Financial and Strategic Management
Core concepts
This domain combines corporate finance and strategy. Finance content includes time value of money, capital budgeting (payback, discounted payback, net present value, internal rate of return, profitability index), cost of capital, capital structure and leverage, dividend policy, working capital management and risk-return analysis.
Strategy content covers environmental analysis, industry structure, resource and capability analysis, competitive positioning, corporate-level strategy (growth, diversification, integration), portfolio tools, and implementation through structure, culture and control. Know the distinction between strategy formulation and implementation, and between corporate and business-level strategy.
Traps
- Using accounting profit instead of cash flows in capital budgeting.
- Mixing the cost of equity with the overall cost of capital.
- Choosing between mutually exclusive projects on IRR when scales differ.
- Confusing a strength with an opportunity in a SWOT framing.
- Treating diversification as automatically value-adding.
Worked example
A project costs 1,000 and returns 1,200 after one year. At a 10 percent discount rate, present value is 1,200 divided by 1.10, which is 1,091, so NPV is 91 and the project is accepted. IRR is 20 percent. If a competing project has a higher IRR but a smaller NPV, choose on NPV for value maximisation when the projects are mutually exclusive.
For strategy questions, follow a chain: environment, resources, choice, implementation, evaluation. This structure earns marks even when the recommendation is debatable.