CIMA F3 flashcards

34 cards. Read the term and the definition here. The deck at the top of this page is optional.

Mendelow matrix

Stakeholder mapping tool classifying stakeholders by power and interest; high power/high interest are key players requiring active engagement; low power/low interest need minimal effort.

Agency problem

Conflict between principals (shareholders) and agents (managers) due to separation of ownership and control; managers may pursue own interests; mitigated by monitoring, incentives, and takeover threat.

Shareholder value analysis

Value-based management approach: value = present value of future free cash flows; shareholder value added = (ROIC − WACC) × invested capital; focuses on long-term cash generation.

Balanced scorecard

Performance measurement framework with four perspectives: financial, customer, internal processes, learning and growth; each has objectives, measures, targets, and initiatives linking strategy to action.

Porter's five forces

Industry attractiveness model: rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers; guides competitive strategy.

Ansoff matrix

Growth strategy grid: market penetration (existing products/markets), product development (new products/existing markets), market development (existing products/new markets), diversification (new products/new markets).

BCG matrix

Portfolio analysis tool: stars (high growth/high share), cash cows (low growth/high share), question marks (high growth/low share), dogs (low growth/low share); guides investment and divestment decisions.

Sustainable growth rate

Maximum growth without external equity: g = ROE × (1 − dividend payout ratio); assumes constant debt/equity ratio and asset turnover; indicates internally funded growth capacity.

WACC formula

Weighted average cost of capital = (E/V) × Ke + (D/V) × Kd × (1 − T); use market values for weights; Ke from CAPM; represents minimum required return on investments.

Modigliani–Miller with tax

Capital structure theory: with corporate tax, firm value increases by Tc × D (present value of tax shield); WACC decreases with debt; ignores distress costs.

Trade-off theory

Optimal capital structure balances tax shield benefits of debt against financial distress costs; debt increases value until marginal distress costs exceed tax benefits.

Pecking order theory

Financing preference: internal funds first, then debt, then external equity; driven by asymmetric information and desire to avoid signalling negative information.

Rights issue

Offer of new shares to existing shareholders at a discount; theoretical ex-rights price (TERP) = (market value of existing shares + proceeds) / total shares after issue.

Convertible bonds

Debt securities convertible into equity at a predetermined ratio; lower coupon than straight debt; value = straight bond value + conversion option; dilutes equity if converted.

Dividend policy

Decision on distribution of profits to shareholders; residual theory pays only from earnings not needed for positive-NPV investments; clientele, signalling, and agency effects also matter.

Lease versus buy

Decision comparing present value of after-tax lease payments with cost of buying less PV of tax depreciation and residual value; consider cash flow timing and tax.

NPV

Net present value = sum of discounted cash flows minus initial investment; accept if positive; measures absolute value added; preferred investment appraisal method.

IRR

Internal rate of return: discount rate making NPV zero; accept if IRR exceeds cost of capital; may conflict with NPV for mutually exclusive projects due to scale or timing.

Payback period

Time to recover initial investment from cash flows; ignores time value and cash flows after payback; simple risk indicator; discounted payback uses discounted cash flows.

Accounting rate of return

ARR = average annual accounting profit / average investment; uses profits not cash flows; ignores time value; expressed as percentage; compare with target rate.

Sensitivity analysis

Tests how NPV changes with a variable; % change to make NPV zero = (NPV / PV of variable) × 100; identifies critical variables; does not incorporate probability.

Scenario analysis

Evaluates NPV under multiple combinations of variables (e.g., best, worst, most likely); provides range of outcomes; can assign probabilities for expected value.

Risk-adjusted discount rate

Adds risk premium to WACC for higher-risk projects; or use certainty equivalents (expected cash flow × coefficient) discounted at risk-free rate; adjusts for risk.

CAPM

Capital asset pricing model: E(R) = Rf + β(Rm − Rf); beta measures systematic risk; used to estimate cost of equity; assumes diversified investors.

Real options

Flexibility in investment decisions: option to expand, abandon, delay, or switch; value = NPV without option + value of flexibility; evaluated using decision trees or option pricing.

Free cash flow to firm

FCFF = EBIT × (1 − T) + depreciation − capital expenditure − increase in working capital; enterprise value = PV of FCFF at WACC; equity value = EV − debt + cash.

Free cash flow to equity

FCFE = net income + depreciation − capex − Δ working capital + net borrowing; equity value = PV of FCFE at cost of equity; used in equity valuation.

Dividend valuation model

P0 = D1 / (Ke − g) for constant growth; g = retention ratio × ROE; multistage models for changing growth; values equity based on expected dividends.

P/E ratio valuation

Value = EPS × industry P/E; earnings yield = 1 / P/E; use forward or trailing P/E; adjust for growth and risk differences; simple relative valuation method.

Net asset value

Asset-based valuation: total assets − liabilities at market values; includes tangible assets; may ignore intangible value and going concern; useful for asset-heavy firms.

Merger synergies

Value of combined firm = VA + VB + synergy; sources include economies of scale, revenue enhancement, tax benefits, improved management; synergy may be overestimated.

M&A financing

Cash offer, share exchange (ratio = offer price / acquirer share price), or debt; impacts EPS and ownership dilution; accretion/dilution analysis compares pro forma EPS.

Defensive tactics

Measures against hostile takeover: poison pills, staggered boards, golden parachutes, white knights, pac-man defence; evaluate impact on shareholder value.

Corporate restructuring

Divestment (sell non-core assets), spin-off (separate legal entity), carve-out (IPO of subsidiary), management buyout (MBO); motives include focus, debt reduction, unlocking value.