acca paper f9 – financial management revision course june 2010 exams

ACCA Paper F9 – Financial Management

Revision CourseJune 2010 Exams

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Key Dates for the June 2010 exam

Registered with ACCA by 31 December 2009

Exam entry by 15 April 2010

Exam date 10 June 2010

Exam results 23 August 2010

Three Steps to Success

Step 1Learning

Taught course

Step 2Practise &

revise

Revision course

Step 3Exam rehearsal

Question day

Final Mock

How to use the revision material• Revision notes

– Skills bank – 5 key skills required to pass this paper– Knowledge bank – summaries of all key topics in the syllabus– Recent relevant articles from ACCA website

• Revision kit

– Preparation questions– Past exam questions – Mock exams– MyStudy online question debriefs

Online Learning Environment - How to get access

Log in details emailed to you Not received log in details or have IT queries?

Contact [email protected] or telephone 0845 0751 100

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Contact [email protected] or telephone 0845 0751 100

Visit http://learn.bpp.com Visit http://learn.bpp.com

Questions?

Why have we developed this?To reinforce key skills needed to pass the exam!

Why have we developed this?To reinforce key skills needed to pass the exam!

What’s included?Your printed Practice and Revision Kit in e-book and interactive formats, and a

selection of on line debriefs of key questions.

What’s included?Your printed Practice and Revision Kit in e-book and interactive formats, and a

selection of on line debriefs of key questions.

How does it work?You can access the online

learning environment from any PC* with an internet connection

*Minimum requirements apply

How does it work?You can access the online

learning environment from any PC* with an internet connection

*Minimum requirements apply

How much does it cost?Nothing! The online environment is provided at no

additional cost to the classroom course

How much does it cost?Nothing! The online environment is provided at no

additional cost to the classroom course

Logging on to MyStudy…

Your Learning Plan…

Drilling down to the chapters…

Launching an online lecture…

What the online lectures look like…

page 5

The examination paper

Examiner: Anthony HeadExaminer: Anthony Head

50% numerical 50% discussion

60% knowledge 40% application

Format of the Exam Marks

4 questions All compulsory worth 25 marks each 100

page 5-6

Syllabus

A Financial management function

B Financial management environment

C Working capital management

D Investment appraisal techniques

E Sources of business finance

Syllabus

F Cost of capital

G Business valuations

H Risk management

page 22

Chapter 1- financial management & objectives

Maximisation of shareholder wealth


Total shareholder return =

dividend yield + capital gain

page 22



Value for moneyValue for money

• Economy

• Efficiency

• Effectiveness


page 22




Needs of other stakeholders


• Internal

• Connected

• External


page 22






• Corporate governance

• Incentive schemes

Corporate governanceAgency theory

Corporate governanceAgency theory


page 24



Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision

Financial accountingManagement accounting

Financial accountingManagement accounting


page 26

Chapter 2 – economic environment




Economic environmentEconomic environment

page 28

Chapter 3 – financial markets & institutions



Investment decisionInvestment decision Financing decisionFinancing decision

Financial marketsFinancial marketsFinancial institutionsFinancial institutions

Dividend decisionDividend decision

DisintermediationMoney marketCapital market

Financial intermediaries • Maturity transformation• Aggregation of funds• Pooling losses

Chapter 4 – working capital




•cash operating cycle•sales /net working capital ratio•overtrading

Working capitalcan boost profits

Working capitalcan boost profits

Working capital cancause liquidity problems

Working capital cancause liquidity problems

Conflict between objectivesConflict between objectives

Chapter 5 – managing working capital




• holding cost Ch x Q/2• ordering cost Co x D/Q• EOQ• buffer stock• discounts • JIT

