Professional Examinations
Paper P4
Advanced Financial Management
EXAM KIT
P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Published by:
Kaplan Publishing UK
Unit 2 The Business Centre
Molly Millar’s Lane
Wokingham
Berkshire
RG41 2QZ
ISBN: 978-1-78415-235-2
© Kaplan Financial Limited, 2015
Printed and bound in Great Britain
The text in this material and any others made available by any Kaplan Group company does not
amount to advice on a particular matter and should not be taken as such. No reliance should be
placed on the content as the basis for any investment or other decision or in connection with any
advice given to third parties. Please consult your appropriate professional adviser as necessary.
Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to
any person in respect of any losses or other claims, whether direct, indirect, incidental,
consequential or otherwise arising in relation to the use of such materials.
All rights reserved. No part of this examination may be reproduced or transmitted in any form or
by any means, electronic or mechanical, including photocopying, recording, or by any information
storage and retrieval system, without prior permission from Kaplan Publishing.
Acknowledgements
The past ACCA examination questions are the copyright of the Association of Chartered Certified
Accountants. The original answers to the questions from June 1994 onwards were produced by
the examiners themselves and have been adapted by Kaplan Publishing.
We are grateful to the Chartered Institute of Management Accountants and the Institute of
Chartered Accountants in England and Wales for permission to reproduce past examination
questions. The answers have been prepared by Kaplan Publishing.
ii
K A P LA N P UB L I S H I N G
CONTENTS
Page
Index to questions and answers
v
Analysis of past papers
xi
Exam technique
xiii
Paper specific information
xv
Kaplan’s recommended revision approach
xix
Kaplan’s detailed revision plan
xxi
Mathematical tables and formulae sheet
xxvii
Section
1
Practice Questions – Section A
1
2
Practice Questions – Section B
53
3
Answers to Practice Questions – Section A
121
4
Answers to Practice Questions – Section B
235
Key features in this edition
In addition to providing a wide ranging bank of real past exam questions, we have also included
in this edition:
•
An analysis of all of the recent examination papers.
•
Paper specific information and advice on exam technique.
•
Our recommended approach to make your revision for this particular subject as effective as
possible.
This includes step by step guidance on how best to use our Kaplan material (Complete text,
pocket notes and exam kit) at this stage in your studies.
•
Enhanced tutorial answers packed with specific key answer tips, technical tutorial notes and
exam technique tips from our experienced tutors.
•
Complementary online resources including full tutor debriefs and question assistance to
point you in the right direction when you get stuck.
K APLAN P UBLI S H I N G
iii
P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T
You will find a wealth of other resources to help you with your studies on the following sites:
www.mykaplan.co.uk
www.accaglobal.com/students/
Quality and accuracy are of the utmost importance to us so if you spot an error in any of our
products, please send an email to mykaplanreporting@kaplan.com with full details.
Our Quality Co-ordinator will work with our technical team to verify the error and take action to
ensure it is corrected in future editions.
iv
K A P LA N P UB L I S H I N G
INDEX TO QUESTIONS AND ANSWERS
INTRODUCTION
The majority of the questions within this kit are past ACCA exam questions. The index identifies
which sitting the questions were from. An ‘A’ next to the question in the index means that the
past exam question has been adapted in some way, for example some of the past exam questions
have been modified to reflect the current format of the exam.
KEY TO THE INDEX
PAPER ENHANCEMENTS
We have added the following enhancements to the answers in this exam kit:
Key answer tips
All answers include key answer tips to help your understanding of each question.
Tutorial note
All answers include more tutorial notes to explain some of the technical points in more detail.
Top tutor tips
For selected questions, we “walk through the answer” giving guidance on how to approach the
questions with helpful ‘tips from a top tutor’, together with technical tutor notes.
These answers are indicated with the “footsteps” icon in the index.
KAPLAN P UBLI S H I N G
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P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T
ONLINE ENHANCEMENTS
Timed question with Online tutor debrief
For selected questions, we recommend that they are to be completed in full exam conditions (i.e.
properly timed in a closed book environment).
In addition to the examiner’s technical answer, enhanced with key answer tips and tutorial notes
in this exam kit, online you can find an answer debrief by a top tutor that:
•
works through the question in full
•
points out how to approach the question
•
how to ensure that the easy marks are obtained as quickly as possible, and
•
emphasises how to tackle exam questions and exam technique.
These questions are indicated with the “clock” icon in the index.
Online question assistance
Have you ever looked at a question and not known where to start, or got stuck part way through?
For selected questions, we have produced “Online question assistance” offering different levels of
guidance, such as:
•
ensuring that you understand the question requirements fully, highlighting key terms and
the meaning of the verbs used
•
how to read the question proactively, with knowledge of the requirements, to identify the
topic areas covered
•
assessing the detail content of the question body, pointing out key information and
explaining why it is important
•
help in devising a plan of attack
With this assistance, you should then be able to attempt your answer confident that you know
what is expected of you.
These questions are indicated with the “signpost” icon in the index.
