CA Inter Paper 6: FM & SM cheat sheet

Leverage relationships: Degree of Operating Leverage (DOL) = Contribution / EBIT; Degree of Financial Leverage (DFL) = EBIT / (EBIT − Interest); Degree of Combined Leverage (DCL) = DOL × DFL = Contribution / (EBIT − Interest).

Capital structure theories: Net Income approach holds that more debt lowers WACC and raises firm value; Net Operating Income approach holds firm value is independent of leverage (WACC constant); Traditional approach finds an optimum between the two; MM (without tax) proves irrelevance, while MM with tax gives value = unlevered value + tax rate × debt.

Cost of capital: Kd (irredeemable) = I(1 − t) / Net proceeds; Kp = Preference dividend / Net proceeds; Ke (Gordon growth) = D1/P0 + g; Ke (CAPM) = Rf + β(Rm − Rf); WACC = weighted average of after-tax component costs using market-value weights where available.

Capital budgeting: NPV = PV of inflows − Initial outlay; IRR is the discount rate at which NPV = 0; Profitability Index = PV of inflows / Initial outlay (accept if PI > 1); Discounted Payback uses cumulative discounted cash flows. Accept independent projects when NPV > 0, and rank mutually exclusive projects by NPV.

Working capital: Operating Cycle = Raw material holding period + WIP period + Finished goods period + Receivables collection period − Payables deferral period. Working capital gap = Current assets − Current liabilities (excluding bank finance for working capital).

Cash management models: Baumol model EOQ-style cash balance = √(2 × Annual cash need × Transaction cost / Opportunity cost per rupee); Miller–Orr gives upper limit = 3Z − 2L and return point Z = L + (3/4) × spread, where spread = 3 × (3 × variance of daily cash flows × transaction cost / 4 × daily interest rate)^(1/3).

Dividend policy: Walter model P = [D + (E − D) × r/Ke] / Ke; Gordon model P = D1 / (Ke − g); MM hypothesis holds dividend policy is irrelevant in perfect markets; Residual theory pays dividends only from earnings left after funding positive-NPV projects with retained earnings.

Receivables management: Average collection period = (Debtors / Credit sales) × 365; Factoring cost = Commission + Discount charge on advance; evaluate a credit-policy change by comparing incremental contribution against incremental investment cost × required return.

Bond and equity valuation: Value of a bond = PV of coupons at the required yield + PV of redemption value; if yield > coupon rate the bond trades at a discount. Cum-dividend and ex-dividend prices differ by the dividend amount; rights issue value per share = (N × cum-rights price + Issue price) / (N + 1).

Porter's Five Forces: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, and rivalry among existing competitors. Use it to judge industry attractiveness, not firm-level performance.

Porter's generic strategies: cost leadership, differentiation, and focus (cost focus or differentiation focus). A firm 'stuck in the middle' lacks a clear advantage and earns below-average returns.

Value chain analysis: primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service) and support activities (firm infrastructure, HR management, technology development, procurement).

BCG matrix axes are market growth rate and relative market share; cells are Star (high growth, high share), Cash Cow (low growth, high share), Question Mark (high growth, low share) and Dog (low growth, low share).

Ansoff's product–market matrix: market penetration (existing product, existing market), product development (new product, existing market), market development (existing product, new market), diversification (new product, new market).

Core competence criteria (Prahalad and Hamel): it must be valuable, rare, difficult to imitate, and non-substitutable; it should give access to many markets and be hard for competitors to copy.

SWOT analysis pairs internal strengths and weaknesses with external opportunities and threats; TOWS converts them into SO, ST, WO and WT strategies. PESTLE covers political, economic, social, technological, legal and environmental factors.

Strategic levels: corporate strategy (portfolio, diversification, M&A), business strategy (competitive positioning), and functional/operational strategy (marketing, finance, HR, operations).

Industry life cycle stages: introduction, growth, maturity and decline. Each stage changes the emphasis on investment, pricing, capacity and product differentiation, which affects financing and capital budgeting choices.