Managing working capitalManaging working capital

InventoryInventory






ReceivablesReceivables

• Policy• Credit analysis system• Credit control system• Debt collection





• Cost• Benefit


PayablesPayables

Foreign accounts receivableForeign accounts receivable

• Letters of credit• Bills of exchange• Invoice discounting• Export factoring

Chapter 6 – financing working capital




• layoutCash flow forecastingCash flow forecasting

Financing investments in working capitalFinancing investments in working capital

LayoutJan

Cash receiptsSales receipts X

Issue of shares

XCash payments

Purchase payments XDividends X

Non current assets XWages X

XCash surplus/deficit XCash balance, beginning X

Cash balance, ending X

Chapter 6 – financing working capital




Mathematical modelsMathematical models

• Baumol • Miller-Orr

Funding investments in working capitalFunding investments in working capital

Day 1 recap quiz

1. What is total shareholder return ?

2. What are the functions of a financial intermediary ?

3. What is the average inventory level in an EOQ system?

4. What are the advantages of JIT?

5. What sort of company might use a debt factor ?

Day 1 recap quiz - solutions

1. (change in the share price + dividend paid) / start of year share price

2. Maturity transformation, aggregation, pooling losses

3. Q/2 + buffer

4. Avoid ‘hidden costs’ of inventory

5. Rapidly expanding small/medium sized company.

Chapter 7 – investment decision




ROCEROCE

Relevant costsRelevant costs

Chapter 7 – investment decision




paybackpayback

Capital budgeting framework

Capital budgeting framework

• Collecting ideas

• Screening out

• Financial analysis

• Review

Chapter 8 – DCF methods




NPVNPV IRRIRR

NPV vs IRRNPV vs IRR

1. NPV of the project at 5%2. NPV of the project at 10%3. Use formulaIRR = a + (NPVa x (b-a)) NPVa-NPVb

Chapter 9 – allowing for tax & inflation




Allowing for taxAllowing for tax

Tax payments

Total tax cash flow

Tax benefit from WDAs

Chapter 9 – allowing for tax & inflation




Allowing for inflationAllowing for inflation

LayoutLayout

If there is 1 rate of inflation - ignoreIf there is more than 1 rate of inflation - include

(1 + r)(1 + h) = (1 + i)(1 + r)(1 + h) = (1 + i)

page 49

LayoutFlows T0 T1……… T4

Sales receipts X X

Costs (X) (X)

Operating cash flows X X

Taxation (X) (X)

Capital expenditure (X)

Tax benefit of CAs X X

Working capital (change) (X) (X) X

Net cash flows (X) X X

DF@ post-tax cost of capital X X X

Present value (X) X X

NPV - sum of the present values

Chapter 10 – project appraisal & risk




Project appraisal & riskProject appraisal & risk

page 52

Risk and uncertainty

Predictable = risk

Predictable = risk

Unpredictable = uncertainty

Unpredictable = uncertainty

If the variability of a project’s outcome is

If the variability of a project’s outcome is

page 52

Risk

Quantifying risk

• expected values

• risk adjusted discount factor

page 52

Uncertainty

Describing uncertainty

• payback period (done)

• adjusted payback period

• sensitivity analysis

• simulation

Chapter 11 – specific investment decisions




Asset replacementAsset replacement

Capital rationingCapital rationing

Divisible: PV inflows investmentIndivisible – trial & error

Equivalent Annual CostNPV Annuity factor

Chapter 11 – specific investment decisions




Lease vs buyLease vs buy

Operating leasesFinance leasesNumerical analysis

Day 2 recap quiz

1. What is the difference between ROCE & IRR ?

2. Why is NPV superior to IRR?

3. What is EAC and EAA and when are they suitable?

4. What type of finance might a company experiencing hard capital rationing consider using?

5. What is the difference between an operating and a finance lease?


1. Although both are % measures, ROCE does not adjust for the time value of money and may include non-relevant cash flows

2. NPV is an absolute measure of wealth and is more suitable for choosing between projects

3. They are expressions of the annual cost or benefit of a project and are appropriate for asset replacement decisions.

4. Leasing is one of the few sources of finance likely to be available.

5. Operating is short term and generally removes all the risks of ownership.

Chapter 12 – sources of finance




• overdraft• trade credit• debt factor• short-term loan

Short-term financeShort-term finance Long-term financeLong-term finance

• Debt • Venture capital• Leases• Preference shares• Equity

Sources of financeSources of finance

page 59

Chapter 12 - continued

Methods of issuing new shares

• rights issue

• placing

• stock exchange introduction

• public offer

Chapter 13 – dividend policy




Dividend policyDividend policy M&M M&MDividend policyDividend policy

Key ratios•Dividend yield •Dividend cover •Dividend payout

Key ratios•Dividend yield •Dividend cover •Dividend payout

Lifecycle issuesLifecycle issues

Chapter 14 – gearing & capital structure




Small companiesSmall companies Mix of debt & equityMix of debt & equity

• L• O• S• S

Sources of financeSources of finance

Chapter 15 – cost of capital



Investment decisionInvestment decision Financing decisionFinancing decisionInvestment decisionInvestment decision

Cost of capitalCost of capital

Cost of debtCost of debt

page 66

Cost of irredeemable debt – with tax

Kd = i po

(1- t)

Formula not given

page 66

Cost of redeemable debt

Time cash flows0 market value1-n interest (post tax)n redemption

IRR approach

page 66

Cost of convertible debt

Time cash flows0 market value1-n interest (post tax)n redemption

• or value of shares if greater

page 66

Cost of Preference Shares

Kpref = dPo

Formula not given

Chapter 15 – cost of capital



Investment decisionInvestment decision Financing decisionFinancing decisionInvestment decisionInvestment decision

Cost of capitalCost of capital

Cost of debtCost of debt Cost of equityCost of equity

page 66

Cost of equity

Ke = d1 + g

poDividend yield

Future dividend growth

page 66

Cost of equity - assumptions

Ke = d1 + g

poDividends are paidCompany has a share

price Can be estimated &

constant

page 66

CAPM - formula

E(r) = Rf + β (E(Rm) – Rf)E(r) = Rf + β (E(Rm) – Rf)

Risk free rate

Market premium for

risk of holding shares

Risk of this share

page 66

% of total finance that is equity

% of total finance that is debt

WACC = Ve Ke + Vd Kd (1-T)

