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ESAA Final Level Exam study materials
ESAA Final Level Exam study resources

ESAA Final Level Exam: Corporate Finance and Treasury

ESAA Final Level Exam · Work through your exam, one topic at a time.

All guide sections

Corporate Finance and Treasury

This domain tests investment appraisal, financing decisions, and liquidity and risk management. Candidates must calculate value, explain the cost of capital, and recognise how treasury policy protects cash and covenants. Questions often mix a calculation with a recommendation.

Core rules

  • Net present value is the primary investment criterion. Accept projects with positive NPV when cash flows are incremental and discounted at an appropriate risk-adjusted rate.
  • WACC weights after-tax cost of debt and cost of equity. Use market values where available. CAPM estimates cost of equity as risk-free rate plus beta times the market risk premium.
  • IRR can mislead with non-conventional cash flows or mutually exclusive projects. Use NPV for value creation and IRR as a supplementary measure.
  • Capital structure affects risk and return. Debt creates a tax shield but increases financial distress and covenant risk.
  • Working capital policy balances liquidity, credit risk, and profitability. Treasury manages cash concentration, forecasting, banking relationships, and counterparty limits.
  • FX and interest-rate exposures can be hedged with forwards, futures, options, or swaps. Hedging reduces volatility but has cost and basis risk.

Worked example

A firm has 60% equity at a cost of 12% and 40% debt at a pre-tax cost of 6%. The tax rate is 25%. After-tax cost of debt is 6% x (1 - 0.25) = 4.5%. WACC is 0.60 x 12% + 0.40 x 4.5% = 7.2% + 1.8% = 9.0%. A project with cash flows discounted at 9% and a positive NPV adds value, assuming its risk matches the firm. If the project is riskier, use a higher project-specific rate. Do not deduct interest payments in project cash flows when the discount rate already reflects financing.

Traps that cost marks

Do not include sunk costs or financing costs in project cash flows. Do not ignore tax on salvage value or working capital recovery. Do not use book values for WACC when market values are available. Do not assume IRR is always reliable. Do not hedge a exposure without stating the objective and cost.