Financial Statement Analysis
20%of exam
Corporate Finance
20%of exam
Decision Analysis
25%of exam
Risk Management
10%of exam
ERM / COSORisk ResponsesHedgingDerivatives
Investment Decisions
10%of exam
NPVIRRPaybackProfitability IndexReal Options
Professional Ethics
15%of exam
IMA 4 StandardsConflict ResolutionEthics HelplineCode of Conduct
Quick Facts
- Exam
- CMA Part 2
- Credential
- IMA CMA
- Format
- 100 MCQ + 2 essays
- Time
- 4 hr (3hr MCQ, 1hr essay)
- Pass
- 360/500 scaled
- Essay gate
- 50% MCQ to reach essays
- Windows
- Jan-Feb, May-Jun, Sep-Oct
- Provider
- Prometric (ICMA)
DuPont 3-Step
Margin x Turnover x Leverage = ROE
Margin: NI/SalesTurnover: Sales/AssetsLeverage: Assets/Equity
Current vs Quick Ratio
Current
- Includes inventory
- CA / CL
- Broad liquidity
Quick
- Excludes inventory
- Stricter test
- Acid-test
Quick removes least liquid
Liquidity Ratios
- Current ratio
- CA / CL
- Quick ratio
- (CA - inventory - prepaid) / CL
- Cash ratio
- (Cash + securities) / CL
- Net working capital
- CA - CL
- Higher = safer
- More liquid cushion
Qualified vs Adverse Opinion
Qualified
- Except for issue
- Otherwise fair
- Limited misstatement
Adverse
- Not fairly stated
- Pervasive misstatement
- Worst opinion
Adverse = statements unreliable
Leverage Ratios
- Debt-to-equity
- Total debt / equity
- Debt-to-assets
- Total debt / total assets
- TIE
- EBIT / interest expense
- Low TIE
- Default risk (<1.5x)
- Solvency
- Long-term obligation safety
Activity Ratios
- Inventory turnover
- COGS / avg inventory
- Days inventory
- 365 / inv turnover
- AR turnover
- Net credit sales / avg AR
- DSO
- 365 / AR turnover
- CCC
- DSO + DIO - DPO
- Shorter CCC
- Less cash tied up
Profitability
- Gross margin
- Gross profit / sales
- Operating margin
- EBIT / sales
- Net margin
- Net income / sales
- ROA
- Net income / total assets
- ROE
- Net income / equity
- P/E ratio
- Price / EPS
DuPont + Quality
- DuPont ROE
- Margin x turnover x leverage
- Net margin
- Net income / sales
- Asset turnover
- Sales / total assets
- Equity multiplier
- Assets / equity
- Earnings quality
- Cash-backed, repeatable income
- Common-size
- Percent of sales/assets
Leverage Chain
DOL x DFL = DTL
DOL: operating riskDFL: financial riskDTL: total risk
Operating vs Financial Leverage
Operating (DOL)
- Fixed operating costs
- CM / EBIT
- Business risk
Financial (DFL)
- Fixed interest costs
- EBIT / (EBIT-int)
- Financial risk
DOL x DFL = DTL
Cost of Capital
- WACC
- Blended equity, after-tax debt cost
- CAPM
- Rf + Beta(Rm - Rf)
- After-tax debt
- Rd x (1 - tax rate)
- Market risk premium
- Rm - Rf
- Beta
- Systematic risk only
- Hurdle rate
- Blended required return
WACC Tax Shield
Debt costs Rd x (1 - tax)
Interest: deductibleEquity: no shieldLowers WACC to a point
Debt vs Equity Financing
Debt
- Tax-deductible interest
- Cheapest source
- Adds financial risk
Equity
- No fixed payment
- Dilutes ownership
- Higher cost
Tax shield favors debt
Capital Structure
- Optimal structure
- Mix minimizing WACC
- Tax shield
- Deductible interest
- MM Prop I
- No-tax: structure irrelevant
- MM with taxes
- Value rises with debt
- Trade-off theory
- Shield vs distress cost
- Distress cost
- Raises Rd and Re
Working Capital
- EOQ
- Minimizes total inventory cost
- D / S / H
- Demand / order / holding
- Forgo discount
- ~37% on 2/10 net 30
- Float
- Delay in cash movement
- Aggressive policy
- Less WC, higher risk
- Conservative policy
- More WC, lower risk
Leverage + Dividends
- DOL
- CM / EBIT
- DFL
- EBIT / (EBIT - interest)
- DTL
- DOL x DFL
- Residual dividend
- Pay after positive-NPV projects
- Stable dividend
- Smoothed predictable payout
- Stock split
- More shares, same value
Relevant vs Sunk Cost
Relevant
- Future cost
- Differs by choice
- Affects decision
Sunk
- Already incurred
- Cannot change
- Always ignore
Only relevant costs matter
Relevant Cost: Include or Ignore?