Online question enhancements and answer debriefs will be available on MyKaplan at:
www.mykaplan.co.uk
vi
K A P LA N P UB L I S H I N G
INDEX TO QUES TIO NS AND ANSWE RS
SECTION A-TYPE QUESTIONS
Page number
Answer
Past exam
A=adapted
1
121
Jun 06(A)
Question
Role and responsibility towards stakeholders
1
Vadener plc
Advanced investment appraisal
2
Wurrall Inc
3
124
Jun 04(A)
3
Daron
6
129
Dec 95(A)
4
Sleepon Hotels Inc
8
135
Dec 05(A)
5
Partsea plc
10
140
Jun 07
6
Blipton International
12
143
Dec 08
7
Semer
13
147
Dec 05
8
Tramont Co
15
149
Pilot 2012
9
Chmura Co
17
155
Dec 13
Acquisitions and mergers
10
Stanzial Inc
19
161
Dec 06(A)
11
Burcolene
21
165
Dec 07(A)
12
Anchorage Retail Company
23
170
Dec 09
13
Pursuit Co
26
176
Jun 11
14
Nente Co
28
180
Jun 12
15
Mlima Co
30
184
Jun 13
16
Nahara Co and Fugae Co
32
190
Dec 14
Corporate reconstruction and reorganisation
17
BBS Stores
35
195
Jun 09
18
Coeden Co
37
201
Dec 12
Treasury and advanced risk management techniques
19
Somax plc
39
204
Jun 96
20
Lammer plc
41
208
Jun 06(A)
21
Casasophia Co
42
212
Jun 11
22
CMC Co
44
216
Jun 14
Economic environment for multinationals
23
AVTO
46
222
Dec 03
24
Oberberg AG
48
227
Dec 02
KAPLAN P UBLI S H I N G
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P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T
SECTION B-TYPE QUESTIONS
Question
Answer
Past exam
A=adapted
Role and responsibility towards stakeholders
25
TYR Inc
53
235
Jun 03(A)
26
Forthmate Inc and Herander Inc
54
238
Dec 06(A)
27
Saturn Systems
55
240
Jun 08
28
Solar Supermarkets
56
243
Dec 08
29
International Enterprises
57
245
Dec 07(A)
30
Kengai Co
59
247
Dec 11
31
Ennea Co
59
249
Jun 12
32
Limni Co
61
253
Jun 13
33
Kamala Co
62
256
Dec 14
Advanced investment appraisal
34
Strayer Inc
65
260
Jun 02(A)
35
Tampem Inc
65
263
Dec 06(A)
36
Digunder
66
266
Dec 07(A)
37
Kenand Co
67
268
–
38
Fubuki Co
68
273
Dec 10
39
Investment Project Review
69
277
Jun 09(A)
40
MMC
70
281
Jun 11
41
Tisa Co
71
282
Jun 12
42
Arbore Co
72
284
Dec 12
43
Burung Co
74
287
Jun 14
44
Riviere Co
75
290
Dec 14
Acquisitions and mergers
45
Doubler Inc
76
294
Jun 07(A)
46
Mercury Training
78
297
Jun 08(A)
47
Kodiak Company
79
299
Dec 09(A)
48
Kilenc Co
80
302
Jun 12
49
Sigra Co
81
305
Dec 12(A)
50
Hav Co
83
307
Jun 13
51
Makonis Co
84
311
Dec 13
52
Vogel Co
85
313
Jun 14
v i ii
K A P LA N P UB L I S H I N G
INDEX TO QUES TIO NS AND ANSWE RS
Corporate reconstruction and reorganisation
53
Reflator Inc
87
316
Dec 05(A)
54
Alaska Salvage
88
319
Dec 09
55
Proteus Co
88
321
Dec 11
56
Doric Co
89
324
Pilot 2012
57
Nubo Co
91
326
Dec 13
Treasury and advanced risk management techniques
58
Black-Scholes (AVT)
92
329
Dec 01(A)
59
Uniglow
93
331
Jun 02(A)
60
MJY plc
93
333
Dec 05(A)
61
Collar Hedge
94
335
Jun 03(A)
62
Interest Rate Hedges
95
337
Jun 05
63
Polytot plc
96
340
Jun 04(A)
64
Arnbrook plc
97
342
Jun 06(A)
65
Asteroid Systems
97
344
Jun 08
66
Phobos Co
98
348
Dec 08
67
Multidrop
99
351
Jun 10(A)
68
Pondhills
100
356
Jun 01(A)
69
Currency Swaps
102
358
Dec 04(A)
70
FNDC plc
103
360
Dec 06(A)
71
Levante Co
104
363
Dec 11
72
Sembilan Co
105
366
Jun 12
73
Lignum Co
105
368
Dec 12(A)
74
Alecto Co
107
371
Pilot 2012
75
GNT CO
108
375
Pilot 2012
76
Kenduri Co
109
377
Jun 13
77
Awan Co
110
379
Dec 13
78
Faoilean Co
111
382
Jun 14
79
Keshi Co
112
385
Dec 14
Economic environment for multinationals
80
Deputy Chief Financial Officer
113
389
Jun 09
81
Moose Co
114
391
Dec 09
82
Lamri Co
115
392
Dec 10
KAPLAN P UBLI S H I N G
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P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T
Emerging issues in finance and financial management
83
GoSlo Motor Corporation
116
395
Jun 10
84
JJJ Co
117
397
–
85
Strom Co
118
400
Dec 12(A)
86
Integrated Reporting
119
403
-
x
K A P LA N P UB L I S H I N G
ANALYSIS OF PAST PAPERS
The table below summarises the key topics that have been tested in recent P4 examinations. The
list of topics matches the chapter titles in the Kaplan Complete Text.
Note that the references are to the number of the question in this edition of the exam kit.
