Finance and Financial Management
Finance and Financial Management tests time value of money, investment appraisal, cost of capital, working capital and ratio analysis. The arithmetic is simple; the marks are lost on method choice and on mixing nominal and real figures.
Core rules
- NPV: discount incremental after-tax cash flows at the project or company WACC; accept if NPV is positive.
- IRR: the rate where NPV is zero; it can conflict with NPV for mutually exclusive projects or unconventional cash flows, and NPV prevails.
- WACC: weight market values of debt and equity; the debt component is after tax, giving kd × (1 − t).
- CAPM: cost of equity = risk-free rate + beta × market risk premium.
- Working capital: operating cycle = inventory days + receivable days − payable days; shortening it releases cash.
- Ratios: compare liquidity, gearing and profitability across periods and peers, and read them together, not in isolation.
Worked example
A project costs 100,000,000 KZT and returns 60,000,000 KZT in each of years 1 and 2; the discount rate is 10%. Discount factors are 0.9091 and 0.8264, giving present values of 54,545,455 and 49,586,777, a total of 104,132,232 KZT. NPV is 104,132,232 − 100,000,000 = 4,132,232 KZT, so the project is acceptable; the IRR of about 13.1% exceeds the 10% hurdle. Note that a positive NPV adds value only if the discount rate reflects the project's risk.
Traps
- Using book values instead of market values in WACC.
- Deducting interest from cash flows and then discounting at WACC, which double-counts financing.
- Choosing IRR over NPV for mutually exclusive projects.
- Discounting nominal cash flows at a real rate.