CMA Sri Lanka SL2 Financial Strategy & Valuation Exam key terms

The long-term plan for raising, allocating and controlling a company's financial resources so that investment, financing and dividend decisions support its competitive position and stated objectives.

The objective of increasing the long-run market value of ordinary shares, including dividends received, so that owners' total return is maximised rather than short-term accounting profit.

The view that a firm should balance the interests of employees, customers, suppliers, lenders, communities and shareholders, rather than pursue shareholder value alone, because long-term success depends on these relationships.

A conflict of interest arising when managers, acting as agents for owners, pursue their own goals, such as sales growth or job security, instead of maximising shareholder value; monitoring and incentives are the usual remedies.

The system of rules, board structures and accountability mechanisms by which a company is directed and controlled, intended to protect shareholders and ensure that management acts in the entity's long-term interest.

The mix of debt, preference shares and equity finance a company uses to fund its assets and operations, usually described by the ratio of debt to total capital employed.

The proportion of a company's capital provided by fixed-charge finance such as debt and preference shares; higher gearing magnifies both returns and losses to ordinary shareholders and raises financial risk.

The extent to which a firm's cost structure is fixed rather than variable. High operating gearing means small changes in sales produce large changes in operating profit, increasing business risk.

Under restrictive assumptions of perfect markets and no taxes, capital structure does not affect firm value; with corporate taxes, debt creates value through the tax shield on interest, offset by bankruptcy costs.

The idea that firms choose debt levels by balancing the tax shield benefit of interest against the rising expected costs of financial distress, producing an optimal gearing ratio for each company.

The observation that firms prefer internal retained earnings first, then debt, and issue new equity only as a last resort, because of information asymmetry and the costs of issuing securities.

Direct and indirect costs incurred when a firm struggles to meet debt obligations, including legal and advisory fees, lost customers, supplier pressure and fire-sale asset values, which reduce firm value.

The minimum return ordinary shareholders require to hold a company's shares, reflecting the risk-free rate plus a premium for the systematic risk they bear; used as the equity component of the WACC.

The blended after-tax cost of a company's debt and equity, weighted by market values, representing the minimum return new projects must earn to leave shareholder value unchanged.

A method of estimating the cost of equity by adding the risk-free rate to a reward for systematic risk, calculated as the equity beta multiplied by the market risk premium.

A measure of how far a share's returns move with the market; it captures non-diversifiable risk and is used in the CAPM, with higher beta implying a higher required return.

A share valuation and cost of equity method that discounts expected future dividends growing at a constant rate, giving the current price as next dividend divided by required return less growth.

An investment appraisal method that values a project's base case as if all-equity financed, then adds the present value of financing side effects such as interest tax shields and subsidised loans.

The sum of a project's expected cash flows discounted at the appropriate cost of capital, less the initial outlay; a positive NPV indicates that shareholder value increases.

The discount rate at which a project's net present value equals zero. A project is acceptable when its IRR exceeds the required return, though it can mislead for non-conventional cash flows.

The present value of a project's future cash flows divided by its initial investment. It ranks projects under capital rationing by value created per unit of scarce capital.

The time taken for cumulative cash inflows to recover the initial investment. It is simple and emphasises liquidity but ignores cash flows after payback and the time value of money.

A technique that varies one input at a time to show how far it can change before a project's NPV falls to zero, highlighting the variables to which the decision is most exposed.

Project risk assessment that recalculates NPV under several consistent combinations of variables, such as pessimistic, base and optimistic cases, to show the range of possible outcomes.

A required return increased above the firm's WACC for riskier projects, reflecting the principle that higher-risk cash flows must be discounted at a higher rate.

Valuable choices embedded in investment projects, such as the option to delay, expand, abandon or switch, which conventional DCF ignores and which can justify a strategic premium.

A situation where a firm cannot fund all positive-NPV projects because capital or management capacity is limited, requiring projects to be ranked by value created per unit of scarce resource.

Cash generated by operations after tax and reinvestment in fixed and working capital, available to all providers of finance; it is the foundation of most discounted cash flow valuations.

The total value of a business's operating assets, equal to equity value plus net debt and other claims; it is the appropriate numerator for multiples such as EV/EBITDA.

Valuing a company by applying price-to-earnings, EV/EBITDA or similar ratios observed for comparable listed firms or transactions to the subject company's earnings or cash flow.

A value-based performance measure equal to net operating profit after tax less a capital charge on invested capital; positive EVA means the firm has created wealth above its cost of capital.

An offer of new shares to existing shareholders in proportion to their holdings, usually at a discount, allowing the company to raise equity while protecting holders against dilution.

A debt instrument giving the holder the right to convert into ordinary shares at a set price and date; the conversion option lowers the coupon but creates potential dilution.

A lease transferring substantially all the risks and rewards of ownership to the lessee, capitalised as an asset and liability; the lessee recognises depreciation and interest rather than rent expense.

The number of days between paying suppliers and collecting cash from customers, calculated from inventory and receivable days less payable days; a shorter cycle reduces working capital funding needs.

The order size that minimises the combined annual cost of holding inventory and placing orders, derived from demand, ordering cost and holding cost per unit.

A private, negotiated agreement to buy or sell an asset or currency at a fixed price on a future date, used to hedge transaction exposure but carrying counterparty and liquidity risk.

An agreement between two parties to exchange fixed and floating interest payments on a notional principal, used to change the interest rate profile of debt or reduce borrowing costs.

An option contract that pays the buyer when a reference interest rate exceeds a strike rate, protecting floating-rate borrowers against rising rates while retaining benefit from falls.

The risk that exchange rate movements change the domestic currency value of already contracted foreign currency receivables or payables, affecting realised cash flows.