TOPIC
Jun
12
Dec
12
The role and responsibility
of the financial manager
Investment appraisal
Q41
The financing decision
Q31,
Q72
Dec
13
Jun
14
Dec
14
Q15
Q9
Q22
Q79
Q43
Q16,
Q44
Q42
Q32
The dividend decision
International operations
and international
investment appraisal
Jun
13
Q32
Q85
Q9
Q48
International operations the financing decision and
the dividend decision
Option pricing
Q16,
Q44
Q14
WACC
Risk adjusted WACC and
APV
Q18
Q41
Corporate failure /
reconstruction
An introduction to risk
management
Q41
Hedging foreign exchange
risk
Hedging interest rate risk
Q15
Business valuation
Q14
Topical issues in financial
management
Q31,
Q48
Q78
Q22
Q18
Q43
Q18
Q15
Q42
Q32
Q73
Q76
Q72
Strategic aspects of
acquisitions
KAPLAN P UBLI S H I N G
Q9
Q57
Q33
Q16,
Q44
Q22
Q77
Q79
Q49
Q50
Q51
Q52
Q16
Q49
Q15,
Q50
Q51
Q52
Q16
Q85
Q57
Q79
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PAPER P4: ADVANCED FINANCIAL MANAGEMENT
x ii
K A P LA N P UB L I S H I N G
EXAM TECHNIQUE
•
Use the allocated 15 minutes reading and planning time at the beginning of the exam:
– read the questions and examination requirements carefully, and
– begin planning your answers.
See the Paper Specific Information for advice on how to use this time for this paper.
•
Divide the time you spend on questions in proportion to the marks on offer:
– there are 1.8 minutes available per mark in the examination
– within that, try to allow time at the end of each question to review your answer and
address any obvious issues
Whatever happens, always keep your eye on the clock and do not over run on any part of
any question!
•
Spend the last five minutes of the examination:
– reading through your answers, and
– making any additions or corrections.
•
If you get completely stuck with a question:
– leave space in your answer book, and
– return to it later.
•
Stick to the question and tailor your answer to what you are asked.
– pay particular attention to the verbs in the question.
•
If you do not understand what a question is asking, state your assumptions.
Even if you do not answer in precisely the way the examiner hoped, you should be given some
credit, if your assumptions are reasonable.
•
You should do everything you can to make things easy for the marker.
The marker will find it easier to identify the points you have made if your answers are legible.
•
Written questions:
Your answer should have:
– a clear structure
– a brief introduction, a main section and a conclusion.
Be concise.
It is better to write a little about a lot of different points than a great deal about one or two
points.
•
Computations:
It is essential to include all your workings in your answers.
Many computational questions require the use of a standard format:
e.g. net present value.
Be sure you know these formats thoroughly before the exam and use the layouts that you see
in the answers given in this book and in model answers.
•
Reports, memos and other documents:
Some questions ask you to present your answer in the form of a report, a memo, a letter or
other document.
Make sure that you use the correct format – there could be easy marks to gain here.
KAPLAN P UBLI S H I N G
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PAPER P4: ADVANCED FINANCIAL MANAGEMENT
x iv
K A P LA N P UB L I S H I N G
PAPER SPECIFIC INFORMATION
THE EXAM
FORMAT OF THE EXAM
Section A:
Section B:
1 compulsory question worth 50 marks
Choice of 2 from 3 questions (25 marks each)
Total time allowed: 3 hours, plus 15 minutes for reading and planning
Number of marks
50
50
–––
100
–––
AIM
To apply relevant knowledge, skills and exercise professional judgement as expected of a senior
financial executive or advisor, in taking or recommending decisions relating to the financial
management of an organisation.
OBJECTIVES
On successful completion of this paper, candidates should be able to:
•
explain the role and responsibility of the senior financial executive or advisor in meeting
conflicting needs of stakeholders
•
evaluate potential investment decisions and assess their financial and strategic
consequences, both domestically and internationally
•
assess and plan acquisitions and mergers as an alternative growth strategy
•
evaluate and advise on alternative corporate re-organisation strategies
•
apply and evaluate alternative advanced treasury and risk management techniques
•
evaluate the impact of macro economics and recognise the role of international financial
institutions in the financial management of multinationals
•
identify and assess the potential impact of emerging issues in finance and financial
management.
PASS MARK
The pass mark for all ACCA Qualification examination papers is 50%.
KAPLAN P UBLI S H I N G
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PAPER P4: ADVANCED FINANCIAL MANAGEMENT
READING AND PLANNING TIME
Remember that all three hour paper based examinations have an additional 15 minutes reading
and planning time.
ACCA GUIDANCE
ACCA guidance on the use of this time is as follows:
This additional time is allowed at the beginning of the examination to allow candidates to read
the questions and to begin planning their answers before they start to write in their answer
books. This time should be used to ensure that all the information and, in particular, the exam
requirements are properly read and understood. During this time, candidates may only annotate
their question paper. They may not write anything in their answer booklets until told to do so by
the invigilator.
KAPLAN GUIDANCE
Since there is a choice of questions in Section B, you must decide which questions to attempt, and
in which order.
During the 15 minutes of reading time you should be able to review the questions in Section B and
decide which ones are most appealing. All students have different strengths and preferred topics,
so it is impossible to give general advice on which questions should be chosen. However, it is
worth noting that numerical questions can often be more time consuming than written questions,
so you are more likely to over run on numerical questions. Try to choose questions which give a
balance between numerical and written elements.
In relation to paper P4, we recommend that you take the following approach with your reading
time:
•
Skim through Section B, assessing the level of difficulty of each question. Try to decide
which question looks least appealing and ignore it.
