CIMA F3 key terms

The long-term plan for raising, allocating and controlling an organisation's money so that its financial objectives support its overall mission, balancing growth, risk and shareholder return.

A measurable target expressed in money terms, such as a required return on capital, a dividend growth rate or a maximum gearing level, that guides decisions and allows later performance to be judged.

The discipline of setting financial goals, choosing between competing uses of funds and monitoring outcomes over multi-year horizons, rather than dealing with routine bookkeeping or short-term cash administration.

Any party with a legitimate interest in an entity's financial decisions, including shareholders, lenders, employees, customers, suppliers, regulators and local communities, whose competing claims must be weighed when setting strategy.

The conflict that arises when managers act in their own interests rather than those of the owners who appointed them, for example by pursuing size or perks instead of value creation.

The money spent monitoring managers, bonding their behaviour and bearing any residual loss from misalignment, such as audit fees, incentive schemes and the value lost through poor decisions.

The system of board structures, controls, disclosures and accountability arrangements through which an entity is directed and held to account by shareholders and other stakeholders.

A framework that estimates the value created for owners by forecasting free cash flows, discounting them at an appropriate cost of capital and comparing the result with capital invested.

A period profit measure equal to operating profit after tax less a charge for the capital employed, showing whether a business earned more than its investors' required return.

The pace at which sales can expand using retained earnings and existing borrowing capacity without issuing new equity or changing capital structure, given a constant dividend payout.

The proportion of an entity's capital provided by debt rather than equity, often measured as debt to equity or debt to total capital, indicating financial risk borne by shareholders.

The mix of debt, preference shares and ordinary equity used to finance a company's operations and investments, which determines its cost of capital and exposure to financial risk.

Theory stating that, in a world without tax, bankruptcy costs or information gaps, capital structure does not change firm value, but that introducing tax makes debt beneficial through the interest tax shield.

The reduction in tax payable created by deducting interest on debt, which increases the cash available to investors and gives borrowing a value advantage over equity finance.

Direct and indirect losses arising when a company struggles to meet debt obligations, including legal and advisory fees, lost customers, supplier pressure and management time diverted to crisis handling.

The blended required return on a firm's finance, calculated by weighting the after-tax cost of debt and the cost of equity by their market values in the capital structure.

The return shareholders require for bearing ownership risk, commonly estimated with the dividend growth model or the capital asset pricing model, and used as the discount rate for equity-funded projects.

A method of estimating required return as the risk-free rate plus a beta coefficient multiplied by the market risk premium, linking expected return to systematic risk only.

A measure of how far a share's returns move relative to the overall market; a beta above one indicates greater systematic risk than the market and a higher required return.

Operating profit divided by interest payable, showing how many times finance costs are covered by trading earnings and therefore how much cushion exists before debt servicing becomes strained.

A condition written into a loan agreement, such as a maximum gearing ratio or minimum interest cover, which the borrower must satisfy and whose breach can trigger default or renegotiation.

The company's approach to deciding how much profit to distribute to shareholders and how much to retain, considering signals to investors, cash needs and clientele preferences.

Profits kept in the business rather than paid out as dividends, forming an internal source of equity finance that avoids issue costs but is not free because shareholders expect a return.

An offer of new shares to existing shareholders, usually at a discount to market price, in proportion to their holdings, raising fresh equity while letting them avoid dilution.

The reduction in existing owners' percentage claim on earnings and voting power caused by issuing additional shares, which must be weighed against the benefit of funds raised.

The sum of a project's expected cash flows discounted at the required rate of return, with any positive result meaning the investment adds value to the firm.

The discount rate at which a project's net present value equals zero; a project is acceptable when this rate exceeds the cost of capital, though multiple rates can arise with unusual cash flow patterns.

The rate used to convert future cash flows into present value, reflecting the time value of money and the risk of the particular project or business being assessed.

The time taken for cumulative cash inflows to recover the initial investment, valued for simplicity and focus on liquidity but criticised for ignoring cash flows after the cut-off.

A variant of payback that accumulates discounted rather than raw cash flows, so recovery is measured after allowing for the cost of capital, though later cash flows are still ignored.

A future, incremental cash amount that changes as a direct result of accepting a decision; past spending, committed costs and allocated overheads are excluded from the appraisal.

The value of the best alternative given up when resources are committed to a chosen course, such as rental income forgone when a company uses its own building for a project.

Money already spent or irrevocably committed that cannot be recovered whatever decision is taken, so it must be ignored when appraising future options.

The portion of total risk driven by market-wide factors such as interest rates and economic cycles, which cannot be removed by diversification and is therefore priced by investors.

A technique that varies one input at a time to see how far it can change before a project's decision switches, revealing which assumptions most deserve further investigation.

Appraisal under a small number of coherent alternative futures, such as optimistic, base and pessimistic cases, where several variables move together rather than in isolation.

A probabilistic modelling approach that assigns distributions to uncertain inputs, runs many random combinations and produces a distribution of possible project outcomes rather than a single figure.

The process of estimating what a company, division or shareholding is worth, using methods such as discounted cash flow, market multiples or asset-based measures depending on purpose.

Cash generated by operations after tax and after reinvestment in working capital and fixed assets, representing the amount available to pay all providers of finance.

A share's market price divided by earnings per share, showing how many years of current earnings investors will pay for; used to value shares and compare market expectations.

Profit attributable to ordinary shareholders divided by the weighted average number of shares in issue, a widely quoted measure of per-share profitability that is affected by financing choices.

The extra value created when two businesses combine that exceeds the sum of their separate values, arising from cost savings, revenue gains or improved financial capacity.

The amount paid above the target's pre-bid market value, which must be justified by expected synergies if the deal is not to destroy value for the acquiring shareholders.

A management buy-out: the purchase of a business or division by its existing managers, often funded heavily with debt and private equity, aligning ownership with operational knowledge.

An acquisition financed mainly by borrowed money secured against the target's assets and cash flows, carrying high financial gearing and correspondingly high financial risk.