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CMA Final SFM — Deep Explanation Guide
with Key Formulas & Practical Mastery
This enhanced guide isn’t just a formula sheet—it’s designed to give you conceptual depth, practical context, and an intuitive understanding for every single SFM topic asked in the CMA Final 2025 exam. No rote learning here: the *why* and *how* of every formula is explained, with real-life flavor and application tips throughout.
Table of Contents
- A. Investment Decisions & Project Appraisal
- B. Security Analysis & Portfolio Management
- C. Financial Risk Management
- D. International Financial Management
- E. Mergers, Acquisitions & Corporate Valuation
- F. Derivatives (Futures, Options, Swaps)
- G. Mutual Funds & Performance Measurement
- H. Digital Finance Overview
A. Investment Decisions & Project Appraisal
Why this matters: Strategic investment appraisal ensures capital is only committed to projects that strengthen a business. It’s not just calculation—real-world CFOs use these models for every major business expansion, purchase, or start-up.
1. Net Present Value (NPV)
NPV = Σ [CFt / (1 + r)^t ] – Initial Investment
- CFt = expected net cash flow in year t (inflows – outflows that year).
- r = required rate of return (discount rate, typically company’s WACC).
- t = respective year.
The NPV formula “translates” all future cash flows into their value as if you had them in hand today. This lets you compare all projects regardless of timing.
Example:
Pharma firm is considering a new line: Cost today = ₹40,00,000. It’s estimated to generate net cash flows of ₹13,00,000 in years 1 and 2, ₹17,00,000 in year 3, ₹20,00,000 in year 4. Cost of capital is 12%.
Pharma firm is considering a new line: Cost today = ₹40,00,000. It’s estimated to generate net cash flows of ₹13,00,000 in years 1 and 2, ₹17,00,000 in year 3, ₹20,00,000 in year 4. Cost of capital is 12%.
PV factors:
Year 1: 0.893, Year 2: 0.797, Year 3: 0.712, Year 4: 0.636
PV(Year 1) = ₹13,00,000×0.893 = ₹11,60,900
PV(Year 2) = ₹13,00,000×0.797 = ₹10,36,100
PV(Year 3) = ₹17,00,000×0.712 = ₹12,10,400
PV(Year 4) = ₹20,00,000×0.636 = ₹12,72,000
Sum PV inflows = ₹46,79,400
NPV = 46,79,400 – 40,00,000 = ₹6,79,400
Decision: Since NPV > 0, the project should be accepted; it creates value for the company.
2. Internal Rate of Return (IRR)
Set NPV = 0 and solve for r in: Σ [CFt / (1 + r)^t] = Initial Outlay
What’s IRR conceptually? The IRR is the “break-even” return rate of a project, after factoring all time-value effects.
Suppose you invest ₹1,20,000 and expect ₹40,000 a year for 4 years.
Try r = 12%:
PV(40,000, 4 years, 12%) = 40,000 × PVAF(12%,4) = 40,000 × 3.037 = ₹1,21,480 (NPV slightly positive)
Try r = 14%:
PVAF(14%,4) = 2.914; PV = ₹1,16,560 (NPV negative)
IRR = 12% + [ (1,480) / (1,480+3440) ] ×(14-12) ≈ 12.6%
Try r = 12%:
PV(40,000, 4 years, 12%) = 40,000 × PVAF(12%,4) = 40,000 × 3.037 = ₹1,21,480 (NPV slightly positive)
Try r = 14%:
PVAF(14%,4) = 2.914; PV = ₹1,16,560 (NPV negative)
IRR = 12% + [ (1,480) / (1,480+3440) ] ×(14-12) ≈ 12.6%
IRR is especially valuable when a company has a “minimum required” hurdle rate for projects—if IRR is above it, the project passes!
3. Modified Internal Rate of Return (MIRR)
MIRR = (FV of all +ve CFs / PV of all -ve CFs )^(1/n) – 1
MIRR always provides one logical answer, even for projects that have non-standard (mixed +/–) cash flows and avoids the “multiple IRR” trap.
Cash flows: Year 0: –50,000
Year 1: 15,000 | Year 2: 18,000 | Year 3: 32,000
Assume both investing (discount) and reinvestment rate is 10%.
PV (-ve CF) = 50,000
FV(+ve CFs at yr 3): 15,000×1.21 + 18,000×1.10 + 32,000 = 18,150 + 19,800 + 32,000 = ₹69,950
MIRR = (69,950/50,000)^(1/3) –1 ≈ 12.4%
Year 1: 15,000 | Year 2: 18,000 | Year 3: 32,000
Assume both investing (discount) and reinvestment rate is 10%.
PV (-ve CF) = 50,000
FV(+ve CFs at yr 3): 15,000×1.21 + 18,000×1.10 + 32,000 = 18,150 + 19,800 + 32,000 = ₹69,950
MIRR = (69,950/50,000)^(1/3) –1 ≈ 12.4%
4. Payback & Discounted Payback Period
Payback = years before recovery + (amount to recover/cash flow in year of recovery)
If ₹60,000 invested; cash inflows of ₹22,000/yr, then after 2 years you’ve earned ₹44,000,
need ₹16,000 more. Third year earns ₹22,000.
