IQS LOCAL VARIATIONS
ICSA PROFESSIONAL PROGRAMME PART 2
CORPORATE FINANCIAL MANAGEMENT
Aim
The role of the Chartered Secretary necessitates an understanding of many financial
aspects which might, otherwise, be seen as being within the sole remit of the finance
director of an organisation.
As capital markets grow in diversity and globalisation increases, Chartered Secretaries
will increasingly encounter various financial concepts that will impinge on their work.
Through their study of this subject, the importance of comprehending the implications of
the various forms of raising capital, of rewarding stakeholders, of investment decision
making, of business restructuring, of sources of debt finance will become clear.
This understanding will assist the Chartered Secretary in one of their main
responsibilities – that of communicating with the board and shareholders of an
organisation – and will also allow the Chartered Secretary to justify their participation at
board level and to be a valuable contributor to board meetings.
The aim of this module is to address the need for the Chartered Secretary to be
knowledgeable and competent in the skills of corporate financial planning, and in
understanding the impact of the fiscal environment on the organisation and its decision
making.
Learning Outcomes
At the conclusion of this module, candidates will be able to:
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understand the financial sources and requirements of the employing or client
organization;
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understand the role and efficiency of the capital markets;
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understand the nature and importance of capital structure and the cost of capital;
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understand and apply the principles of working capital management;
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understand the impact of global and multi-national operations on corporate
financial management;
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demonstrate competence in the skills of corporate financial planning.
Pre-requisite Learning
Evidence of assessed pre-requisite knowledge and understanding in the following
disciplines must be demonstrated through the examinations, or those of equivalent
qualifications which have been approved as meeting the Institute's required curriculum
and standards:
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Financial Accounting
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Corporate Law
Learning content
The aim of the module is ‘to address the need for the Chartered Secretary to be
knowledgeable and competent in the skills of corporate financial planning, and in
understanding the impact of the fiscal environment on the organisation and its decisionmaking.’
In previous studies, candidates will have gained a basic under-standing of management
and financial accounting. This module will extend the depth of knowledge and
understanding of these basics and will give the candidate the opportunity to develop the
ability to apply the theories of financial management to a variety of practical situations.
There are eight main areas within the Corporate Financial Management syllabus. The
following is an overview of these areas, including clarification of what is and is not
expected in the examination and advice to help candidates to perform effectively.
Financial objectives and requirements
Candidates must ensure that he/she is able to:
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Distinguish between the main types of organisation.
Identify the various stakeholders connected to an organisation.
Discuss the issue of corporate social responsibility towards the stakeholders.
Distinguish between financial and non-financial objectives.
Consider how the objectives of a ‘not-for-profit’ organisation might differ from the
objectives of a ‘commercial’ organisation.
Discuss the problem of conflict of objectives including the ‘Principal–Agent’
problem.
Justify the primacy of the profit motive for commercial organisations.
Recognise the duties and rights of directors
Explain the ‘satisficing’ principle.
Understand the role of the financial audit
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Sources of finance
Candidates must be able to:
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Understand the role of the primary and secondary financial markets
Explain the requirements for a ‘listing’.
Discuss the implications of the Efficient Market Hypothesis for corporate policy
and financial management.
Discuss the advantages and disadvantages of going public.
Understand the risk-return trade-off.
Explain how markets can influence the finance decision.
Distinguish between different forms of debt finance offered by commercial banks.
Identify the international money and capital markets and outline their operation.
Explain other sources of finance including government aid and grants.
Share and loan capital
Candidates should ensure that he/she is able to:
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Distinguish between Authorised and Issued Share Capital
Explain different forms of share issue
Highlight the advantages of Rights Issues over other forms of share issues.
Explain the purpose and impact of making bonus issues, scrip dividends and
stock splits
Recognise the relevance of a company’s dividend policy
Explain the use of preference shares
Distinguish between convertible debentures and debentures issued with a
warrant
Assess the effect on EPS of the method used to finance a company.
Consider the Dividend and Interest Cover ratios.
Value shares using the dividend growth model and price earnings ratio. Value
debentures.
Capital structure and the cost of capital
Candidates should show that he/she is able to:
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Explain the concept of financial gearing
Distinguish between financial and operating gearing.
Calculate the Weighted Average Cost of Capital.
Calculate the Debt/Equity ratio using short-term and long-term finance.
Understand the cost of using retained profits.
Explain the advantages of financial gearing to the shareholder.
Consider the possible effects of gearing on the value of shares, company risk
and required return.
Understand the Traditional Theory of Capital Structure and compare it with
Modigliani-Miller’s theory, with and without tax.
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Distinguish between systematic and unsystematic risk.
Understand the risk reduction effect of diversification (Portfolio theory).
Explain the Capital Market Line.
Calculate the beta of a company.
Use beta to calculate the required rate of return of an investment.
Discuss the appropriateness of the CAPM in investment appraisal.