- Already incurred→Ignore(Sunk cost)
- Forgone benefit→Include(Opportunity cost)
- Differs by choice→Include(Relevant)
- Same either way→Ignore(Irrelevant)
- Avoidable fixed cost→Include(Stops if dropped)
- Allocated common fixed→Ignore(Unavoidable)
- Joint cost pre-split→Ignore(Sunk)
- Idle capacity order→Ignore fixed(Use incremental)
CVP Analysis
- CM per unit
- Price - variable cost
- CM ratio
- CM / selling price
- Break-even units
- Fixed costs / CM unit
- Break-even dollars
- Fixed costs / CM ratio
- Target units
- (FC + profit) / CM unit
- Margin of safety
- Sales - break-even sales
Relevant Costs
- Relevant cost
- Future, differs by choice
- Sunk cost
- Incurred, always irrelevant
- Opportunity cost
- Forgone next-best benefit
- Make-or-buy
- Avoidable cost vs price
- Special order
- Price > incremental cost
- Keep-or-drop
- Drop if segment margin negative
Pricing + Constraints
- Cost-plus
- Markup on cost
- Target costing
- Price - profit = cost
- Price elasticity
- %Qty / %Price
- Elastic (>1)
- Price up, revenue down
- Constraint rule
- CM per scarce unit
- Expected value
- Sum(probability x payoff)
Risk Management
- ERM
- Firm-wide risk process
- COSO ERM
- Risk linked to strategy
- Risk appetite
- Acceptable risk level
- Avoid / reduce
- Exit or mitigate
- Share / accept
- Transfer or retain
- Forwards/futures
- Lock in price
- Options
- Right, not obligation
- Swaps
- Exchange cash flows
NPV vs IRR
NPV
- Dollar value added
- WACC reinvestment
- Use when conflict
IRR
- Percent return
- Reinvest-at-IRR flaw
- Multiple rates possible
Mutually exclusive = NPV
Which Capital Budgeting Method?
- Measure value added→NPV(Dollars)
- Mutually exclusive→NPV(Ignore IRR conflict)
- Rank under rationing→Profitability Index(Value per dollar)
- Need % return→IRR(vs hurdle rate)
- Liquidity / risk screen→Payback(Years to recover)
- Time value matters→Discounted payback(PV inflows)
- Flexibility / uncertainty→Real options(Adds to NPV)
- NPV vs IRR conflict→NPV(Realistic reinvestment)
Capital Budgeting
- NPV
- PV inflows - investment
- NPV rule
- Accept if NPV > 0
- IRR
- Rate where NPV = 0
- IRR rule
- Accept if IRR > hurdle
- Payback
- Years to recover cost
- PI
- PV inflows / investment
- Real options
- Expand, abandon, defer
IMA Ethics Standards
C-C-I-C: Competence Confidentiality Integrity Credibility
Competence: skillConfidentiality: secrecyIntegrity: no conflictsCredibility: fair disclosure
IMA Ethics
- Competence
- Skill, current knowledge
- Confidentiality
- No improper disclosure
- Integrity
- Avoid conflicts of interest
- Credibility
- Fair, full disclosure
- Conflict step 1
- Follow firm policy
- Escalate
- Higher management levels
- Ethics Helpline
- IMA confidential advice
Common Traps
NPV vs IRR
NPV = dollar value added ≠ IRR = % return, reinvest flaw
Sunk vs relevant
Sunk costs always ignored ≠ Only future differences count
Current vs quick
Current includes inventory ≠ Quick excludes inventory
ROA vs ROE
ROA ignores financing ≠ ROE rises with profitable debt
Cost-plus vs target
Cost-plus ignores demand ≠ Target starts at market price
Joint cost trap
Pre-split costs are sunk ≠ Process if revenue > added cost
Payback weakness
Payback ignores time value ≠ Ignores post-payback flows
Last Minute
- 1.FSA 20, CorpFin 20, Decision 25
- 2.Risk 10, Investment 10, Ethics 15
- 3.Need 360 of 500 to pass
- 4.Hit 50% MCQ to reach essays
- 5.WACC blends equity and after-tax debt
- 6.CAPM is riskfree plus beta premium
- 7.EOQ minimizes total inventory cost
- 8.Mutually exclusive projects use NPV
- 9.Sunk costs irrelevant; opportunity costs relevant
- 10.DuPont: margin x turnover x leverage
- 11.Ethics: Competence Confidentiality Integrity Credibility
- 12.Ethics conflict: follow policy, then escalate
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