Examiner’s report
Advanced Financial Management (AFM)
March/June 2024
Advanced
Financial
Management (AFM)
March/June 2024
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.
Contents
General comments .............................................................. 2
Format of the exam .............................................................. 2
Question 1 - Mahoney Co .................................................... 2
Part (a) – 7 marks ............................................................ 4
Part (b)(i) – 7 marks ......................................................... 5
Part (b)(ii) – 6 marks ........................................................ 5
Part (b)(iii) – 5 marks ........................................................ 6
Part (b)(iv) – 7 marks ....................................................... 7
Part (b)(v) – 8 marks ........................................................ 7
Professional skills – 10 marks .......................................... 8
Question 2 – Littlebredy Co ............................................... 10
Part (a) – 11 marks ........................................................ 11
Part (b) – 5 marks .......................................................... 12
Part (c) – 4 marks ........................................................... 13
Professional skills – 5 marks .......................................... 14
Question 3 - Garnod Co ..................................................... 15
Part (a) – 6 marks .......................................................... 16
Part (b) – 9 marks .......................................................... 17
Part (c) – 5 marks ........................................................... 18
Professional skills – 5 marks .......................................... 18
Examiner’s report – AFM September/December 2024
General comments
This examiner’s report should be used in conjunction with the published March/June
2024 sample exam which can be found on the ACCA Practice Platform.
In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process,
highlighting the strengths and weaknesses of candidates who attempted these
questions. Future candidates can use this examiner’s report as part of their exam
preparation, attempting question practice on the ACCA Practice Platform and
reviewing the published answers alongside this report.
Format of the exam
The examination comprised two sections, A and B. Section A consisted of one
compulsory question for 50 marks in total. Section B consisted of two compulsory
questions for 25 marks each. 10 professional skills marks were available within
Section A for communication, analysis and evaluation (A&E), scepticism and
commercial acumen. In Section B there are 5 professional skills (P) marks in each
question from at least two of analysis and evaluation, scepticism and commercial
acumen.
Section A
Question 1 - Mahoney Co
Format of the question
Mahoney Co was drawn from the risk management section of the syllabus (section
E), focusing on foreign exchange risk. The scenario is broadly similar in complexity
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to previous questions that have been drawn from the same syllabus area. The
requirements tested the ability of candidates to undertake a number of detailed
calculations and to discuss associated issues relevant to those calculations.
Exam technique and time management
Mahoney Co is worth 50 marks which translates into 90 minutes for candidates to
spend on this question. Candidates should read the question thoroughly to become
familiar with the scenario and then plan their time carefully in order to address the
specific issues in the question and gain maximum marks for each requirement.
Candidates must then plan their answer to enable them to have the opportunity to
gain maximum marks for each section. Candidates should ensure they address the
requirement in the time allotted and avoid unnecessary detail such as copying the
facts from the scenario. Marks are not allocated for information which is repeated
from the scenario without any analysis or evaluation.
Scenario
This 50-mark question was about a listed holding company based in the eurozone
where the company and its subsidiaries specialise in large-scale infrastructure
projects around the world. The company was due to review an investment proposal
having been invited to work on a port regeneration project by the government of
Amasia.
The requirements of this question were split into two parts. The first part required
candidates to explain why countries might impose protectionist measures and the
economic benefits that would arise if the country entered into a customs union with
its neighbours. The second part, which formed the major part of the question,
required a report to be prepared. Initially the report required candidates to calculate
intra-group cash flows using multilateral netting and to calculate the results of
potential forward and futures markets hedges. Candidates were then asked to
discuss their results. Secondly, candidates were asked to calculate the net present
value (NPV) of the port regeneration project using a currency swap and then a
currency option to hedge the cash flows from the project. Finally, candidates were
asked to discuss the results of their NPV calculations and the assumptions that they
had made when making the calculations.
Up to 10 professional marks were available in this question. Most of the professional
marks related to the report candidates were asked to prepare as part of second part
of the question.