•
Now focus on the other Section B questions (which, by a process of elimination, you have
now decided to attempt). Work out how much time you should spend on each part of the
requirements (using the measure of 1.8 minutes per mark). Decide which techniques you
will need to attack each of the questions.
•
Turn to Section A. Skim through the requirements and decide what topics are being tested
(e.g. business valuation, NPV).
•
Decide the order in which you think you will attempt the questions:
This is a personal choice and you have time on the revision phase to try out different
approaches, for example, if you sit mock exams.
A common approach is to tackle the question you think is the easiest and you are most
comfortable with first.
Others may prefer to tackle the longest question first, or conversely leave it to the last.
It is usual however that students tackle their least favourite topic and/or the most difficult
question in their opinion last. It is sensible to try to attack the preferred questions before
attempting the difficult looking ones.
Whatever your approach, you must make sure that you leave enough time to attempt all
questions fully and be very strict with yourself in timing each question.
x vi
K A P LA N P UB L I S H I N G
ANALYSIS OF PAST PAPERS
•
For each question in turn, read the requirements and then the detail of the question
carefully.
Always read the requirement first as this enables you to focus on the detail of the
question with the specific task in mind.
For computational questions:
Highlight key numbers / information and key words in the question, scribble notes to
yourself on the question paper to remember key points in your answer.
For written questions:
Take notice of the format required (e.g. letter, memo, notes) and identify the recipient of
the answer. You need to do this to judge the level of financial sophistication required in
your answer and whether the use of a formal reply or informal bullet points would be
satisfactory.
Plan your beginning, middle and end and the key areas to be addressed and your use of
titles and sub-titles to enhance your answer.
For all questions:
Spot the easy marks to be gained in a question and parts which can be performed
independently of the rest of the question.
Make sure that you do these parts first when you tackle the question.
Don’t go overboard in terms of planning time on any one question – you need a good
measure of the whole paper and a plan for all of the questions at the end of the 20
minutes.
By covering all questions you can often help yourself as you may find that facts in one
question may remind you of things you should put into your answer relating to a different
question.
•
With your plan of attack in mind, start answering your chosen question with your plan to
hand, as soon as you are allowed to start.
Always keep your eye on the clock and do not over run on any part of any question!
DETAILED SYLLABUS
The detailed syllabus and study guide written by the ACCA can be found at:
www.accaglobal.com/students/
K APLAN P UBLI S H I N G
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PAPER P4: ADVANCED FINANCIAL MANAGEMENT
x vi i i
K A P LA N P UB L I S H I N G
KAPLAN’S RECOMMENDED REVISION
APPROACH
QUESTION PRACTICE IS THE KEY TO SUCCESS
Success in professional examinations relies upon you acquiring a firm grasp of the required
knowledge at the tuition phase. In order to be able to do the questions, knowledge is essential.
However, the difference between success and failure often hinges on your exam technique on the
day and making the most of the revision phase of your studies.
The Kaplan complete text is the starting point, designed to provide the underpinning knowledge
to tackle all questions. However, in the revision phase, pouring over text books is not the answer.
Kaplan Online fixed tests help you consolidate your knowledge and understanding and are a
useful tool to check whether you can remember key topic areas.
Kaplan pocket notes are designed to help you quickly revise a topic area, however you then need
to practise questions. There is a need to progress to full exam standard questions as soon as
possible, and to tie your exam technique and technical knowledge together.
The importance of question practice cannot be over-emphasised.
The recommended approach below is designed by expert tutors in the field, in conjunction with
their knowledge of the examiner and their recent real exams.
The approach taken for the fundamental papers is to revise by topic area. However, with the
professional stage papers, a multi topic approach is required to answer the scenario based
questions.
You need to practise as many questions as possible in the time you have left.
OUR AIM
Our aim is to get you to the stage where you can attempt exam standard questions confidently, to
time, in a closed book environment, with no supplementary help (i.e. to simulate the real
examination experience).
Practising your exam technique on real past examination questions, in timed conditions, is also
vitally important for you to assess your progress and identify areas of weakness that may need
more attention in the final run up to the examination.
In order to achieve this we recognise that initially you may feel the need to practise some
questions with open book help and exceed the required time.
The approach below shows you which questions you should use to build up to coping with exam
standard question practice, and references to the sources of information available should you
need to revisit a topic area in more detail.
KAPLAN P UBLI S H I N G
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PAPER P4: ADVANCED FINANCIAL MANAGEMENT
Remember that in the real examination, all you have to do is:
•
attempt all questions required by the exam
•
only spend the allotted time on each question, and
•
get them at least 50% right!
Try to practise this approach on every question you attempt from now to the real exam.
EXAMINER’S COMMENTS
We have included many of the examiner’s comments to the examination questions in this kit for
you to see the main pitfalls that students fall into with regard to technical content.
However, too many times in the general section of the report, the examiner comments that
students had failed due to:
•
“misallocation of time”
•
“running out of time” and
•
showing signs of “spending too much time on an earlier question and clearly rushing the
answer to a subsequent question”.
Good exam technique is vital.
xx
K A P LA N P UB L I S H I N G
THE KAPLAN PAPER P4 REVISION PLAN
Stage 1: Assess areas of strengths and weaknesses
Review the topic listings in the revision table plan below
Determine whether or not the area is one with which you are comfortable
Comfortable
with the technical content
Not comfortable
with the technical content
Read the relevant chapter(s) in
Kaplan’s Complete Text
Attempt the Test your understanding
examples if unsure of an area
Attempt appropriate Online Fixed
Tests
Review the pocket notes on this area
Stage 2: Practise questions
Follow the order of revision of topics as recommended in the revision table plan below and
attempt the questions in the order suggested.