Leverage relationships: Degree of Operating Leverage (DOL) = Contribution / EBIT; Degree of Financial Leverage (DFL) = EBIT / (EBIT − Interest); Degree of Combined Leverage (DCL) = DOL × DFL = Contribution / (EBIT − Interest).

Capital structure theories: Net Income approach holds that more debt lowers WACC and raises firm value; Net Operating Income approach holds firm value is independent of leverage (WACC constant); Traditional approach finds an optimum between the two; MM (without tax) proves irrelevance, while MM with tax gives value = unlevered value + tax rate × debt.

Cost of capital: Kd (irredeemable) = I(1 − t) / Net proceeds; Kp = Preference dividend / Net proceeds; Ke (Gordon growth) = D1/P0 + g; Ke (CAPM) = Rf + β(Rm − Rf); WACC = weighted average of after-tax component costs using market-value weights where available.

Capital budgeting: NPV = PV of inflows − Initial outlay; IRR is the discount rate at which NPV = 0; Profitability Index = PV of inflows / Initial outlay (accept if PI > 1); Discounted Payback uses cumulative discounted cash flows. Accept independent projects when NPV > 0, and rank mutually exclusive projects by NPV.

Working capital: Operating Cycle = Raw material holding period + WIP period + Finished goods period + Receivables collection period − Payables deferral period. Working capital gap = Current assets − Current liabilities (excluding bank finance for working capital).

Cash management models: Baumol model EOQ-style cash balance = √(2 × Annual cash need × Transaction cost / Opportunity cost per rupee); Miller–Orr gives upper limit = 3Z − 2L and return point Z = L + (3/4) × spread, where spread = 3 × (3 × variance of daily cash flows × transaction cost / 4 × daily interest rate)^(1/3).

Dividend policy: Walter model P = [D + (E − D) × r/Ke] / Ke; Gordon model P = D1 / (Ke − g); MM hypothesis holds dividend policy is irrelevant in perfect markets; Residual theory pays dividends only from earnings left after funding positive-NPV projects with retained earnings.

Receivables management: Average collection period = (Debtors / Credit sales) × 365; Factoring cost = Commission + Discount charge on advance; evaluate a credit-policy change by comparing incremental contribution against incremental investment cost × required return.

Bond and equity valuation: Value of a bond = PV of coupons at the required yield + PV of redemption value; if yield > coupon rate the bond trades at a discount. Cum-dividend and ex-dividend prices differ by the dividend amount; rights issue value per share = (N × cum-rights price + Issue price) / (N + 1).

Porter's Five Forces: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, and rivalry among existing competitors. Use it to judge industry attractiveness, not firm-level performance.

Porter's generic strategies: cost leadership, differentiation, and focus (cost focus or differentiation focus). A firm 'stuck in the middle' lacks a clear advantage and earns below-average returns.

Value chain analysis: primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service) and support activities (firm infrastructure, HR management, technology development, procurement).

BCG matrix axes are market growth rate and relative market share; cells are Star (high growth, high share), Cash Cow (low growth, high share), Question Mark (high growth, low share) and Dog (low growth, low share).

Ansoff's product–market matrix: market penetration (existing product, existing market), product development (new product, existing market), market development (existing product, new market), diversification (new product, new market).

Core competence criteria (Prahalad and Hamel): it must be valuable, rare, difficult to imitate, and non-substitutable; it should give access to many markets and be hard for competitors to copy.

SWOT analysis pairs internal strengths and weaknesses with external opportunities and threats; TOWS converts them into SO, ST, WO and WT strategies. PESTLE covers political, economic, social, technological, legal and environmental factors.

Strategic levels: corporate strategy (portfolio, diversification, M&A), business strategy (competitive positioning), and functional/operational strategy (marketing, finance, HR, operations).

Industry life cycle stages: introduction, growth, maturity and decline. Each stage changes the emphasis on investment, pricing, capacity and product differentiation, which affects financing and capital budgeting choices.