General comments
Performance in this question was most encouraging. In particular, many candidates
seemed able to have a balanced attempt at the requirements and whilst some
requirements were attempted less well there were others, such as the multilateral
netting, which were very well attempted. Additionally, candidates often scored well
on the broad communication marks and the analysis and evaluation marks which
naturally accompany a good attempt to earn the technical marks in a question.
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However, candidates did not earn so many of the more specific scepticism and
commercial acumen marks that were available.
Part (a) – 7 marks
Explain why countries might impose protectionist measures on imports and
the possible economic benefits if Amasia forms a customs union with its
neighbouring countries.
This was worth 7 marks and, as indicated, required candidates to explain why
countries might impose protectionist measures and the economic benefits that would
arise if the country entered into a customs union with its neighbours. Performance in
this question part was mixed. Some candidates were able to write a very full and
relevant answer and showed good knowledge of many relevant points. Hence, they
were able to earn all the technical marks available and pick up a professional
commercial acumen mark for using appropriate information from the real world in
their explanations. Conversely some candidates did not provide a response to this
question part at all. It may be that some of these candidates skipped over this initial
question part as they were keen to make progress in the second part of the question
and decided they would come back to this part later. If this is a technique candidates
are using, they should be aware that it rarely works. The vast majority of the time,
candidates who skipped over this question part never returned to it.
To maximise their marks candidates should avoid repeating or over explaining what
is in fact only one point. Their time would be better spent thinking about, and then
succinctly explaining a second point. However, points did need to be explained,
albeit briefly, and candidates who produced a bullet point list of points were
penalised to some extent.
An issue that arose at times was that candidates spent too long defining terms, such
as what is meant by a customs union, or strayed from the requirement and, for
instance, explained the sort of protectionist measures a country could use.
Candidates should be strict with themselves and make sure that the points they raise
are answering the question posed. It was good to see that most candidates
maintained a sensible balance between the two sub-parts to this question part and
did not focus on one to the exclusion of the other.
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Part (b)(i) – 7 marks
Calculates the impact on intra-group cash flows if multilateral netting is used
to settle outstanding balances.
This was also worth 7 marks and required candidates to calculate the impact on
intra-group cash flows if multilateral netting was to be used. This was generally very
well done and many candidates earned all 7 marks. The final two marks were for
detailing the settlement transactions given the instructions in the question.
Candidates quite often lost both marks as, they either ignored this part of the
requirement, or detailed settlement transactions which did not work, given the net
amounts owing and owed that they had calculated. Candidates who detailed
settlement transactions which did work but were not in line with the instructions in the
question were given some credit.
Although candidates almost universally did well on this question part some
candidates seemed to waste a great deal of time as they did not create an efficiently
structured answer. Many candidates earned the available marks very quickly and
efficiently and hence had more time to devote to the remainder of the question.
Part (b)(ii) – 6 marks
Calculates the results of using the forward and futures markets to hedge the
disposal proceeds from the divestment of Oliviera Co.
This question part was worth 6 marks. Candidates were expected to hedge a foreign
currency receipt using both a forward market hedge and a futures hedge. It was
pleasing to see that the vast majority of candidates were able to successfully
translate one currency into another and hence got the correct result for the forward
market hedge. This is a distinct improvement on previous exam sessions and it is to
hoped that this improvement continues.
With regard to the futures market hedge, although performance overall was still good
results were more mixed. The main problem was that candidates were often unable
to calculate the final outcome given the need to hedge any amount unhedged or
over-hedged by the futures hedge using the forward market. Other candidates
seemed to rush into their work and failed to clearly identify that there was a need to
Examiner’s report – AFM March/June 2024
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buy September futures. Hence, they lost what should have been a relatively easy
mark. Equally candidates sometimes failed to round the number of contracts or failed
to round to the nearest whole number as instructed to in the question. Once again
this led to the loss of a mark that should have been easily gained.
Part (b)(iii) – 5 marks
Briefly discusses, using the results from parts (i) and (ii) above:
• the advantages and disadvantages of the policy to settle intra-group
balances;
• whether the forward or futures market would be a better choice to hedge
Oliviera Co’s disposal proceeds.