Try to avoid referring to text books and notes and the model answer until you have completed
your attempt.
Try to answer the question in the allotted time.
Review your attempt with the model answer and assess how much of the answer you achieved in
the allocated exam time.
KAPLAN P UBLI S H I N G
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PAPER P4: ADVANCED FINANCIAL MANAGEMENT
Fill in the self-assessment box below and decide on your best course of action.
Comfortable with question attempt
Not comfortable with question attempts
Only revisit when comfortable with
questions on all topic areas
Focus on these areas by:
•
Reworking test your understanding
examples in Kaplan’s Complete Text
•
Revisiting the technical content from
Kaplan’s pocket notes
•
Working any remaining questions on
that area in the exam kit
•
Reattempting an exam standard
question in that area, on a timed,
closed book basis
Note that :
The “footsteps questions” give guidance on exam techniques and how you should have
approached the question.
The “clock questions” have an online debrief where a tutor talks you through the exam
technique and approach to that question and works the question in full.
Stage 3: Final pre-exam revision
We recommend that you attempt at least one three hour mock examination containing a set of
previously unseen exam standard questions.
It is important that you get a feel for the breadth of coverage of a real exam without advanced
knowledge of the topic areas covered – just as you will expect to see on the real exam day.
Ideally this mock should be sat in timed, closed book, real exam conditions and could be a mock
examination offered by your tuition provider.
xx ii
K A P LA N P UB L I S H I N G
5
9
9
Foreign investment
appraisal
Risk adjusted WACC
APV
KA P LAN PUBL I SH ING
Module 1 Revision Test
2
Complete
Text
Chapter
8
Investment appraisal
WACC
Topic
9
9
5
2
Pocket
note
Chapter
8
4, 38, 43
8
41
6
-
Questions
to
attempt
–
Module 1: Investment appraisal and WACC
KAPLAN’S DETAILED REVISION PLAN
Before you can start appraising projects,
it is vital to understand how the WACC
can be calculated. Notice that several
formulae used to derive WACC appear
on the formula sheet. Make sure you
identify which need to be learned and
which are given.
Investment appraisal is very commonly
tested. Make sure you understand NPV
and MIRR in particular.
Foreign NPV is very similar to “normal”
NPV. The parity theories are frequently
tested, so learn how to apply the
formulae.
Degearing and regearing betas is one of
the examiner’s favourite topics. The
formula is given in the exam, but learn
how to apply it.
APV questions are very common. The key
is to remember to discount the
investment cash flows at an ungeared
cost of equity and the financing cash
flows using the risk free rate.
Attempt these questions to check your
understanding of Module 1 topics.
Tutor guidance
Date
attempted
Self assessment
xx i ii
xx iv
15
Business valuation
Module 2 Revision Test
15
Complete
Text
Chapter
14
Free cash flow analysis
Strategic aspects of
acquisitions
Topic
15
15
Pocket
note
Chapter
14
16, 50, 51
10
12, 13
Questions
to
attempt
48
Module 2: Acquisitions and business valuation
PAPER P4: ADVANCED FINANCIAL MANAGEMENT
Valuation questions tend to contain
calculations and discussion. This chapter
covers the key discursive aspects.
The examiner’s favourite method of
business valuation is the discounted free
cash flow approach, so revise the
method from Chapter 15.
Now cover the other valuation methods.
Questions will tend to mix discursive and
computational elements, so focus on
both aspects.
Attempt these questions to check your
understanding of Module 1 and 2 topics.
Tutor guidance
Date
attempted
K A PLA N PUB L I SH ING
Self assessment
1
1
Roles / responsibilities
of the financial
manager
Module 3 Revision Test
KA P LAN PUBL I SH ING
10
Pocket
note
Chapter
7
10
Complete
Text
Chapter
7
Corporate failure /
reconstruction
Option pricing
Topic
9, 18, 27,
78
Attempt these questions to check your
understanding of Module 1, 2 and 3
topics.
Tutor guidance
Questions
to
attempt
58, 36, 40 The Black Scholes formulae are given on
the formula sheet, but make sure you
can apply them in various circumstances.
56
Following the recent global recession,
this is a very topical area, so highly
examinable. Learn the indicators of
financial distress and the calculation of
ratios.
28
Date
attempted
Module 3: Option pricing, corporate failure and roles / responsibilities of the financial manager
Self assessment
xx v
KA PLAN’ S DE TA ILE D REV IS ION PLAN
xx vi
12, 13
13
12
Pocket
note
Chapter
11
63, 66,
77, 79
64
62, 74
20, 21
Questions
to
attempt
–
Chapter 11 gives a good introduction to
risk management topics.
Learn the different methods of hedging.
The key here is to adapt a systematic
approach, laying out your workings
carefully so that you don’t get muddled.
As with currency hedging, learn all the
methods, and the advantages and
disadvantages of using each of them.
Swaps are often overlooked by some
students who focus mainly on futures
and options. However, they are quite
frequently tested – look at Q65 to see
how.
Attempt these questions to check your
understanding of Module 1, 2, 3 and 4
topics.
Tutor guidance
Date
attempted
Self assessment
K A PLA N PUB L I SH ING
Note that not all of the questions are referred to in the programme above. The remaining questions are available in the kit for extra practice for those who
require more questions on some areas.
