital budget is exhausted.

20. What is the profitability index (PI) formula?

    PI = Present value of future cash flows / Initial investment. (Equivalently NPV/Investment + 1.) Accept if PI > 1.

21. How is selection handled for indivisible projects under capital rationing?

    By examining all feasible combinations of whole projects within the budget and choosing the combination that maximizes total NPV.

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