This question part was worth just 5 marks. Candidates were asked to briefly discuss
their results in (b)(i) and (b)(ii). In so doing they were asked to discuss advantages
and disadvantages of the policy to settle intra-group balances and whether the
forward market or the futures market would provide the better hedge. Candidates
often earned full marks here as there was a very great number of points that could
be made. Candidates must seek to be efficient and use their time wisely – a good
number of scripts presented answers which were too long and discussed too many
points given the marks available. Having said that candidates should try to properly
develop points. For instance, although mentioning that the futures hedge would
suffer from basis risk because the basis may not decline in a linear fashion would
earn a technical mark, candidates who then went on to say that the outcome from
the futures hedge might be more or less than expected due to basis risk could gain
an additional mark.
A common problem that arose when discussing multilateral netting, was that
candidates would often state that an advantage was that this netting would eliminate
all risks arising from currency rate fluctuations. In reality, this is not the case and the
situation is far more nuanced.
Although candidates did well on this question part the answers produced were often
rather general and did not make use of the scenario as much as they could have.
For instance, candidates rarely raised the issue that, as the group policy only
requires settlement payments to be paid in six months’ time this could potentially
give group companies which are owed significant amounts cash flow issues.
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Part (b)(iv) – 7 marks
Compares the net present value (NPV) in € of the regeneration project in
Amasia when either the currency swap or the currency option is used to hedge
the project’s cash flows.
This question part was worth 7 marks. Candidates were expected to calculate two
NPV’s for the regeneration project. The first of these was based on the assumption
that a currency swap was to be used and the second assumed that a currency option
would be used.
In total there were 5 marks for calculating the NPV based on the currency swap. Two
of these marks were for forecasting future exchange rates using purchasing power
parity theory (PPPT). Most candidates earned these marks. There were then marks
for the € cash flows in Years 1 & 2, the € cash flows in Year 3 and the final NPV.
Most candidates earned the first and last of these marks but very few recognised
that the swap rate would only account for a proportion of the cash to be received in
the third year.
There were just 2 marks for calculating the NPV using the currency option. Few
candidates were able to do this successfully although those that could were able to
earn the available marks very quickly. This was probably the question part where
candidates were weakest but those that were confident enough to have a go and
adopted a sensible approach using their FM knowledge were often able to achieve a
pass mark in this question part. This was the case even though they were often very
uncertain as to how to deal with the swap and/or the option. Candidates must
recognise that this is often the case and must develop the confidence to attempt
question parts even when they feel somewhat ill at ease.
Part (b)(v) – 8 marks
Discusses, using the results from part (iv) above:
• whether the currency swap or currency option would be a better choice
to hedge the risk associated with the project in Amasia;
• the assumptions made when estimating the regeneration project’s NPV;
Examiner’s report – AFM March/June 2024
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•
whether the regeneration project should be undertaken.
This was the largest question part and was worth 8 marks in total. The requirement
was split into three sub-parts.
In the first sub-part candidates were asked to discuss whether the currency swap or
the currency option would be a better choice to hedge the risk associated with the
regeneration project. Whilst most candidates who had managed to calculate NPV’s
in (b)(iv) were able to answer this question in simple terms, there was often very little
discussion.
The second sub-part of this requirement asked for a discussion of assumptions that
had been made when estimating the NPV’s of the regeneration project. Most
candidates were able to make a fair attempt at this. However, the assumptions given
were often stated (sometimes using a bullet point format) rather than discussed in
any meaningful way. Candidates were not given full credit where this was the case.
As has been said previously, candidates are encouraged to develop points further.
For instance, many candidates discussed the assumption that the exchange rate
forecasts were based on PPPT and that this may not hold true. However, candidates
who went on to say that the actual NPV may be lower or higher than that forecast as
a result of this issue could earn additional credit.
The final sub-part of the question required a discussion about whether the
regeneration project should be undertaken. Just as with the first sub-part of this
question, most candidates who had managed to calculate NPV’s in part (b)(iv) were
able to answer this question in simple terms but there was often very little
discussion. At this level candidates should be thinking more broadly and should, for
instance, be suggesting the potential for follow-on projects or real options to add
further value over and above the NPV calculated.
