ACCA FM - course notes PDF

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Financial Management FM Course Notes For exams in September 2018, December 2018, March 2019 and June 2019 ISBN: 9781509775668

Improving study material and removing errors There is a constant need to update and enhance our study materials in line with both regulatory changes and new insights into the exams. BPP appoints, from one of our experienced tutor team, a subject expert to update and improve these course notes regularly. These updates are technically checked by another tutor and frequently proofread. We always aim to leave no numerical errors and narrative typos. However, given the volume of detailed information being changed in a short space of time, it is regrettable that an error may slip through our net despite our best intentions. We apologise sincerely for any inconvenience that this might cause. If you find a specific error or typo please let us know at [email protected] so we can correct it immediately. In addition we would welcome any suggestions you may have to further improve these study materials.

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Financial Management (FM) Study Programme Taught Phase Study Programme Page

Introduction to the exam and the course ........................................................................................... 5 1 Financial management and financial objectives ...................................................................... 15 2 Economic environment for business – home study chapter .................................................... 25 3 Financial markets and institutions ........................................................................................... 31 Achievement Ladder Step 1 4 5 6

43 

Working capital ........................................................................................................................ 45 Managing working capital ........................................................................................................ 53 Working capital finance ........................................................................................................... 69

Achievement Ladder Step 2 7 8 9 10 11

79 

Investment decision ................................................................................................................. 81 Investment appraisal using discounted cash flow (DCF) methods .......................................... 93 Allowing for tax and inflation .................................................................................................. 103 Project appraisal and risk ...................................................................................................... 115 Specific investment decisions................................................................................................ 123

Achievement Ladder Step 3

133 

12 Sources of finance ................................................................................................................. 135 13 Dividend policy – home study chapter ................................................................................... 147 Achievement Ladder Step 4 14 15 16 17 18 19 20

155 

The cost of capital ................................................................................................................. 157 Gearing and capital structure ................................................................................................ 173 Capital structure .................................................................................................................... 181 Business valuations ............................................................................................................... 195 Market efficiency.................................................................................................................... 209 Foreign currency risk ............................................................................................................. 213 Interest rate risk ..................................................................................................................... 231

Achievement Ladder Step 5

245 

Achievement Ladder Step 6

247 

21 22 23 24

Answers to Lecture Examples ............................................................................................... 249 Appendix A: Formulae and ratios ......................................................................................... 285 Appendix B: Mathematical tables .......................................................................................... 289 Step 4 and Step 6 questions ................................................................................................. 293 3

INTRODUCTION

Welcome to Financial Management (FM) Our aim is to help you confidently prepare for success in your exam in an effective and efficient way; allowing you to personalise your learning experience, step by step, whilst being supported by BPP’s team of experts. These course notes are one of the components of your FM programme, and are one of the tools you have at your disposal as a student of BPP. They focus primarily on ensuring you acquire the technical knowledge and understanding required to pass your exam. They have been written by our subject matter experts and tutors, are will be delivered to you by our expert tutor team, be it in centre or online. These course notes play two important roles in your programme: 1.

Knowledge – the course notes will help you to learn and understand the key knowledge topics to allow you to progress up the Achievement Ladder

2.

Support – you can revisit specific elements in your course notes in the light of feedback you receive as you attempt each step on the Achievement Ladder.

Remember, the Achievement Ladder is the unique tool to allow you to see your own progression towards being fully prepared for the real exam.

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INTRODUCTION

Introduction to (FM) Financial Management Overall aim of the syllabus To develop the knowledge and skills expected of a financial manager, relating to issues affecting investments, financing, and dividend policy decisions.

The syllabus The broad syllabus headings are: A B C D E F G

Financial management function Financial management environment Working capital management Investment appraisal Business finance Business valuations Risk management

Main capabilities On successful completion of this exam, candidates should be able to:        

Discuss the role and purpose of the financial management function Assess and discuss the impact of the economic environment on financial management Discuss and apply working capital management techniques Carry out effective investment appraisal Identify and evaluate alternative sources of business finance Explain and calculate the cost of capital and the factors which affect it Discuss and apply principles of business and asset valuations Explain and apply risk management techniques in business

Links with other exams Advanced Financial Management

Financial Management

Management Accounting This diagram shows where links exist between this exam and other exams that may precede or follow it.