Payback = 2 + (16,000/22,000) ≈ 2.73 years.
need ₹16,000 more. Third year earns ₹22,000.
Payback = 2 + (16,000/22,000) ≈ 2.73 years.
Payback is a cash-risk tool, not a value tool; discounted payback is better, but NPV always wins for decisions.
B. Security Analysis & Portfolio Management
In real life, you don’t buy single stocks or bonds—you create portfolios. You need to analyze risk, return and inter-relationships between assets. Whether you’re managing your own wealth, running a mutual fund, or working for a corporate treasury, this skill set is fundamental.
1. Bond Valuation
Price = Σ (Coupon / (1 + YTM)^t ) + Face Value/(1 + YTM)^n
A ₹1,000 bond; 3 years; 8% coupon; market YTM = 9%. Coupons paid annually.
PV coupons: 80/1.09 = 73.4; 80/1.1881 = 67.3; 80/1.2950 = 61.8
PV FV: 1000/1.295 = 772.8
Total value = 73.4 + 67.3 + 61.8 + 772.8 = ₹975.3
PV coupons: 80/1.09 = 73.4; 80/1.1881 = 67.3; 80/1.2950 = 61.8
PV FV: 1000/1.295 = 772.8
Total value = 73.4 + 67.3 + 61.8 + 772.8 = ₹975.3
2. Yield to Maturity (YTM) and Current Yield
YTM ≈ [Coupon + (FV-Price)/n ] / [(FV+Price)/2]
If coupon = ₹80, price = ₹975, FV = ₹1,000, n=3:
YTM = [80 + (1000–975)/3] / [(1000+975)/2]
= (80 + 8.33) / 987.5 = 0.089 or 8.9%
YTM = [80 + (1000–975)/3] / [(1000+975)/2]
= (80 + 8.33) / 987.5 = 0.089 or 8.9%
3. Duration and Modified Duration
Duration = Σ [ t × PV(CFt) ] / Price
Duration = “average time to get your money.” Useful for immunization and interest rate risk management.
4. Dividend Discount Model (DDM)
Value = D1 / (Ke − g)
Used for predicting intrinsic value of stable-growth stocks (banking, FMCG, etc).
5. CAPM and Beta
Ke = Rf + β (Rm − Rf)
Gilt rate = 6%; Market return = 12%; stock beta = 1.25
Ke = 6 + 1.25×(12–6) = 6 + 7.5 = 13.5%
Ke = 6 + 1.25×(12–6) = 6 + 7.5 = 13.5%
6. Portfolio Expected Return and Variance
Rp = w1 R1 + w2 R2
σp² = w1²σ1² + w2²σ2² + 2w1w2ρσ1σ2
Adding negatively correlated assets can reduce overall risk!
C. Financial Risk Management
Modern business faces risks from volatility in markets, currency, and interest. Professional risk tools help foresee, quantify, and mitigate these.
1. Value at Risk (VaR)
VaR = Z × σ × √t × Portfolio Value
A portfolio of ₹1 crore, 1-day std dev = 2.2%; 99% Z = 2.33.
VaR = 2.33×0.022×1,00,00,000 = ₹5,12,600
This tells you: “There is only a 1% chance you will lose more than this in one day.”
VaR = 2.33×0.022×1,00,00,000 = ₹5,12,600
This tells you: “There is only a 1% chance you will lose more than this in one day.”
D. International Financial Management
1. Forward Exchange Rate
F = S × (1 + id)/(1 + if)
This formula lets you “lock in” a future rate for cross-border repatriation or payments, useful for hedging and planning.
If current USD/INR = 82.5, id = 6%, if = 2%:
F = 82.5 × 1.06 / 1.02 = 85.78
F = 82.5 × 1.06 / 1.02 = 85.78
E. Mergers, Acquisitions & Corporate Valuation
Whether you’re expanding your own firm or valuing a possible takeover, you’ll need to assess future cash flows, synergy gains, and proper exchange ratios.
1. DCF Valuation of Company
Firm Value = Σ [FCFt / (1+WACC)^t]
2. Post Merger EPS
EPS = Combined PAT / Total Shares after Merger
F. Derivatives
Modern finance manages risk using smart tools like futures, options, and swaps. These “derive” their value from underlying stocks, commodities, or rates.
1. Futures Cost-of-Carry
F = S × e^(r – y) T
2. Black-Scholes Formula (Call Option)
C = S N(d1) – K e^(–rT) N(d2) d1 = [ln(S/K) + (r + σ²/2)T ]/ σ√T d2 = d1 – σ√T
Deep-dive into why options have value: time, volatility, and underlying movement expectations.
3. Swap Valuation
Fixed payment = Notional × Rate × (Days/360)
G. Mutual Funds & Performance
Mutual Funds offer diversification and risk management for everyday investors. You must assess not just returns, but also risk-adjusted performance.
1. NAV
NAV = (Assets – Liabilities)/Units
2. Sharpe, Treynor, Jensen’s Alpha
Assess MF performance after adjusting for market or absolute risk.
H. Digital Finance
Digital payments (UPI, wallets), blockchain, robo-advisory, digital lending are changing both the HOW and the WHAT of SFM—think speed, transparency, new risks, new controls!