Professional skills – 10 marks
The communication marks are largely earned by the format and style of the report
and for using a style and language which creates a clear well-presented report with a
suitable tone. Whilst candidates’ performance seems to be improving and most
reports presented have an opening rubric and an introduction, very many candidates
could earn extra marks by making sure that they structure their report with suitable
sub-headings and finish their report with a brief conclusion.
Analysis and evaluation marks are awarded for clear, efficient and effective
numerical analysis. Generally, candidates who are technically proficient are better
able to earn these marks. Many candidates were competent in demonstrating
analysis and evaluation.
Examiner’s report – AFM March/June 2024
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Further communication and analysis and evaluation marks were available to
candidates who made clear recommendations and gave advice that was consistent
with their previous calculations. Candidates must make sure that recommendations
and advice are clearly stated as it is often the case that candidates ‘sit on the fence’
and never finally give any clear recommendation or advice. As a result, they may
lose marks they could have easily gained.
What has been described above is common to most AFM Section A questions and
although candidates are earning a good number of these marks there is still room for
improvement in the areas described.
Generally, candidates seem to be less capable at earning the scepticism and
commercial acumen marks and this is especially true where a candidate’s answer is
rather thin and underdeveloped. This report has already identified how more of these
marks could be earned in the discussion on each of the question parts. Future
candidates would do well to reflect on the points raised and try to act on them when
taking their examination
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Section B
Question 2 – Littlebredy Co
Format of the question
Littlebredy Co was a 25-mark question, based around a listed supplier of furniture
and equipment. The question was drawn from Section B of the syllabus, focusing on
investment appraisal and the application of option pricing theory to investment
decisions. In part (b), candidates were expected to discuss the extent to which
Littlebredy Co’s investment would represent a diversification for the company. The
discussion topic in part (c) related to section A of the syllabus, which involves
“communicating financial policy and goals to internal and external stakeholders.”
Scenario
The first exhibit presented information about Littlebredy Co about the two major
investment opportunities under consideration by the board. The first one was an
investment in facilities to manufacture office pods and the second was an investment
in facilities to manufacture furniture and equipment for schools and universities. The
following exhibit then presented financial information about the first project so the
financial acceptability of this project could be assessed.
The third exhibit presented further information about the second project, stating that
this was a new business area for the company and that initial calculations had
suggested the project would have a negative net present value (NPV). Further
financial information was provided relating to a government programme of support
which one of the directors believed would result in further investment and related
costs in 4 years’ time.
The final exhibit contained information about the boards reporting strategies and the
desire not to include commercially sensitive information about their future investment
strategy in its statutory reports. Littlebredy Co’s business review had been criticised
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for not disclosing the business’ future investment strategy and the media have
commented that this could be the reason the share price had recently fallen.
The first requirement asked candidates to evaluate the first project detailed in exhibit
2. Then, candidates were asked to evaluate the second project using the BlackScholes option pricing model. Part (b) required a discussion on whether the new
project relating to schools and universities represented a diversification for
Littlebredy Co. Part (c) asked candidates to discuss what changes Littlebredy
should make to its reporting to provide more information about the rationale for, and
the factors affecting, its future investment strategies in response to the criticism it
had received. In addition to the technical marks that were available in this question,
candidates were also expected to demonstrate professional skills throughout their
responses. The professional skills being examined in Littlebredy Co included
analysis and evaluation, scepticism, and commercial acumen.
General comments
The overall performance of candidates on this question was good. The calculation
requirements in this question were not technically demanding and many candidates
were able to produce a well-structured answer demonstrating their ability to apply the
NPV method of investment appraisal. The second evaluation in part (a)(ii) required
inputs to be plugged into the Black-Scholes spreadsheet calculator supplied to
candidates. Candidates who were well prepared scored good or very good marks,
especially on parts (a)(i) and (a)(ii). The responses to the discussion requirements in
parts (b) and (c), were handled less well. Both discussion elements were slightly
different to previous questions and many candidates did not score highly on either of
these parts.
