How to simplify section B & Section C of US CMA part 2? Guidlines..Read

 

How to simplify section B & Section C of US CMA part 2? Guidlines..Read

How to simplify section B & Section C of US CMA part 2? Guidlines..Read..

US CMA Part 2 - Students find Section B & C the most confusing because formulas are similar. I teach it with this simple logic to my students:

\### SECTION B: CORPORATE FINANCE \[20%\] - Money Management

Don't memorize 15 formulas. Remember only ONE story: \*"Where to get money, Where to put money, and What to return to investor."\*

\*1. Where to get money? - Cost of Capital\*

Simplified: Company needs money. It has 2 pockets - Debt (loan) and Equity (share).

Debt is cheaper because interest gives tax saving.

\> \*Example:\* Company takes loan at 10% interest, Tax rate 30%

\> Cost of Debt = 10% x (1 - 0.30) = 7%

\> So actual cost is only 7%, not 10%. This is WHY CMA always asks after-tax cost.

\*2. Where to put money? - Capital Structure\*

Question is always: More debt is good or bad?

Simple Rule: Debt is good till it increases profit, but too much debt = Risk of bankruptcy.

\> \*Trick for exam:\* If question says "Optimal Capital Structure" - Choose the point where WACC is MINIMUM and Firm Value is MAXIMUM. Both happen at same point.

\*3. What to return? - Dividend & Share Repurchase\*

Company earned profit. Should it give dividend or keep it?

If company has good project to invest -> Don't give dividend, invest it.

If no good project -> Give back to shareholders.

\> \*Example:\* Gordon Model you see in B. Just remember: Stock Price = Dividend / (Return - Growth)

\> If Dividend = $2, Return = 10%, Growth = 4%

\> Price = 2 / (0.10 - 0.04) = $33.33. That's it.

\### SECTION C: DECISION ANALYSIS \[25%\] - Heart of Part 2

This is CVP + Marginal Analysis. All questions are ONE line: \*"Should I accept or reject?"\*

\*Use this 2-Minute Rule:\*

\*Rule 1: For CVP, forget all formulas. Remember only 1:\*

\*Profit = (P - V) x Q - F\*

Where P=Price, V=Variable cost, Q=Qty, F=Fixed cost.

\> \*Example:\* Price $50, Variable $30, Fixed $20,000, Qty 2000

\> Profit = (50-30) x 2000 - 20000 = 40,000 - 20,000 = $20,000

\> Breakeven? Profit = 0, so 0 = (20) x Q - 20,000 -> Q = 1,000 units. Done. No need to learn separate breakeven formula.

\*Rule 2: For Decision Making, ONLY Consider RELEVANT Cost.\*

Relevant = Future + Different + Cash.

Sunk Cost (already spent) = NEVER relevant. Fixed cost which will not change = NEVER relevant.

\> \*Exam Trap Example:\*

\> You have old machine book value $10,000. New machine costs $30,000. Should you replace?

\> Students take $10,000. WRONG.

\> $10,000 is Sunk Cost. Ignore it. Only compare: New machine cost vs Saving from new machine. That's it.

\> \*Special Order Decision Example:\*

\> Normal Price $100, Variable $60, Fixed $20. Special order offers $70 for 500 units, spare capacity available.

\> Should you accept?

\> Normal thinking: Loss of $10 ($70-$80 total cost). WRONG.

\> CMA Thinking: Fixed cost will be incurred anyway, so irrelevant. Contribution = $70 - $60 = $10 profit per unit. ACCEPT. You earn extra $5,000.

\*My Advice for First Attempt:\*

1.  \*Section B:\* Practice 50 Questions on WACC, CAPM, and Dividend Models only. 70% of B comes from there.

2.  \*Section C:\* Practice 100 Questions on CVP and Marginal Analysis. If you are strong in "Relevant Costing", you will clear C easily.

3.  Don't learn formulas by heart. Write on one paper: \*All C formulas start from (P-V) x Q\*. You will never forget.

If you want, I can ✍️ write further helpful tips on same section...Just write ✍️ YES