Use the Capital Asset Pricing Model to calculate the cost of capital.
Working capital management
Candidates should be able to:
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Explain what is meant by ‘working capital’ and ‘working capital management’.
Explain, and identify the symptoms, of overtrading.
Calculate and explain relevant ratios.
Identify the need for effective working capital management
Distinguish between cash flows and profits.
Explain the importance of liquidity to survival
Discuss the means of checking the creditworthiness of customers.
Explain the role of factoring and invoice discounting.
Consider the importance of creditors.
Explain the use of discounts in credit management
Compare the costs of factoring with the cost of discounts for early settlements.
Discuss the particular problems of credit management facing an exporting
company.
Explain methods used in control of stock
Understand the benefits and dangers of a JIT system
Identify the various form of bank finance available to small and medium
companies.
Discuss how the procedures for Treasury Management can be applied by
national and multinational organisations.
Capital investment appraisal
Candidates should be able to:
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Compare different methods used in appraising long term investments
Discuss the advantages of any one method over the others
Use present value and annuity tables
Explain the importance of the time value of money
Explain the relationship between the rate of inflation and interest rates
Evaluate projects on a real terms and nominal terms basis
Calculate capital allowances and associated tax relief (NB: 25% reducing
balance basis only)
Assess the impact of tax relief on the cost of borrowed finance
Discuss the different methods of financing investments
Compare finance leases with operating leases.
Contrast leasing with other methods of credit finance such as hire purchase.
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Identify the relevant cash flows associated with a Lease versus Buy decision.
Compare hard capital rationing with soft capital rationing.
Use profitability indices to rank projects.
Consider the effect of risk on the likely outcome of a project.
Use sensitivity analysis.
Consider ways to reduce the level of risk of a project.
Business restructuring/reorganisation
Candidates should be able to:
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Explain the different types of expansions and the motives behind them.
The methods used to finance the expansions
Discuss the reasons for a public company becoming private
Discuss Debt-Equity swaps
Distinguish between acquisitions and mergers
Explain the different types of mergers
Discuss the motives for mergers.
Understand the different methods used to evaluate companies for the purpose of
merging.
Calculate share values using such methods as asset valuation and dividend
growth model.
Explain the difference between a management buy-out and a management buyin.
Predict the possibility of company failure using different models.
Consider the reasons for divestment.
International aspects
Candidates should be able to:
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Discuss the reasons companies invest overseas
Distinguish between an international and a multinational corporation
Understand the different forms of foreign exchange (FX) risk
Understand different methods of hedging against risk
Discuss the use of the forward market
Discuss the use of the futures market.
Discuss the use of options in managing FX risk
Discuss the various methods that can be used to finance overseas investments.
Understand the issues surrounding the repatriation of profits.
Discuss the best methods of overcoming country risks
Calculate the cost of hedging for import and export situations
Calculate expected future exchange rates given the premium or discount.
The eight areas listed above are not discreet areas. There is much overlapping. For
example, the valuation of a share might give candidates the return required by a
shareholder which can influence capital structure, which in turn can influence the cost of
capital and hence the net present value of a potential investment. Candidates should be
aware of this overlap throughout their studies.
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Study Materials and Resources
Study Text
Corporate Finance Management, Glen Arnold, Prentice Hall
Recommended Reading List
Arnold, G.C. Corporate Financial Management, Financial Times Pitman: London.
Valdez, S. An Introduction to Global Financial Markets, Macmillan: London.
Weston, J.F. and Brigham, E.T. Essentials of Managerial Finance, Dryden: London
Magazines, Journals and Newsletters
There is a wide variety of magazines and journals servicing the accountancy market.
Some are quite academic, and will be of limited use to ICSA students. Others,
particularly the regular magazines and newsletters produced by the accountancy
professional bodies, are worth regular review. In many cases, article archives are posted
on these organisations’ web-sites. Newsletters specifically targeted at professional
accounting students are also often available in downloadable format.
Accountancy The monthly journal of the The Institute of Chartered Accountants in
England and Wales (ICAEW).
CA Magazine Monthly magazine of the Institute of Chartered Accountants of Scotland
Accounting & Business The monthly magazine from ACCA
Financial Management, CIMA
Public Finance Bi-monthly magazine from C I Public Finance Association (CIPFA)
Web Resources
Accountancy magazine www.accountancymagazine.com
Association of Chartered Certified Accountants (ACCA) www.accaglobal.com
Chartered Institute of Management Accountants (CIMA) www.cimaglobal.com
The Institute of Certified Public Accountants of Singapore (ICPAS) www.icpas.com.sg
The Chartered Institute of Public Finance and Accountancy (CIPFA) www.cipfa.org.uk
The Financial Times www.ft.com
The Institute of Chartered Accountants in England and Wales (ICAEW)
www.icaew.co.uk
The Institute of Chartered Accountants of Scotland (ICAS) www.icas.org.uk
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the icsa international qualifying scheme