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ACCA APPROVED CONTENT PROVIDER ACCA Passcards Paper P4 Advanced Financial Management Passcards for examsup to June 2015ThiNganHang.com ThiNganHang.com
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First edition 2007, Eighth edition June 2014 All rights reserved. No part of this publication may be ISBN 9781 4727 1132 8 reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, e ISBN 9781 4727 1188 5 photocopying, recording or otherwise, without the prior British Library Cataloguing-in-Publication Data written permission of BPP Learning Media. A catalogue record for this book is available from the © British Library BPP Learning Media Ltd Published by Printed in the UK by 2014 BPP Learning Media Ltd RICOH UK Limited BPP House, Aldine Place Unit 2 142-144 Uxbridge Road Wells Place London W12 8AA Merstham RH1 3LG www.bpp.com/learningmedia Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources. ThiNganHang.com ThiNganHang.com
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Preface Contents Welcome to BPP Learning Media’s ACCAPasscards for Professional Paper P4 Advanced Financial Management. They focus on your exam and save you time. They incorporate diagrams to kickstart your memory. They follow the overall structure of BPP Learning Media’s Study Texts, but BPP Learning Media’s ACCA Passcards are not just a condensed book. Each card has been separately designed for clear presentation. Topics are self contained and can be grasped visually. ACCA Passcards are still just the right size for pockets, briefcases and bags. Run through the Passcards as often as you can during your final revision period. The day before the exam, try to go through the Passcards again! You will then be well on your way to passing your exams. Good luck! ThiNganHang.com Page iii ThiNganHang.com
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Preface Contents Page Page 1 The role and responsibility of senior 9 Acquisitions and mergers vs growth 81 financial executive 1 10 Valuation for acquisitions and mergers 87 2 Financial strategy formulation 7 11 Regulatory framework and processes 99 3a Conflicting stakeholder interests 17 12 Financing mergers and acquisitions 105 3b Ethical issues in financial management 23 13–14 Reconstruction and reorganisation 111 3c Environmental issues 25 15 The treasury function in multinationals 119 4 Trading and planning in a multinational environment 31 16 Hedging forex risk 123 5 DCF 41 17 Hedging interest rate risk 135 6 Application of option pricing theory in 18 Dividend policy in multinationals and investment decisions 47 transfer pricing 143 7a Impact of financing and APV method 51 19 Recent developments 149 7b Valuation and free cash flows 65 8 International investment decisionsThiNganHang.com73 ThiNganHang.com
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1: The role and responsibility of senior financial executive Topic List Senior financial executives are required to make crucial decisions, including those related to investment, distribution and retention. Financial management Financial planning ThiNganHang.com ThiNganHang.com
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Financial Financial management planning Financial objectives Non-financial objectives The prime financial objective is tomaximise the Non-financial objectives do not negate financial market value of the company’s shares. Primary objectives, but they do mean that the primary targets are profits and dividend growth. Other targets financial objectives may be modified. They take may be the level of gearing, profit retentions, operating account of ethical considerations. profitability and shareholder value indicators. Why profit maximisation is not a Examples sufficient objecture Employee welfare Risk and incertainty Management welfare Profit manipulation Society’s welfare Sacrifice of future profits? Service provision Dividend policy ThiNganHang.com Responsibilities towards customers/suppliers ThiNganHang.com
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Investment Financing Dividend decisions decisions decisions Investment decisions include: Financial decisions include: Dividend decisions may affect New projects Long-term capital structure views of the company’s long-term Takeovers Need to determine source, cost prospects, and thus the shares’ Mergers and risk of long-term finance. market values. Sell-off/Divestment Short-term working capital Payment of dividends limits the The financial manager must: management amount of retained earnings Identify decisions available for re-investment. Balance between profitability and Evaluate them liquidity is crucial. Decide optimal fund allocation ThiNganHang.com Page 3 1: The role and responsibility of senior financial executive ThiNganHang.com