Candidates generally seemed to be more competent in terms of demonstrating the
skill of analysis and evaluation, particularly in their numerical analysis, compared to
the skills of scepticism and commercial acumen.
Part (a) – 11 marks
Part (a)(i) – 7 marks
Evaluate the financial acceptability of the investment in office pods.
Candidates generally are well prepared for calculating the NPV of a project. In this
case, there were less variables than in many previous questions and on the whole
candidates were awarded good or very good marks on this section. Marks were
awarded for calculating the fixed costs, the working capital, and the taxation
correctly. Both the fixed costs and the working capital were generally dealt with very
well but there are still some candidates who do not calculate the incremental working
capital or who do not release the total investment back into the project in the final
year.
Examiner’s report – AFM March/June 2024
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It was the tax calculation that was often calculated incorrectly. The two instructions
given were that losses should be carried forward and that there was a 100%
allowance for the initial investment. If these rules are followed and applied to the
correct taxable cash flow, there would be no tax paid until years 3 and 4. Many
candidates did not read the question properly and incorrectly applied tax allowable
depreciation across all 4 years of the cash flows.
Part (a)(ii) – 4 marks
Evaluate, using the Black-Scholes pricing model, whether Littlebredy Co
should proceed with the investment in the furniture and equipment for schools
and universities.
There were marks for correctly identifying the inputs to the Black-Scholes model.
Many candidates were able to identify the input data correctly and gain full marks as
there were no calculations required for this. All the data was provided in the
question. Common errors were to get the exercise price and the asset price the
wrong way round, to input the exercise date incorrectly and/or to incorrectly identify
the option as a put rather than a call. Many candidates scored the maximum or close
to the maximum on this part of the question.
Part (b) – 5 marks
Discuss the extent to which the investment in furniture and equipment for
schools and universities would represent diversification for Littlebredy Co.
This part of the question required a discussion on diversification from the perspective
of Littlebredy Co’s products and markets. Candidates often took a shareholder view,
which is how diversification is often questioned and recognised that shareholders
could often diversify their own portfolios cheaper and more quickly. In this scenario
candidates needed to discuss whether the schools and universities project
represented diversification for Littlebredy Co and focus their discussion on the
differentiation of the market and the product that the project related to. The other
project relating to office pods was not part of this requirement although many
candidates did bring it into their comments. Many candidates were able to discuss
the impact of the government support for the future development of the market but a
very small number of candidates were able to relate the issue of diversification to
Littlebredy Co’s products and markets in enough detail to gain good marks.
Examiner’s report – AFM March/June 2024
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Part (c) – 4 marks
Advise Littlebredy Co on what changes to make to its reporting to provide
more information about the rationale for, and the factors affecting, its future
investment strategies.
The scenario explained that Littlebredy Co adhered to the requirements of the
corporate governance code to publish a business review. The company had faced
criticism from the media and investors that the analysis in the business review was
not sufficient, particularly relating to its investment strategies. Candidates were
required to advise based on the changes that should be made by Littlebredy Co to
provide more information in its reporting on its future investment strategies. There
were quite a few candidates who misread the requirement and answered the
question by discussing the factors that affect Littlebredy Co’s future investment
strategy. In this case, however, some credit was awarded for sensible comments.
Unfortunately, candidate performance on this part of the question was very weak and
few candidates gained good marks.
There was some evidence that candidates did not fully understand the type of
information that should be published and a common error was the suggestion that
detailed NPV’s, budgets and cash flow forecasts should all be provided in the annual
business review. Another common mistake was that candidates focused on historic
ratios and trends relating to the company’s annual financial statements but the
question clearly stated in the scenario that these are already published. Answers that
were awarded high marks recognised the need to give more information than was
required by law focusing on planned investment strategies and how the company
was going to achieve them while recognising the need for commercial sensitivity.
Candidates that discussed integrated reports and related them to this issue were
also awarded good marks.