Module 4 Revision Test
12, 13
13
Hedging – interest rate
risk
Swaps
12
Complete
Text
Chapter
11
Hedging – currency risk
Risk management
Topic
Module 4: Risk management and hedging
PAPER P4: ADVANCED FINANCIAL MANAGEMENT
MATHEMATICAL TABLES AND FORMULAE SHEET
Modigliani and Miller Proposition 2 (with tax)
ke = kie + (1 − T)(kie − kd)
Vd
Ve
The Capital Asset Pricing Model
E(ri) = Rf + βi(E(rm) − Rf)
The asset beta formula

  Vd (1 – T)

Ve
βe  + 
βd 
βa = 
 (Ve + Vd (1 – T))   (Ve + Vd (1 – T)) 
The Growth Model
P0 =
D0 (1+ g)
(re – g)
Gordon’s growth approximation
g = bre
The weighted average cost of capital
 V 
 V 
WACC =  e k e +  d k d (1 – T)
 Ve + Vd 
 Ve + Vd 
The Fisher formula
(1+i) = (1+r)(1+h)
Purchasing power parity and interest rate parity
S1 = S0 ×
KAPLAN P UBLI S H I N G
(1+ hc )
(1+ hb )
F0 = S0 ×
(1+ i c )
(1+ ib )
xx v ii
PAPER P4: ADVANCED FINANCIAL MANAGEMENT
Modified Internal Rate of Return
1
 PV  n
MIRR =  R  (1 + re) – 1
 PVI 
The Black-Scholes option pricing model
c = PaN(d1) – PeN(d2)e−rt
Where:
2
d1 =
In(Pa /Pe ) + (r + 0.5s )t
s t
d2 = d1 – s t
The Put Call Parity relationship
p = c − Pa + Pee−rt
x x v ii i
K A P LA N P UB L I S H I N G
MA THEMA TICAL TABLES AND FORM ULAE S HEE T
MATHEMATICAL TABLES
Standard normal distribution table
0.0
0.1
0.2
0.3
0.4
0.00
.0000
.0398
.0793
.1179
.1554
0.01
.0040
.0438
.0832
.1217
.1591
0.02
.0080
.0478
.0871
.1255
.1628
0.03
.0120
.0517
.0910
.1293
.1664
0.04
.0159
.0557
.0948
.1331
.1700
0.05
.0199
.0596
.0987
.1368
.1736
0.06
.0239
.0636
.1026
.1406
.1772
0.07
.0279
.0675
.1064
.1443
.1808
0.08
.0319
.0714
.1103
.1480
.1844
0.09
.0359
.0753
.1141
.1517
.1879
0.5
0.6
0.7
0.8
0.9
.1915
.2257
.2580
.2881
.3159
.1950
.2291
.2611
.2910
.3186
.1985
.2324
.2642
.2939
.3212
.2019
.2357
.2673
.2967
.3238
.2054
.2389
.2704
.2995
.3264
.2088
.2422
.2734
.3023
.3289
.2123
.2454
.2764
.3051
.3315
.2157
.2486
.2794
.3078
.3340
.2190
.2518
.2823
.3106
.3365
.2224
.2549
.2852
.3133
.3389
1.0
1.1
1.2
1.3
1.4
.3413
.3643
.3849
.4032
.4192
.3438
.3665
.3869
.4049
.4207
.3461
.3686
.3888
.4066
.4222
.3485
.3708
.3907
.4082
.4236
.3508
.3729
.3925
.4099
.4251
.3531
.3749
.3944
.4115
.4265
.3554
.3770
.3962
.4131
.4279
.3577
.3790
.3980
.4147
.4292
.3599
.3810
.3997
.4162
.4306
.3621
.3830
.4015
.4177
.4319
1.5
1.6
1.7
1.8
1.9
.4332
.4452
.4554
.4641
.4713
.4345
.4463
.4564
.4649
.4719
.4357
.4474
.4573
.4656
.4726
.4370
.4485
.4582
.4664
.4732
.4382
.4495
.4591
.4671
.4738
.4394
.4505
.4599
.4678
.4744
.4406
.4515
.4608
.4686
.4750
.4418
.4525
.4616
.4693
.4756
.4430
.4535
.4625
.4699
.4762
.4441
.4545
.4633
.4706
.4767
2.0
2.1
2.2
2.3
2.4
.4772
.4821
.4861
.4893
.4918
.4778
.4826
.4865
.4896
.4920
.4783
.4830
.4868
.4898
.4922
.4788
.4834
.4871
.4901
.4925
.4793
.4838
.4875
.4904
.4927
.4798
.4842
.4878
.4906
.4929
.4803
.4846
.4881
.4909
.4931
.4808
.4850
.4884
.4911
.4932
.4812
.4854
.4887
.4913
.4934
.4817
.4857
.4890
.4916
.4936
2.5
2.6
2.7
2.8
2.9
.4938
.4953
.4965
.4974
.4981
.4940
.4955
.4966
.4975
.4982
.4941
.4956
.4967
.4976
.4983
.4943
.4957
.4968
.4977
.4983
.4945
.4959
.4969
.4977
.4984
.4946
.4960
.4970
.4978
.4984
.4948
.4961
.4971
.4979
.4985
.4949
.4962
.4972
.4980
.4985
.4951
.4963
.4973
.4980
.4986
.4952
.4964
.4974
.4981
.4986
3.0
.4987
.4987
.4987
.4988
.4988
.4989
.4989
.4989
.4990
.4990
This table can be used to calculate N (d1), the cumulative normal distribution function needed for
the Black-Scholes model of option pricing. If d1 > 0, add 0.5 to the relevant number above.