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INTRODUCTION

Taught Phase Aims

Achieving ACCA's Study Guide Outcomes A

Financial management function

A1 The nature and purpose of financial management

Chapter 1

A2 Financial objectives and the relationship with corporate strategy

Chapter 1

A3 Stakeholders and impact on corporate objectives

Chapter 1

A4 Financial and other objectives in not-for-profit organisations

Chapter 1

B

Financial management environment

B1 The economic environment for business

Chapter 2

B2 The nature and role of financial markets and institutions

Chapter 3

B3 The nature and role of money market

Chapter 3

C

Working capital management

C1 The nature, elements and importance of working capital

Chapter 4

C2 Management of inventories, accounts receivable, accounts payable and cash

Chapter 5

C3 Determining working capital needs and funding strategies

Chapter 6

D

Investment appraisal

D1 Investment appraisal techniques

Chapter 7,8

D2 Allowing for inflation and taxation in DCF

Chapter 9

D3 Adjusting for risk and uncertainty

Chapter 10

D4 Specific investment decisions

Chapter 11

E

Business finance

E1 Sources of and raising business finance E2 Estimating the cost of capital

Chapter 12,13 Chapter 15

E3 Sources of finance and their relative costs

Chapter 14,15,16

E4 Capital structure theories and practical considerations

Chapter 16

E5 Finance for small and medium-sized enterprises

Chapter 14

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INTRODUCTION

F

Business valuations

F1 Nature and purpose of the valuation of business and financial assets

Chapter 17

F2 Models for the valuation of shares

Chapter 17

F3 The valuation of debt and other financial assets

Chapter 17

F4 Efficient market hypothesis and practical considerations in the valuation of shares

Chapter 18

G

Risk management

G1 The nature and types of risk and approaches to risk management

Chapter 19

G2 Causes of exchange rate fluctuations and interest rate fluctuations

Chapters 19/20

G3 Hedging techniques for foreign currency risk

Chapter 19

G4 Hedging techniques for interest rate risk

Chapter 20

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INTRODUCTION

The Examination 50% Numerical

50% Discussion

60% Knowledge

40% Application

Computer-based exams ACCA have commenced the launch of computer-based exams (CBEs). They have been piloting computer-based exams in limited markets since September 2016 with the aim of rolling out into all markets internationally over a five-year period. Paper-based examinations will be run in parallel while the CBEs are phased in and BPP materials have been designed to support you, whichever exam option you choose. Exam duration The Applied Skills module examinations contain a mix of objective and longer type questions with a duration of 3 hours for 100 marks. For paper-based exams there are an extra 15 minutes to reflect the manual effort required. As ACCA increase their offering of session CBEs, they will be introducing seeded content to guarantee all exams are equivalent and fair. When the seeded content is introduced, students will be given more time to complete the exams – increasing to 3 hours and 20 minutes to take into account the inclusion of additional seeded content. For more information on these changes and when they will be implemented, please visit the ACCA website: www.accaglobal.com/gb/en/student/exam-entry-and-administration/computer-basedexams/session-cbes.html Format of the exam The exam will be available in paper and computer based exam modes of delivery. The exam format is the same irrespective of the mode of delivery and will comprise 3 exam sections: Section

Style of question type

Description

Proportion of exam, %

A

Objective test (OT)

 15 questions x 2 marks

30

B

Objective test (OT) case

 3 questions

30

 Each question will contain 5 subparts each worth 2 marks C

Constructed Response (Long questions)

 2 questions x 2 marks

40 100

Total

Section A and B questions will be selected from the entire syllabus. The paper version of these objective test questions contain multiple choice only and the computer based versions will contain a variety. The responses to each question or subpart in the case of OT cases are marked automatically as either correct or incorrect by computer.

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INTRODUCTION Section C questions will mainly focus on the following syllabus areas but a minority of marks can be drawn from any other area of the syllabus   

Working capital management (syllabus area C) Investment appraisal (syllabus area D) Business finance (syllabus area E)

The responses to these questions are human marked. Candidates are provided with a formula sheet and tables of discount factors and annuity factors (see Appendix B)

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INTRODUCTION

Key to icons The following icons appear in this set of study notes

Question practice This is a question we recommend you attempt to reinforce your learning on a key topic

Section reference in the Study Text You could further consolidate your knowledge in this area with additional reading from the Study Text.

Formula to learn Formula given in exam

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INTRODUCTION

Key skills required to pass Our analysis of the examining team's comments on past exams, together with our experience of preparing students for this type of exam, suggests that to pass FM you will need to develop a number of key skills.

