CMA Inter Paper 11 (FMDA) common mistakes
CMA Inter Paper 11 (FMDA) · Understand the traps and how to avoid them.
In objective or scenario questions, the candidate treats profit maximisation and wealth maximisation as interchangeable, choosing 'maximum accounting profit' as the decision rule even when timing, risk and cash flow are mentioned.
The candidate has memorised the phrase 'wealth maximisation' but has not linked it to the three tests: timing of cash flows, risk adjustment and long-term value. Under exam pressure, the familiar profit figure looks safer.
What to do instead
Before answering, write WM = present value of expected future cash flows adjusted for risk. Reject options that maximise current accounting profit without considering timing or risk. In a 2-mark answer, state the three superiority points explicitly.
When choosing between debt, equity and hybrid financing, the candidate selects the source with the lowest coupon or interest rate and ignores maturity matching, security, covenants, dilution and refinancing risk.
Candidates reduce a financing decision to a cost comparison because interest rates are visible, while control dilution and covenant risk feel qualitative and are skipped under time pressure.
What to do instead
Use a four-column comparison: effective cost (after tax and issue costs), risk (fixed charge, refinancing, covenant), control/dilution and flexibility. Match long-term assets with long-term funds and short-term assets with short-term funds. State why the lowest-coupon option may still be unsuitable.
In ratio analysis, the candidate divides a flow item such as PAT or sales by a year-end balance sheet figure, or compares ratios computed on different bases, producing a wrong ratio and a wrong interpretation.
Formula recall is stronger than basis recall. Year-end figures are easier to pick from the balance sheet than average balances, and the candidate does not state the convention being used.
What to do instead
For stock-based denominators such as inventory, receivables, payables and equity, use average balances where opening and closing figures are available. Write the formula and units before substituting. Add a one-line note: 'averages used' or 'closing used because opening is unavailable'.
While computing WACC, the candidate uses book value weights, takes the coupon rate as the cost of debt before tax, and omits reserves, preference capital or lease liabilities from the capital structure.
Textbook formulas are remembered in isolated pieces. The candidate forgets that debt cost must be after tax and that weights should reflect the market value of each source, not just paid-up equity and term loans.
What to do instead
Build a WACC table: source, market value, weight, after-tax cost. Use Kd = interest × (1 − tax rate) for redeemable debt, or the yield-to-maturity approach when issue costs or premium/redemption are given. Include all long-term sources. Use marginal WACC for a new project, not the historical WACC.
In leverage questions, the candidate uses sales instead of contribution for DOL, uses EBIT instead of EBIT minus interest for DFL, or calculates combined leverage as DOL + DFL rather than DOL × DFL.
The symbols look similar and the candidate has not internalised the income-statement structure: sales → contribution → EBIT → PBT → PAT. A single substitution error then changes the entire answer.
What to do instead
Write the ladder first: Sales − Variable cost = Contribution; Contribution − Fixed cost = EBIT; EBIT − Interest = PBT. Then apply DOL = Contribution/EBIT, DFL = EBIT/(EBIT − Interest), DCL = DOL × DFL. For EBIT-EPS indifferent points, set EPS under two financing plans equal and solve for EBIT.
In capital budgeting, the candidate includes sunk costs and allocated head-office overhead, ignores the release of working capital at the end of the project, or forgets the depreciation tax shield and tax on salvage value.
Candidates copy accounting profit figures into project cash flows. Accounting profit includes sunk and allocated costs that are not incremental, while examiners deliberately include them as traps.
What to do instead
Use a standard incremental cash-flow grid: initial outflow; operating cash flow = (contribution − fixed cash costs − depreciation) × (1 − tax) + depreciation; terminal flow = salvage × (1 − tax on gain) + working capital recovery. Exclude sunk costs and allocated overhead that will be incurred anyway; include opportunity cost and incremental working capital.
In dividend decision questions, the candidate applies the Walter or Gordon model without checking whether the assumptions fit, or confuses DPS with EPS and retention ratio with payout ratio.
The models are memorised as formulas, so the candidate substitutes whatever dividend figure appears first. The relationship between r and k, which determines whether growth creates value, is not tested.
What to do instead
Write the model, label every variable and convert DPS/EPS and payout/retention consistently. Check the assumption: Walter assumes internal financing and constant r and k; Gordon assumes a perpetual growth rate g = br and requires k > g. State whether r > k, r = k or r < k before concluding.
In working capital questions, the candidate calculates an operating cycle but calls it the cash conversion cycle, omits payables, or uses sales instead of cost of goods sold for inventory days.
The two cycles sound alike, and the candidate mixes turnover ratios with day counts. Using sales for inventory flatters the cycle and is a common trap.
What to do instead
Write the cycle explicitly: inventory days = average inventory/COGS × 365; receivable days = average receivables/credit sales × 365; payable days = average payables/credit purchases × 365. Operating cycle = inventory days + receivable days; cash conversion cycle = operating cycle − payable days. Reconcile the final figure to the question asked.
In data cleaning, the candidate deletes every row with a missing value or outlier without justification, treats numeric codes such as 1 = male and 2 = female as ordinal quantities, and does not document the cleaning rule.
Cleaning feels like a preliminary chore, so the candidate applies the fastest delete or mean-substitute action. There is no data dictionary check and no distinction between missing completely at random and missing because of a process failure.
What to do instead
Profile the column first: count missing, minimum, maximum and frequency of codes. Classify each variable as numeric, categorical or date. Choose a documented rule: keep and flag, impute with median for skewed numeric data, or drop only when missingness is high and non-informative. Convert coded categories to labels before analysis.
In spreadsheet or Python data-analysis questions, the candidate uses a pie chart for a time trend, omits axis labels and units, or writes a formula with relative references that break when copied, and then reports the output without sanity-checking it.
Tool mechanics are learned separately from visualisation principles. The candidate focuses on producing a chart or formula rather than on whether the chart type answers the question and whether cell references remain stable.
What to do instead
Match chart to purpose: line for trend, bar for comparison, pie only for parts of one whole with few categories, scatter for relationship. Label axes with units and title the chart. In spreadsheets, lock fixed ranges with absolute references ($A$2:$A$20) and test one copied row. In Python, check dtypes, shape and null counts before plotting or aggregating.