There are some candidates who produce brief bullet point lists with little or no
explanation and in this case, few if any marks are awarded. In addition, some
candidates copy paragraphs from the question as part of their answer which is to be
discouraged since no marks are awarded for this approach.
Candidates would be advised to study published financial statements and annual
business reviews of a small selection of listed companies to determine the type of
information that is published and to prepare themselves for any similar questions in
the future.
Examiner’s report – AFM March/June 2024
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Professional skills – 5 marks
On the whole candidates were awarded an average mark for professional skills.
Candidates were generally good at demonstrating skills of analysis and evaluation
but not so good at demonstrating scepticism and commercial acumen.
Analysis and evaluation
Many candidates were able to gain very good marks here by providing wellstructured numerical analysis for their calculations in part (a)(i). To gain full marks for
analysis and evaluation, candidates had to make sure they included both a
recommendation in (a)(i)and (a)(ii) commenting on their previous analysis and using
their own calculations. Candidates can be reassured that if they recommend a
decision different to the suggested solution, they will still be awarded credit as long
as their recommendation is consistent with their own workings.
Scepticism
To demonstrate the skill of scepticism, candidates were expected to adopt a
questioning approach to the information provided in a way that would impact the
decisions; for example, forecasting that the investment amount in 4 years’ time
would be difficult and if this changed, it would have a significant effect on the
outcome of the option and hence the decision. Most candidates struggled to
demonstrate the requisite level of scepticism and would do well to focus on this
aspect of the requirements in their preparation for the exam.
Commercial acumen
To demonstrate commercial acumen, candidates need to use the information from
the scenario or the real world to enhance their discussion. In this case, for example,
the political environment regarding government support of the schools and
universities project could be significantly affected by a change in government.
Candidates can use the information in the scenario to draw evidence that relates to
the organisational context or any other practical commercial considerations that
could be considered.
Candidates do not need to use valuable time drawing up a table in their answer and
highlighting where they have demonstrated the relevant skills.
Examiner’s report – AFM March/June 2024
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Question 3 - Garnod Co
Format of the question
Garnod Co was a 25-mark question, based around a listed company, which provides
courses for accountancy qualifications. The question was drawn from Section C of
the syllabus, focusing on mergers and acquisitions. The scenario and requirements
are broadly similar in complexity to previous questions that have been drawn from
the same syllabus area.
Scenario
The first exhibit provides background information on Garnod Co, which has been
quicker than its competitors to develop profitable e-learning course packages. The
company is looking to expand into new areas of training where there is potential for
cross-selling courses and further opportunities for development of e-learning
packages. In order to progress this desire to expand, the board has identified two
possible companies that they could potentially take over. The remaining exhibits
provide additional information about the two takeover targets.
The requirements for this question are split into three parts. The first part requires
candidates to analyse the suitability, as possible takeover targets, of the two
companies identified. The second part, which is the question part with the largest
number of marks available, requires candidates to make calculations with regard to
the potential acquisition of one of the companies identified (Pilsur Co). The final part
of the question requires candidates to discuss the feasibility and effectiveness of two
defence strategies that it has been suggested Pilsur Co may decide to use if it is
threatened with being taken over by Garnod Co.
Up to 5 professional marks are available in this question. Professional marks can be
earned in all the separate question parts.
Examiner’s report – AFM March/June 2024
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General comments
Performance in this question was mixed. Whilst most candidates seemed able to
make a reasonably balanced attempt at the requirements, there were a significant
number of candidates who seemed to lack confidence in the calculations required in
the second part of the question. Indeed, some candidates were only able to make a
rather limited attempt at the calculations. However, in doing this they were often able
to pick up enough marks to earn a pass in this question part. With regard to the
discursive question parts, it was the first part which was generally answered more
satisfactorily and a good proportion of candidates were able to earn full marks here.
Some candidates, who were not able to make any meaningful attempt at the
calculations required, seemed to give up and only provide very limited answers to
the question as a whole. Candidates must learn to remain positive as others in the
same situation focused on the discursive question parts and often ended up with a
creditable score to the question as a whole.
Part (a) – 6 marks
Analyse the suitability of Pilsur Co and Marhew Co as possible takeover
targets for Garnod Co.
