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CMA Final Paper 15 study materials
CMA Final Paper 15 study resources

CMA Final Paper 15: Strategic Financial Management

CMA Final Paper 15 · Work through your exam, one topic at a time.

All guide sections

Strategic Financial Management

This domain tests strategic rather than routine finance: capital structure policy, payout and buyback decisions, long-term financing choice, cost of capital, and whether a stated growth plan is fundable from internal cash. Questions usually end in a board-level judgement - cut the dividend, raise debt, or raise equity.

Core rules

  • Value is created only where ROIC exceeds WACC; growth with ROIC below WACC destroys value. Growth is not a strategy in itself.
  • Sustainable growth rate (SGR) = b × ROE, where b is the retention ratio and ROE uses opening equity. SGR is the growth achievable with no fresh equity and constant leverage.
  • Pecking order: internal funds first, then debt, then equity - driven by issue costs and information asymmetry.
  • MM without tax: capital structure is irrelevant. With tax, value rises by t × D, but distress and agency costs of debt cap the gain (trade-off theory).
  • MM dividend irrelevance holds in perfect markets; in practice signalling, clientele effects and free-cash-flow/agency arguments make buybacks flexible and often tax-efficient for returning surplus cash.
  • Match currency and tenor to the asset: long-gestation projects need long-term funds; working capital needs short-term facilities.

Worked example

PAT ₹120 crore, opening net worth ₹800 crore, payout 40%. ROE = 15%, b = 0.60, so SGR = 9%. Management's plan assumes 14% sales growth with assets growing in step, leaving a 5%-of-assets funding gap. Options: (i) cut payout to zero, lifting SGR to 15%; (ii) add debt to raise the equity multiplier, but only while interest cover stays above the 3× covenant; (iii) issue equity, which dilutes EPS unless project ROIC beats WACC. The best answer names the cheapest option that preserves the covenant and the credit rating.

Traps

The examiner penalises using closing instead of opening equity in ROE; treating SGR as a maximum rather than a no-external-financing rate; ignoring issue costs and personal taxes in payout comparisons; and recommending equity when the debt covenant has headroom.