1 Exam approach 5 Good knowledge of the whole syllabus

Effective reading and planning at the start of the exam

A B

C

2 Tackling multiple

4 Tackling constructed

choice questions. Specific skills are needed in section A of the exam

response questions Good technique is essential in section C

3 Tackling objective test case questions. Good technique is essential in section B.

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A B C D

...... …… ...... …… ...... …… ...... ……

INTRODUCTION

Skill 1 – Effective reading and planning time at the start of the exam We recommend that you spend time at the beginning of your exam looking through the requirements in sections B and C. Once you feel familiar with the exam we then recommend that you attempt Section C, ensuring that you spend adequate time reading and planning before you begin to write up your answer. Comments from examining teams across all exams regularly suggest that students appear less time-pressured if they do larger section C style questions first. Focus on the requirement first, underlining key verbs such as prepare, comment, explain, discuss etc to ensure you answer the question properly. You should make good use of the time you have to read the rest of the question, underlining and annotating important and relevant information, and making notes of any relevant technical information you think you will need. Answers plans for written questions can help consolidate your thoughts before you start writing. However our recommendations are not inflexible. If you would prefer to start on section A or B questions, then do those first, but DON'T run over time on them. Advice on tackling each of the question types is given below. The only way to find out which way works for you is to attempt written assessments on your achievement ladder, mock exams and in your practice and revision kit. A B C D

...... …… ...... …… ...... …… ...... ……

Skill 2 – Tackling multiple choice questions

Section A of the exam will include fifteen 2 mark multiple choice questions. Time allocation is important here to ensure you tackle all of the questions in the allotted time. There is no negative marking on multiple choice questions, so if you are unsure you should make sure that you guess rather than leaving the question out! Having a selection of answers to choose from does not make section A easier. The wrong options will often be very plausible. You need to think carefully before selecting an option and ensure you practice lots of questions so that you can spot red-herrings and potential pitfalls.

Skill 3 – Tackling objective test case questions Read through the whole case first and then skim the five questions. Identify the easier or less time consuming questions quickly as these should be attempted first. The questions are independent of each other meaning they can be answered in any order.

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INTRODUCTION A B

C

Skill 4 – Tackling constructed response questions

Approach is very important in section C. Professional presentation of answers is an area that students often don’t do well. It is vital that you do not throw marks away purely because the examiner cannot follow what you have done. Numbers should be logically presented, well referenced to workings and written neatly and in discussion questions you need to avoid waffle. It is important that you make and explain your point fully without going overboard. You also need to ensure that you stick to the requirements in the question. This may sound obvious but many candidates appear to get side tracked in the exam and therefore waste precious time on answers that don’t score any marks. Candidates are required to not just make a point but need to apply it to the scenario given. Whenever you think you have finished your answer always go back and re-read that requirement before moving on.

Skill 5 – Knowledge of the syllabus You need to have a good, broad knowledge of all of the FM syllabus. The Examiner can and will test all areas of the syllabus. Practising Section A questions is a really effective way of testing you knowledge of technical numerical content. For written content, you can also use a variety of memory techniques. Creating mind maps can be helpful as the human brain is better at remembering patterns than lists. Pictures are another excellent memory too as often a simple picture can act as aid in recalling information. Another effective memory technique is to create mnemonics as often it is easier to recall sounds and rhymes than simple lists.

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INTRODUCTION

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Financial management and financial objectives

How have the syllabus learning outcomes been examined? Syllabus learning outcomes

Example past exams

Purpose of financial management, and relationship to financial and management accounting.

Section A (published)

Financial objectives and relationship with corporate strategy.

Section A (published)

Stakeholders and impact on corporate objectives.

Section A (published)

Specimen exam (2 marks), Dec 2014 (4 marks), June 2015 (4 marks), Sept 2016 (2 marks)

Specimen exam (2 marks), Dec 2014 (2 marks), Sept 2016 (2 marks), Dec 2016 (2 marks), Dec 2014 (2 marks) June 2015 (2 marks) Section B Sept 2016 (4 marks)

Financial and other objectives in not-for-profit Section A (published) organisations. June 2015 (2 marks), Dec 2016 (2 marks)

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1: FINANCIAL MANAGEMENT AND FINANCIAL OBJECTIVES

Overview Value for money if a not for profit organisation

Maximisation of shareholder wealth

Linking to –

Encouraged by –

Corporate objectives Needs for other stakeholders

Corporate governance Agency theory

Investment decision

Financing decision (risk management)

Dividend decision

New projects

Raising capital to finance inve...