If d1 < 0, subtract the relevant number above from 0.5.
KAPLAN P UBLI S H I N G
xx ix
PAPER P4: ADVANCED FINANCIAL MANAGEMENT
Present value table
Present value of 1, i.e. (1 + r)-n
where
r = discount rate
n = number of periods until payment
Periods
(n)
1
2
3
4
5
1%
0.990
0.980
0.971
0.961
0.951
2%
0.980
0.961
0.942
0.924
0.906
3%
0.971
0.943
0.915
0.888
0.863
4%
0.962
0.925
0.889
0.855
0.822
5%
0.952
0.907
0.864
0.823
0.784
6%
0.943
0.890
0.840
0.792
0.747
7%
0.935
0.873
0.816
0.763
0.713
8%
0.926
0.857
0.794
0.735
0.681
9%
0.917
0.842
0.772
0.708
0.650
10%
0.909
0.826
0.751
0.683
0.621
6
7
8
9
10
0.942
0.933
0.923
0.914
0.905
0.888
0.871
0.853
0.837
0.820
0.837
0.813
0.789
0.766
0.744
0.790
0.760
0.731
0.703
0.676
0.746
0.711
0.677
0.645
0.614
0.705
0.665
0.627
0.592
0.558
0.666
0.623
0.582
0.544
0.508
0.630
0.583
0.540
0.500
0.463
0.596
0.547
0.502
0.460
0.422
0.564
0.513
0.467
0.424
0.386
11
12
13
14
15
0.896
0.887
0.879
0.870
0.861
0.804
0.788
0.773
0.758
0.743
0.722
0.701
0.681
0.661
0.642
0.650
0.625
0.601
0.577
0.555
0.585
0.557
0.530
0.505
0.481
0.527
0.497
0.469
0.442
0.417
0.475
0.444
0.415
0.388
0.362
0.429
0.397
0.368
0.340
0.315
0.388
0.356
0.326
0.299
0.275
0.350
0.319
0.290
0.263
0.239
1
2
3
4
5
11%
0.901
0.812
0.731
0.659
0.593
12%
0.893
0.797
0.712
0.636
0.567
13%
0.885
0.783
0.693
0.613
0.543
14%
0.877
0.769
0.675
0.592
0.519
15%
0.870
0.756
0.658
0.572
0.497
16%
0.862
0.743
0.641
0.552
0.476
17%
0.855
0.731
0.624
0.534
0.456
18%
0.847
0.718
0.609
0.516
0.437
19%
0.840
0.706
0.593
0.499
0.419
20%
0.833
0.694
0.579
0.482
0.402
6
7
8
9
10
0.535
0.482
0.434
0.391
0.352
0.507
0.452
0.404
0.361
0.322
0.480
0.425
0.376
0.333
0.295
0.456
0.400
0.351
0.308
0.270
0.432
0.376
0.327
0.284
0.247
0.410
0.354
0.305
0.263
0.227
0.390
0.333
0.285
0.243
0.208
0.370
0.314
0.266
0.225
0.191
0.352
0.296
0.249
0.206
0.176
0.335
0.279
0.233
0.194
0.162
11
12
13
14
15
0.317
0.286
0.258
0.232
0.209
0.287
0.257
0.229
0.205
0.183
0.261
0.231
0.204
0.181
0.160
0.237
0.208
0.182
0.160
0.140
0.215
0.187
0.163
0.141
0.123
0.195
0.168
0.145
0.125
0.108
0.178
0.152
0.130
0.111
0.095
0.162
0.137
0.116
0.099
0.084
0.148
0.124
0.104
0.088
0.074
0.135
0.112
0.933
0.078
0.065
Periods
(n)
xx x
K A P LA N P UB L I S H I N G
MA THEMA TICAL TABLES AND FORM ULAE S HEE T
Annuity table
Present value of an annuity of 1, i.e.
where
1- (1 + r) -n
r
r = interest rate
n = number of periods
Periods
(n)
1
2
3
4
5
1%
0.990
1.970
2.941
3.902
4.853
2%
0.980
1.942
2.884
3.808
4.713
3%
0.971
1.913
2.829
3.717
4.580
4%
0.962
1.886
2.775
3.630
4.452
5%
0.952
1.859
2.723
3.546
4.329
6%
0.943
1.833
2.673
3.465
4.212
7%
0.935
1.808
2.624
3.387
4.100
8%
0.926
.1783
2.577
3.312
3.993
9%
0.917
1.759
2.531
3.240
3.890
10%
0.909
1.736
2.487
3.170
3.791
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.893
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.37
11.26
12.13
13.00
13.87
9.787
10.58
11.35
12.11
12.85
9.253
9.954
10.63
11.30
11.94
8.760
9.385
9.986
10.56
11.12
8.306
8.863
9.394
9.899
10.38
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
1
2
3
4
5
11%
0.901
1.713
2.444
3.102
3.696
12%
0.893
1.690
2.402
3.037
3.605
13%
0.885
1.668
2.361
2.974
3.517
14%
0.877
1.647
2.322
2.914
3.433
15%
0.870
1.626
2.283
2.855
3.352
16%
0.862
1.605
2.246
2.798
3.274
17%
0.855
1.585
2.210
2.743
3.199
18%
0.847
1.566
2.174
2.690
3.127
19%
0.840
1.547
2.140
2.639
3.058
20%
0.833
1.528
2.106
2.589
2.991
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.496
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
4.793
4.910
5.008
5.092
4.586
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
Periods
(n)
KAPLAN P UBLI S H I N G
xx xi
PAPER P4: ADVANCED FINANCIAL MANAGEMENT
xx xii
K A P LA N P UB L I S H I N G
Section 1
PRACTICE QUESTIONS – SECTION A
ROLE AND RESPONSIBILITY TOWARDS STAKEHOLDERS
1
VADENER PLC
Vadener plc, a UK company, has instigated a review of the group’s recent performance and
potential future strategy. The Board of Directors has publicly stated that it is pleased with
the group’s performance and proposes to devote resources equally to its three operating
divisions. Two of the divisions are in the UK, and focus on construction and leisure
respectively, and one is in the USA and manufactures pharmaceuticals.
