Corporate Finance and Treasury Operations
What this domain tests
Corporate Finance and Treasury Operations tests capital budgeting, cost of capital, working capital, liquidity management and treasury risk. The exam expects you to choose projects, compute returns and explain how a finance team manages cash, funding and interest-rate or forex exposure within policy limits.
Core rules
- The primary objective is long-term shareholder wealth maximisation, subject to risk and regulatory constraints.
- Use NPV as the preferred capital budgeting rule: discount incremental after-tax cash flows at the weighted average cost of capital (WACC). Accept positive NPV projects.
- IRR is the discount rate making NPV zero. It can mislead when cash flows change sign or projects differ in scale and life.
- WACC = (E/V x Ke) + (D/V x Kd x (1 - tax rate)). Use market values where available and after-tax cost of debt.
- Treasury manages cash positioning, funding, bank relationships, investments, liquidity buffers, foreign exchange and interest-rate risk. Segregate dealing, settlement and confirmation duties.
- Working capital = current assets - current liabilities. Excess inventory and receivables tie up cash; too little liquidity creates default risk.
Worked example
A project costs INR 10 crore and yields INR 4 crore annually for 3 years. At a 10% discount rate, PV = 4/1.10 + 4/1.21 + 4/1.331 = 3.636 + 3.306 + 3.005 = INR 9.947 crore. NPV = 9.947 - 10 = -INR 0.053 crore. The project destroys value, so reject it.
Traps that cost marks
Ignore sunk costs but include opportunity costs. Do not include financing cash flows in project cash flows when WACC already captures financing. IRR is not always reliable. Do not confuse accounting profit with cash flow. Liquidity and profitability can conflict.