Ve+Vd Ve+Vd

WACC formula

Chapter 16 – capital structure



Financing decisionFinancing decision

Capital structure – theories

Capital structure – theories

• M&M – no tax• M&M – with tax

page 68

Gearing structure - summary

Low gearing

High gearing

Young company

Financial distress costs

Mature company

Tax benefits

page 69

Project specific (marginal) cost of capital

1. Find a quoted company in that business

2. Ungear & regear their beta

3. Calculate Ke

Day 3 recap quiz

1. What is a theoretical ex rights price ?

2. What factors should influence the level of debt that a company takes on ?

3. Which is the best way of calculating the cost of equity?

4. How is the cost of convertible debt calculated?

5. How is a project specific cost of capital calculated ?


1. The price of a share after a rights issue, this will often be diluted since the rights issue is at a discount.

2. Lifecycle, operational gearing, security, stability of cash flows.

3. The CAPM is the more stable model.

4. The IRR of the cash flows, using the higher of the par value or the value of the shares at redemption.

5. Ungear a similar company’s beta, regear to your level of debt, then calculate a new Ke.

page 72

Chapter 17 – business valuations



Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decisionInvestment decisionInvestment decision

Avoid over-payingfor acquisitions

Avoid over-payingfor acquisitions

Range of values

Max value

= earnings method or DCF

under new ownership

Intermediate value

= dividends

under existing ownership

Min value

= assets basis

Maximum value

Minimum value

page 72

Earnings basis

Market value = P/E x earnings

Growth prospects Current profitability

Chapter 18 – market efficiency



Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decisionInvestment decisionInvestment decision

Business valuations guided by stock market valuationBusiness valuations guided by stock market valuation

The efficient markets hypothesis

Levels of efficiency

• weak form - historic

• semi-strong form – also publicly available information

• strong form – also reflects information held privately by directors

Behavioural financeBehavioural finance

Chapter 19 – foreign currency risk




Foreign exchange riskForeign exchange risk

Economic riskTranslation risk

Transaction risk

TerminologyTerminology

• 1.9615 $ /£• 0.5098 £/$

page 78

Forward contracts

Forward rates: 1.9600 – 1.9612

Or 1.9606 +/- 0.0006

page 78

Money market hedge - exporter

Expect $ revenue in 3 months time

Borrow in $s today

page 78

Money market hedge – 5 steps (exporter)

1. Receive $s

$£

now

3 mths 2. Repay $ loan

3. Take out $ loan4. £s today

5. Compare to a forward

This determines the size of the $

loan

page 78

Money market hedge - importer

Expect $ costs in 3 months time

$ deposit today

page 78

Money market hedge – 5 steps (importer)

1. Pay $s

$£

now

3 mths 2. Using $ on deposit

3. $ deposit4. Withdraw £s

5. Compare to a forward

Determines the size of the $

deposit today

page 79

Derivatives – futures

1. Receive $s – use spot rate

3 monthsNow

4. Or losses if ex rate moves in your favour

4. Compensation ifex rate moves

against you

2. Contract to buy £ - futures market3. Pay a depositStandard contract

sizes

5. Fixed outcome

page 79

Derivatives – options

1. Receive $s

3 monthsNow

4. Or use spot rate if it moves in your favour

4. Use if ex rate moves against you

2. Contract to buy £ - call option3. Pay a premium

5. Worst case known

page 80

Four way equivalence

Inflation rate differences

Exchange rate movements

PPP theory

Interest rate differences

Forward ratesIRP theory

High interestrates due tohigh inflation

High interest rates predict a decline in the exchange rate

page 80

Four way equivalence

Inflation rate differences

Exchange rate movements

Interest rate differences

Forward rates

Forward rate is an unbiased indicator of the future spot rate

Chapter 20 – interest rate risk




Interest rate riskInterest rate risk

•Higher costs on existing loans•Higher costs on planned loans•Basis risk•Gap exposure

page 82

The yield curve

% yield

Time to maturity

Normal yield curve

page 82

Managing interest rate risk - FRAs

£5m 3-9 FRA at 5%

Size of loan

Start & end

month

Base rate

guaranteed

Exam Technique – how to pass

• Know the syllabus content well

• Use your 15 minutes reading time well

• Effective time management

• Apply your knowledge to the specifics of scenario presented

• Construct your answer logically and coherently

• Do not waffle

• Use a clear layout and show your workings

Exam Technique – how to avoid failing

Do NOT

• Mismanage your time

• Misread the question/requirement

• Answer the question you wish it was

• Leap in without a plan

• Present your answer crudely and in an unprofessional manner

• Dump knowledge instead of applying it

What to do now……

• Revise using your course notes for more detail

• Refer to the Passcards issued on the taught courses as a frequent aide-memoire

• Extensive question practice

– Paper in a day

– P&R kit

• Get help for technical queries

• Step 3 …..

Three Steps to Success

Step 1Learning

Taught course

Step 2Practise &

revise

Revision course

Step 3Exam

rehearsal

Question day

Final Mock

acca paper f9 – financial management revision course june 2010 exams

Documents

online environment

additional cost

online lectures

online lecturewhat

revision kit

key questions

key skills

safety proceduresfire