Strategic Financial Management DEC 2025

Description

Strategic Financial Management

Dec 2025 Examination

 

 

Q1. A firm is considering a strategic acquisition of a competitor. The target company has the following projected free cash flows (in Rs. lakh) for the next 5 years: Year 1: 120, Year 2: 140, Year 3: 160, Year 4: 180, Year 5: 200. After Year 5, free cash flows are expected to grow perpetually at 6% per annum. The acquirer’s weighted average cost of capital (WACC) is 14%. However, due to integration risks, the acquirer wants to apply a 2% risk premium to the WACC for the terminal value calculation only. The acquisition will require an immediate investment of Rs.1,000 lakh, and an additional Rs.200 lakh in Year 2 for restructuring. Calculate the maximum price the acquirer should pay for the target company using the Discounted Cash Flow (DCF) method, clearly showing (a) the present value of explicit period cash flows, (b) the present value of terminal value, and (c) the adjustment for the additional investment. Justify all discounting and risk adjustments. (10 Marks)

Ans 1.

Introduction

Strategic acquisitions are complex financial decisions that require detailed valuation techniques to ensure that the acquiring firm does not overpay for the target company. One of the most widely accepted approaches is the Discounted Cash Flow (DCF) method, which estimates the present value of future free cash flows. This method allows an acquirer to assess the intrinsic value of a business by discounting projected cash inflows to their present worth using an appropriate cost of capital. In this scenario, the acquiring firm is evaluating a competitor with projected cash flows over a

 

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Q2. A listed company in the infrastructure sector has reported strong profits and positive cash flows. The board is divided on whether to distribute higher dividends to shareholders or retain the earnings to fund upcoming expansion projects. The CFO is tasked with presenting an analysis of the long-term financial implications of both options, considering the company’s growth strategy, liquidity needs, and the expectations of various stakeholders. Evaluate the strategic financial management decisions of a firm that must choose between paying dividends now or retaining earnings for future expansion. Critically assess the impact of each option on shareholder value, liquidity, and long-term profitability, and justify your recommendation. (10 Marks)

Ans 2.

Introduction

In the infrastructure sector, listed companies often face the dilemma of whether to reward shareholders with immediate dividends or reinvest profits into business expansion. The decision holds significant implications for financial management, as it directly affects shareholder value, future growth, and the liquidity position of the company. Strong profitability and healthy cash flows provide the firm with flexibility, but the choice between dividend distribution and earnings retention must be aligned with the company’s long-term strategy. While dividends offer short-term returns and build investor

 

 

 

Q3 (A). A company is evaluating a strategic divestment of one of its business units. The unit’s projected free cash flows for the next 4 years are as follows (in Rs. lakhs):

Year	Free Cash Flow (₹ Lakhs)
1	60
2	70
3	80
4	90

 

After year 4, the unit is expected to grow at a constant rate of 5% per annum indefinitely. The company’s weighted average cost of capital (WACC) is 13%. Calculate the value of the business unit using the discounted cash flow (DCF) approach, including the terminal value, and interpret the strategic implications of your result for the divestment decision. (5 Marks)

Ans 3a.

Introduction

The discounted cash flow (DCF) approach is widely recognized as a robust tool for valuing business units, as it focuses on future cash generation rather than only historical performance. In the context of a potential divestment decision, estimating the intrinsic value of a unit helps management assess whether the sale price aligns with its long-term economic worth. By discounting

 

Q3 (B). A company operating in a highly volatile industry finds that its traditional accounting system is inadequate for strategic decision-making. The management wants a new system that not only tracks past performance but also provides predictive insights, supports risk management, and enables timely strategic responses to market changes. Propose a strategic financial management system for a company seeking to improve its forecasting and adaptability in a volatile market. The company’s current accounting model is backward-looking and fails to provide actionable insights for future decision-making. How would you design a forward-looking system that integrates decision support, risk assessment, and performance monitoring? (5 Marks)

Ans 3b.

Introduction

In industries characterized by high volatility, traditional accounting systems that focus solely on past events fail to support agile decision-making. Companies require forward-looking systems that integrate forecasting, risk management, and decision support to navigate uncertainty effectively. A strategic financial management system addresses these gaps by combining predictive