CS Executive CAFM common mistakes
CS Executive CAFM · Understand the traps and how to avoid them.
Computing WACC by weighting each source of finance at book value and then using the resulting rate to discount a project whose risk profile differs from the firm's average, without any risk adjustment.
Textbook WACC drills in Cost and Management Accounting are usually book-value weighted, so candidates memorise one number and apply it mechanically to every capital budgeting problem, ignoring that marginal and market-value weights are what matter for a new project.
What to do instead
For each capital budgeting question, first state the weights used (book vs market), compute the marginal cost of the specific source being raised, and if the project's risk class differs, add a risk premium or use a risk-adjusted rate. Show the reconciliation between book and market weights in one line so the marker sees you chose deliberately.
Treating all fixed costs as irrelevant to a special-order or make-or-buy decision because 'fixed costs are sunk', rather than identifying which fixed costs are avoidable and incremental.
Candidates learn the shorthand 'ignore fixed costs, use contribution' and over-apply it, missing the step of separating committed from discretionary and avoidable fixed costs in the question stem.
What to do instead
Build a two-column table: costs that change with the decision and costs that do not. Explicitly list avoidable fixed costs (supervisor salary, additional rent, setup) as relevant and committed apportioned overhead as irrelevant. Quote the specific line in the question that made each cost avoidable or not.
Mixing up NPV and IRR decision rules when projects are mutually exclusive or of unequal size, choosing the higher IRR project even when its NPV is lower.
IRR is expressed as a percentage and feels intuitive, and many candidates practise single-project accept/reject questions where the two rules agree, so the conflict case is never drilled.
What to do instead
Default to NPV for mutually exclusive projects and for ranking under capital rationing, and state why: IRR assumes reinvestment at the IRR and can give multiple or misleading answers with non-conventional cash flows. Compute both, then write one sentence resolving the conflict in favour of NPV (or profitability index under a hard capital constraint).
Calculating the operating cycle and working capital requirement using year-end balance sheet figures only, without converting to average or daily figures, and without matching the cycle to the financing plan.
Questions often supply a full balance sheet, and candidates grab closing debtors and creditors because they are visible, forgetting that ratios such as debtors turnover need averages and that the cycle must be expressed in days to be usable.
What to do instead
Always convert to days: inventory days, debtor days, creditor days, then net operating cycle. Use averages where opening and closing balances are both given. Then map the cycle to the financing mix, classifying each current asset as permanent or temporary and matching permanent needs to long-term funds.
Applying the dividend discount model or CAPM with mismatched inputs, such as using a nominal risk-free rate with real growth, or a historical beta with a forward-looking market return, without flagging the inconsistency.
Formulas are memorised in isolation in Security Analysis and Portfolio Management, so candidates plug in whatever numbers appear in the question without checking whether growth, discount rate and cash flow are all nominal or all real.
What to do instead
Before computing, write a one-line 'input audit': risk-free rate basis, market return basis, growth basis, and whether cash flows are nominal. If the question forces a mismatch, state the assumption you are making. Keep beta consistent with the return interval used for the market premium.
Confusing systematic and unsystematic risk when answering diversification questions, claiming that adding more securities eliminates all risk or that beta measures total risk.
The terms sound similar and candidates conflate standard deviation (total risk) with beta (systematic risk), especially under time pressure in multiple-choice items.
What to do instead
Anchor the distinction with one sentence each: standard deviation measures total variability and is the right risk measure for a fully diversified portfolio's total return; beta measures sensitivity to market movements and is the only risk priced by CAPM because unsystematic risk is diversifiable. When a question mentions 'number of securities', the answer involves the limit of diversification, not zero risk.
Computing the cost of equity, debt and preference capital but forgetting to adjust debt for tax, or applying the tax shield to preference dividends.
Interest is tax-deductible while dividends are not, and candidates under exam pressure apply a blanket after-tax adjustment to every component.
What to do instead
Write the post-tax cost of each component explicitly: Kd = interest times (1 minus tax rate) for redeemable or perpetual debt, Kp with no tax adjustment, Ke via CAPM or dividend growth with no tax adjustment. If flotation costs are given, incorporate them into the denominator of the relevant component before weighting.
Answering capital market and financial services questions with generic definitions instead of the specific regulatory mechanism, such as describing a depository without naming the dematerialisation process or the role of the issuer and depository participant.
Candidates revise from summary notes that list institution names without the operating flow, so they cannot answer 'who does what, in what order' questions.
What to do instead
For each institution (depository, clearing corporation, merchant banker, credit rating agency, mutual fund), memorise a three-step process flow and the specific document or account involved. Practise writing the flow as a numbered sequence, since examiners award marks for the sequence, not the definition.
Presenting ratio and fund-flow answers as bare numbers without units, workings, or interpretation, so method marks are lost even when the final figure is correct.
Candidates treat Financial Management as a calculation-only paper and skip the interpretive sentence, not realising that 'comment on the result' carries marks and that unlabelled workings cannot be followed.
What to do instead
Adopt a fixed answer template: formula, substitution, result with units (times, days, percentage, rupees), then one interpretive sentence comparing to a benchmark or prior period. Even in multiple-choice papers, do the workings in the margin so a wrong final option still shows method.
Ignoring the time value of money in working capital and receivables decisions, comparing a discount policy's cost with the gross sales increase rather than the change in contribution and the cost of investment in debtors.
Working capital topics feel like 'current' items, so candidates treat cash flows as simultaneous and forget that a credit policy change ties up funds for the collection period.
What to do instead
For every credit or discount decision, compute three things: change in contribution from extra sales, cost of incremental investment in debtors (incremental debtors times cost of capital), and change in bad debts or discount expense. Compare the net of these, not gross sales. State the collection period assumption used.