Recent summarised accounts for the group and data for the individual divisions are shown
below:
Statements of profit or loss:
Revenue
Operating costs
Operating profit
Net interest
Profit before tax
Tax (30%)
Profit after tax
Equity dividends
Retained earnings
KAPLAN PUBLISHING
20X3
1,210
800
Group data £ million
20X4
1,410
870
20X5
1,490
930
––––––
––––––
––––––
410
40
540
56
560
65
––––––
––––––
––––––
370
111
484
145
495
149
––––––
––––––
––––––
259
146
339
170
346
185
––––––
––––––
––––––
113
169
161
––––––
––––––
––––––
1
P AP E R P4 : AD VANCE D F INAN C IA L MA NAGE MEN T
Statements of financial position:
Non current assets:
Tangible assets
Intangible assets
Current assets:
Inventory
Receivables
Cash
Total assets
Shareholders’ equity
Long term liabilities
Payables falling due within one year:
Trade payables
Short term loans
Taxation
Dividends
1,223
100
1,280
250
1,410
250
340
378
10
410
438
15
490
510
15
––––––
––––––
––––––
2,051
2,393
2,675
––––––
––––––
––––––
1,086
400
1,255
410
1,406
470
302
135
55
73
401
170
72
85
430
201
75
93
––––––
––––––
––––––
2,051
2,393
2,675
––––––
––––––
––––––
Note:
The 20X5 amount for shareholders’ equity includes a £10 million loss on translation from
the US division due to the recent weakness of the $US.
Other group data at year end:
Share price (pence)
Number of issued shares (million)
Equity beta
20X3
1,220
300
20X4
1,417
300
20X5
1,542
300
1.10
The company’s share price has increased by an average of 12% per year over the last five
years.
2
Other data at year end:
FT 100 index
PE ratio of similar companies
Risk free rate (%)
Market return (%)
20X3
3,700
15:1
20X4
4,600
14:1
20X5
4,960
15:1
5
12
Divisional data 20X5
Revenue (£m)
Operating profit
Estimated after tax return (%)
Construction
480
160
13
Leisure
560
220
16
Pharmaceuticals
450
180
14
Data for the sector:
Average asset beta 20X5
Construction
0.75
Leisure
1.10
Pharmaceuticals
1.40
K A P LA N P UB L I S H I N G
PRA CTICE QUES TIO NS – SECTION A : S E CTI ON 1
Required:
(a)
Evaluate and comment on the performance of Vadener plc and each of its divisions.
Highlight performance that appears favourable, and any areas of potential concern
for the managers of Vadener. Comment upon the likely validity of the company’s
strategy to devote resources equally to the operating divisions.
All relevant calculations must be shown. Approximately 19 marks are available for
calculations, and 9 for discussion.
(28 marks)
Professional marks for format, structure and presentation of the report for part (a).
(4 marks)
(b)
Discuss what additional information would be useful in order to more accurately
assess the performance of Vadener plc and its divisions.
(7 marks)
(c)
Discuss the possible implications for Vadener plc of the £10 million loss on
translation, and recommend what action, if any, the company should take as a
result of this loss.
(7 marks)
(d)
The company has been advised that it can increase income by writing (selling)
options. Discuss whether or not this is correct, and provide a reasoned
recommendation as to whether or not Vadener plc should adopt this strategy.
(4 marks)
(Total: 50 marks)
ADVANCED INVESTMENT APPRAISAL
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WURRALL INC
The board of directors of Wurrall Inc has requested the production of a four-year financial
plan. The key assumptions behind the plan are:
(i)
Historically, sales growth has been 9% per year. Uncertainty about future economic
prospects over the next four years from 20X5–8, however, implies that this growth
rate will reduce by 1% per year after the financial year 20X5 (e.g. to 8% in 20X6).
After four years, growth is expected to remain constant at the 20X8 rate.
(ii)
Cash operating costs are estimated to be approximately 68% of sales.
(iii)
Tax allowable depreciation for the past few years has been approximately 15% of the
net book value of plant and machinery at year end. This is expected to continue for
the next few years.
(iv)
Inventories, receivables, cash in hand and ‘other payables’ are assumed to increase in
proportion to the increase in sales.
(v)
Investment in, and net book value of, plant and machinery is expected to increase in
line with sales. No investment is planned in other non-current assets other than a
refurbishment of buildings at an estimated cost of $40 million in late 20X7.
(vi)
Any change in interest paid as a result of changes in borrowing may be assumed to
be effective in the next year. Wurrall plans to meet any changes in financing needs,
with the exception of the repayment of the fixed-rate loan, by adjusting its overdraft.
(vii)
Wurrall currently pays 7% per annum interest on its short-term borrowing.
(viii) Corporation tax is expected to continue at its present rate over the next four years.
KAPLAN P UBLI S H I N G
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