CIMA Professional Qualification candidates (Strategic Level) Focus: Financial Strategy (F3) Sections Covered: Chapter 1 (The Role of the Financial Function & Strategy) & Chapter 2 (Financial Risk Management)
| Feature | Debt | Equity | |---------|------|--------| | Cost | Lower (tax shield) | Higher (higher risk) | | Risk to firm | Fixed interest & repayment | No mandatory payment | | Dilution | No | Yes | | Covenants | Often | No | | Impact on gearing | Increases | Decreases | Cima F3 Notes Financial Strategy Chapters 1 And 2
Understanding how an increase in interest rates affects the Weighted Average Cost of Capital (WACC) is a critical link between this chapter and later topics. | Be specific: “Maintain gearing <50% to protect
| Concept | Key Points | Exam Tip | |---------|------------|-----------| | | Financial strategy supports business strategy (growth, risk, return). | Always link a financial decision back to a strategic goal. | | Stakeholder objectives | Shareholders (wealth maximisation), lenders (security), managers (incentives). | Agency conflicts → propose aligned incentives (e.g., share options). | | Financial objectives | ROCE > WACC, EPS growth, gearing range, liquidity ratio targets. | Be specific: “Maintain gearing <50% to protect debt capacity.” | | Risk & return trade-off | Higher return requires higher risk tolerance (e.g., new market entry). | Use CAPM or risk-adjusted discount rates in calculations. | | Sustainable growth rate (SGR) | g = retention ratio × ROCE. | If actual growth > SGR → need external finance. | | If actual growth >