Advanced Financial Management Notes
Subject Overview
Advanced Financial Management is the second Accounting & Finance elective, building on Financial Management with the strategic and advanced side of corporate finance. You'll cover financial strategy formulation and sources of finance (equity, debt, venture capital, private equity), risk and ethical issues in financial decision-making, advanced investment appraisal under capital rationing and uncertainty, and business valuation methods. The final unit covers corporate reconstruction, mergers and acquisitions, and business re-organisation. This is a 6-credit elective paper across 4 units, aimed at students who want to go deeper into corporate finance and M&A.
Subject at a glance
4
Units
37
Topics
6
Credits
4
Infographics
Unit-wise Syllabus
4 units — open any unit for detailed topic-wise notes, diagrams and important exam questions
- Role of the senior financial adviser
- financial strategy formulation
- ratio analysis and gearing considerations
- sources of finance — equity
- debt
- hybrids
- lease finance
- venture capital
- business angel finance
- private equity
- asset securitisation
Equity
Highest
Dilutes ownership
Debt
Lower (tax-deductible interest)
No dilution; fixed obligations
Hybrids (convertibles)
Medium
May dilute later
Venture capital / private equity
High expected return
Investors take board influence
Study guide
This unit takes the viewpoint of a senior finance adviser: forming financial strategy, using ratio analysis and gearing considerations, and choosing among sources of finance such as equity, debt, hybrids, lease finance, venture capital, business angels, private equity and asset securitisation. Compare the sources by cost, control and risk in a table.
- Identifying business and financial risk (operational, reputational, political, economic, regulatory, fiscal)
- risk-return trade-off
- ethical and governance issues
- agency relationships
- transaction cost theory
- integrated reporting
Operational
Failures in processes or systems
Reputational
Damage to brand trust
Political
Government actions
Economic
Recession, inflation, currency
Regulatory and fiscal
Laws and tax changes
Study guide
You study how to identify business and financial risk (operational, reputational, political, economic, regulatory and fiscal), the risk-return trade-off, ethical and governance issues, agency relationships, transaction cost theory and integrated reporting. Link each risk type to a real company example.
- Capital rationing — single and multi-period
- divisible and indivisible projects
- sensitivity analysis
- risk-adjusted discount rates
- simulation and scenario analysis
- market capitalisation
- asset-based valuation
- PE ratio
- dividend valuation
- discounted free cash flow
Market capitalisation
Share price × shares
Asset-based
Net asset value
PE ratio
Earnings × comparable multiple
Dividend valuation
Present value of dividends
Discounted free cash flow
Present value of future cash flows
Study guide
Advanced appraisal deals with uncertainty and limited funds. You study capital rationing for single and multiple periods and for divisible and indivisible projects, sensitivity analysis, risk-adjusted discount rates, simulation and scenario analysis, and valuation methods: market capitalisation, asset-based valuation, PE ratio, dividend valuation and discounted free cash flow. Practise a DCF valuation with a short forecast.
- Financial and capital reconstruction schemes
- reasons for and against mergers and acquisitions
- legal and procedural aspects
- valuation of M&A
- reverse takeovers
- business unbundling
- divestment
- spin-offs
- management buy-outs
- share repurchase
- Merger
- Two firms combine into one
- Acquisition
- One firm buys another
- Demerger / spin-off
- A unit becomes a separate company
- Divestment
- Selling a unit
- Management buy-out
- Managers buy the business
Study guide
The last unit covers capital reconstruction schemes, reasons for and against mergers and acquisitions, legal and procedural aspects, M&A valuation, reverse takeovers, unbundling, divestment, spin-offs, management buy-outs and share repurchase. Know the difference between a merger, an acquisition and a demerger.
Why Advanced Financial Management Matters
Advanced finance topics such as valuation, risk analysis and M&A are the core of corporate finance, investment banking and consulting careers and are the bridge to professional qualifications such as CFA and CA.
How to Prepare for Advanced Financial Management
- Practise discounted cash flow valuation and capital rationing problems.
- Read about one recent Indian merger and note the valuation and rationale.
- Prepare a table of financing sources with their advantages and limitations.
Advanced Financial Management: Frequently Asked Questions
What is capital rationing?
Capital rationing occurs when a firm has limited funds and must choose among profitable projects, usually by ranking them to maximise total value.
What is a leveraged or management buy-out?
A management buy-out occurs when a company's managers purchase the business from its owners, often using borrowed funds.