A complete summary of strategic financial management including a series of practice questions (with answers). Content is based on the SFM course at Leiden University, but is really applicable to any finance related course.
Summary of Strategic Financial
Management
Timo Kats, ICT in Business
1
,Contents
1: The three core financial statements ................................................................................................... 3
Balance sheet ...................................................................................................................................... 3
Income statement ............................................................................................................................... 3
Statement of cash flows...................................................................................................................... 3
2: Measuring performance from the financial statements .................................................................... 5
Important formula’s and ratios........................................................................................................... 5
The Dupont Scheme ............................................................................................................................ 6
3: Time value of money and investment criteria .................................................................................... 7
Future value of money ........................................................................................................................ 7
Present value of money ...................................................................................................................... 7
Investment criteria.............................................................................................................................. 7
4: Financial markets and shares .............................................................................................................. 9
CAPM model ....................................................................................................................................... 9
Weighted average cost of capital (WACC) .......................................................................................... 9
Share price .......................................................................................................................................... 9
Dividend Discount Model.................................................................................................................... 9
Hurdle rate .......................................................................................................................................... 9
5: Other ................................................................................................................................................. 10
Three Basic Laws of Strategic Finance .............................................................................................. 10
The 4 types of competition ............................................................................................................... 10
The value drivers from an investors’ point of view .......................................................................... 10
Risk assessment and heat maps ....................................................................................................... 11
S-C-V .................................................................................................................................................. 11
VUCA ................................................................................................................................................. 11
Sunk costs and opportunity costs ..................................................................................................... 11
DCF-Trap ........................................................................................................................................... 11
6: Exam questions ................................................................................................................................. 12
Subjects ............................................................................................................................................. 12
Examples ........................................................................................................................................... 12
2
, 1: The three core financial statements
Balance sheet
The balance sheet is an overview what a company owns and what a company owes at a point in time.
What is owned is on the left, what is owed is on the right. The different parts that make the balance
sheet are: assets, liabilities and equity. Together, these parts also form the accounting equation,
which is: assets = liabilities + equity.
Next, assets and liabilities are segmented in current (assets and liabilities) and non-current (assets and
liabilities). In this segmentation, current refers to all assets or liabilities that can be converted to cash
or be paid off within a year, and non-current refers to the rest. For example, cash and accounts-
retrievable are current assets, whilst property and equipment are non-current assets.
1) Often, assets and liabilities are sorted from most current/liquid to least current/liquid
2) Equity can either be owners’ equity or stockholders’ equity. Depending on the company.
DEBIT CREDIT
ASSETS LIABILTIES
CURRENT ASSETS CURRENT LIABILITIES
NON-CURRENT ASSETS NON-CURRENT LIABILITIES
EQUITY
Income statement
Also called the profit and loss statement, an income statement is a financial statement that shows you
the company's income and expenditures. It also shows whether a company is making profit or loss for
a given period. In summary, the underlying formula of the income statement is: Net Income =
(Revenues + Gains) – (Expenses + Losses).
However, there are many more steps involved when you go from the top line (aka Revenue) to the
bottom line (aka net income) in practice. Cost of goods sold, operating expenses, EBIT etc. These are
all steps in the income statement and they differ per company.
2022 2021
REVENUE $ 100 $ 80
MORE DETAILED INFO… …. ….
EXPENSES $ 50 $ 20
MORE DETAILED INFO… …. ….
GAINS …. ….
LOSSES …. ….
NET INCOME $ 50 $ 60
Statement of cash flows
The statement of cash flows shows the inflows and outflows of cash due to the firm's activities during
a stated period. There are three categories in the statement of cash flows, namely: cash flow from
operating activities, investing and financing.
In summary, the operations section of the statement of cash flows is related to the operations of the
company, the investing section shows the money that was spent on capital equipment items. Finally,
the financing section shows money that has come into the company through the sale of stock or the
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