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Financial Financial management planning Strategic planning Key elements of financial planning The formulation, evaluation and selection of Long-term investment and short-term cash flow strategies to prepare a long-term plan of action to Surplus cash attain objectives. Strategic decisions should be How finance raised suitable, feasible and acceptable. Profitable Long-term direction Strategic cash flow management Matching activities to environment/resources Planning involves a long horizon, uncertainties and contingency plans. Strategic analysis means analysing the organisation in its environment, its resources, Strategic fund management competences, mission and objectives. Strategic choice involves generating and evaluatingThiNganHang.comConsideration of which assets are essential and strategic options and selecting strategy. how easily assets can be sold. ThiNganHang.com
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Investment Financing Dividend Strategic Selection of products/markets Debt/equity mix Growth v dividend payout Target profits Purchase of major non-current assets Tactical Other non-current asset Lease v buy Scrip v cash dividends purchases Efficient/effective resource usage Pricing Tactical planning and control Conflict may arise between strategic planning (need to invest in more expensive machinery, research andThiNganHang.com development) and tactical planning (cost control). Page 5 1: The role and responsibility of senior financial executive ThiNganHang.com
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Financial Financial management planning Johnson and Scholes separate power groups into 'internal coalitions' and 'external stakeholder groups'. Stakeholder goals Shareholders Providers of risk capital, aim to maximise wealth Suppliers To be paid full amount by date agreed, and continue relationship (so may accept later payment) Long-term To receive payments of interest and lenders capital by due date Employees To maximise salaries and benefits; also prefer continuity in employment Government Political objectives such as sustained economic growth and high employment ThiNganHang.comManagement Maximising their own rewards ThiNganHang.com
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2: Financial strategy formulation Topic List Formulating the correct financial strategy is crucial for business success. The four main areas of financial strategy are capital structure policy, dividend policy, risk Assessing corporate performance management and capital investment monitoring. Financial strategy Arbitrage Risk and risk management ThiNganHang.com ThiNganHang.com
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Assessing corporate Financial Arbitrage Risk and risk performance strategy management Profitability and return Liquidity ratios Current ratio Acid test ratio Return on capital employed Inventory turnover Payables’ days Profit margin Receivables’ days Asset turnover Debt and gearing Stock market ratios Debt ratio (Total debts: Assets) Gearing (Proportion of debt in long-term capital) Dividend yield Interest yield Interest cover Earnings per share Dividend cover Cash flow ratio (Cash inflow: Total debts) Price/earnings ratio ThiNganHang.com ThiNganHang.com
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Comparisons with Comparisons with other Comparisons with companies previous years companies in same industry in different industries % growth in profit These can put improvements on Investors aiming for diversified previous years into perspective if portfolios need to know % growth in revenue differences between industrial other companies are doing better, Changes in gearing ratio and provide further evidence of sectors. Changes in current/quick ratios effect of general trends. Sales growth Changes in inventory/ Growth rates Profit growth receivables turnover ROCE Retained profits Changes in EPS, market price, Non-current asset levels P/E ratios dividend Dividend yields Remember however Inflation – can make figures misleading Results in rest of industry/environment, orThiNganHang.com economic changes Page 9 2: Financial strategy formulation ThiNganHang.com
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Assessing corporate Financial Arbitrage Risk and risk performance strategy management Economic Value Added (EVATM) EVATM = NOPAT – (cost of capital × capital employed) Adjustments to NOPAT Adjustments to capital employed Add: Add: Interest on debt Cumulative goodwill written off Goodwill written off Cumulative depreciation written off Accounting depreciation NBV of intangibles Increases in provisions Provisions Net capitalised intangiblesThiNganHang.com ThiNganHang.com
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Shares Comparison of finance sources Ownership stake Equity (full voting rights) When comparing different sources of finance, for Preference (prior right to dividends) example different categories of debt, the following All companies can use rights issues factors will generally be important: Listed companies can use offer for sale/placing Cost Flexibility Debt/Bonds Commitments Uses Fixed or floating rate Speed/availability Zero coupon (no interest) Certainty of raising amounts Convertible Time period available Bank loans Security over property may be requiredThiNganHang.com Page 11 2: Financial strategy formulation ThiNganHang.com
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