Strategic Financial Management Notes
Subject Overview
Strategic Financial Management exposes students to strategic applications of finance — corporate risk management and financial planning models, corporate valuation approaches (MVA, EVA, DCF) and long-term project evaluation, capital structure theories (Net Income, MM, Miller) and dividend policy, and working capital management and corporate restructuring. A 4-credit core theory paper.
Subject at a glance
4
Units
34
Topics
4
Credits
4
Infographics
Unit-wise Syllabus
4 units — open any unit for detailed topic-wise notes, diagrams and important exam questions
- Meaning
- nature and scope of SFM
- financial and non-financial objectives
- agency theory
- strategic decision-making framework
- shareholder value creation and value drivers
- corporate risk management using forwards/futures/options/swaps
- financial planning models and Higgins' sustainable growth model
Sustainable growth rate (Higgins)
g = ROE × retention ratio
Shareholder value
PV of future free cash flows − debt
Forward hedge
Locks today's rate for a future date
Put-call parity
C + PV(K) = P + S
Study guide
This unit covers the nature and scope of strategic financial management, objectives, agency theory, shareholder value and value drivers, corporate risk management with forwards, futures, options and swaps, financial planning models and Higgins' sustainable growth model. Learn how value drivers link decisions to shareholder value.
- Models and approaches to corporate valuation — Marakon
- Alcar
- McKinsey and DCF (FCFE/FCFF) approaches
- MVA and EVA approaches
- shareholder value creation implications
- valuation of long-term investment decisions
- sensitivity analysis
- risk-adjusted discount rates
- modified IRR and real options
FCFF
EBIT (1 − t) + depreciation − capex − change in working capital
FCFE
FCFF − interest (1 − t) + net borrowing
EVA
NOPAT − (WACC × capital employed)
MVA
Market value of firm − capital employed
Gordon growth value
P0 = D1 / (Ke − g)
Study guide
You study valuation approaches: Marakon, Alcar, McKinsey, DCF with FCFE and FCFF, MVA and EVA, valuing long-term investments, sensitivity analysis, risk-adjusted discount rates, modified IRR and real options. Practise a free cash flow valuation.
- Business and financial risk
- determinants of capital structure
- EBIT/EPS and ROI/ROE analysis
- capital structure theories (Net Income, Net Operating Income, Traditional, Modigliani-Miller, Miller Model)
- financial distress and agency cost
- dividend policy decisions
- payout ratio
- share buybacks
- bonus issues and stock splits
Net Income approach
Yes
More debt lowers WACC and raises value
Net Operating Income approach
No
WACC stays constant
Traditional approach
Yes, up to a point
An optimal debt level exists
Modigliani-Miller (no tax)
No
Arbitrage keeps values equal
MM with taxes
Yes
Interest tax shield adds value
Study guide
You study business and financial risk, capital structure determinants, EBIT-EPS and ROI-ROE analysis, theories (NI, NOI, traditional, MM, Miller), financial distress, agency costs, dividend policy, payout, buybacks, bonus issues and splits. Compare the MM theory with and without taxes.
- Meaning and concepts of working capital
- operating cycle
- permanent and temporary working capital
- approaches and sources of financing
- role of factoring and securitization
- financial distress
- methods of corporate restructuring
- government policies for reviving sick units
Expansion
Mergers, acquisitions, joint ventures
Contraction
Demerger, spin-off, divestiture
Ownership change
Buy-back, LBO, going private
Financial
Debt restructuring, recapitalisation
Study guide
You study working capital, the operating cycle, financing approaches and sources, factoring and securitisation, financial distress, corporate restructuring methods and government policies for reviving sick units. Compute an operating cycle from data.
Why Strategic Financial Management Matters
Strategic finance connects financial decisions to value creation and is key for roles in corporate finance, investment banking and CFO offices, and for CA and CFA study.
How to Prepare for Strategic Financial Management
- Practise DCF valuation and EVA computations.
- Create a comparison table of capital structure theories.
- Read about real corporate restructurings and buybacks.
Strategic Financial Management: Frequently Asked Questions
What is EVA?
Economic Value Added is a firm's net operating profit after tax minus the cost of the capital employed, showing whether it creates value.
What is the Higgins sustainable growth model?
It estimates the growth rate a firm can sustain without raising new equity or changing its financial policies.