This was worth 6 marks and, as indicated, required candidates to analyse the
suitability as possible takeover targets of two companies identified. Performance in
this question part was often good and many candidates were able to write a very full
and relevant answer. It was pleasing to see that most candidates were able to
maintain a sensible balance in their answers by considering both of the potential
takeover targets and did not focus on one to the exclusion of the other.
Some candidates misinterpreted the question to some extent. A few candidates
discussed, in general terms, factors that Garnod Co should consider when analysing
the suitability of takeover targets, rather than using the information in the exhibits to
analyse the suitability of the two targets already identified. Only very limited marks
could be awarded if this approach was adopted. Other candidates seemed to feel
that they had to make a recommendation as to which of the companies identified
would make the best takeover target. This was not required and caused candidates
to waste valuable time. That said, candidates who followed this approach could still
earn a perfectly good mark on this question part.
To maximise their marks candidates should avoid repeating or over explaining what
is in fact only one point. Their time would be better spent thinking about, and then
succinctly explaining a second point. However, points do need to be explained, albeit
briefly, and candidates who produced a bullet point list of points were penalised to
some extent.
Examiner’s report – AFM March/June 2024
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Part (b) – 9 marks
Calculate:
• the minimum price which Pilsur Co’s shareholders are expected to accept;
• the target price which Garnod Co would pay, based on a free cash flow to
equity valuation, on the basis of 60% of the gains from the acquisition
accruing to its shareholders;
• the percentage of gains from the acquisition which would accrue to
Garnod Co’s shareholders if Garnod Co paid the minimum price which
Pilsur Co’s shareholders are expected to accept, based on a free cash flow
to equity valuation.
This part was worth 9 marks and expected candidates to carry out a number of
calculations in order to answer the three questions posed in the requirement.
The first question posed is worth 1 mark and requires candidates to calculate the
minimum price the Pilsur Co shareholders are expected to accept. In order to
calculate this, candidates needed to take the current share value of Pilsur Co and
add a premium of 14%. A surprising number of candidates failed to do this or applied
the premium to a different valuation of the company.
The second question posed, which was worth 7 marks, required candidates to
calculate a target price that Garnod Co would pay given certain assumptions. The
first step in doing this is to calculate a FCFE valuation of Pilsur Co. Although this was
reasonably well attempted, the cost of equity was often calculated using the incorrect
beta and all too often there were minor calculative errors. Whilst minor errors can
sometimes be forgiven, candidates should seek to minimise them. Having done this,
the gain expected from combining the company should then have been calculated.
This required the calculation of the value of the combined company, based on a
multiple of free cash flow to equity, from which the current value of Garnod Co and
the FCFE value of Pilsur Co needed to be subtracted. Few candidates completed
this successfully although many picked up some marks as they calculated the
existing value of Garnod Co and/or the multiple of free cash flows value of the
combined company. Finally, the target price that Garnod would pay could be
calculated based on the FCFE value of Pilsur Co plus the 40% of the gain calculated
that would accrue to the Pilsur Co shareholders. Unfortunately, only a minority of
candidates achieved this.
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Candidates were also expected to calculate the percentage of the gains that would
accrue to the Garnod Co shareholders if the Pilsur Co shareholders are paid the
minimum price they are expected to accept. Many candidates who attempted this
part of the question calculated the overall percentage gain that the Garnod Co
shareholders would receive which is not what was required. It is not uncommon for
candidates to answer the question they were hoping for rather than the question
actually posed and candidates should make sure they read questions carefully in
order to avoid doing this.
Part (c) – 5 marks
Discuss the feasibility and effectiveness of the defence strategies suggested
to fight a takeover bid for Pilsur Co.
This question part was worth 5 marks and required candidates to discuss the
feasibility and effectiveness of two defence strategies that it has been suggested
Pilsur Co may decide to use. Most candidates were able to make a creditable
attempt at this question part although some answers were rather underdeveloped
and did not consider both feasibility and effectiveness. A few candidates discussed
alternative potential defence strategies that the company could follow, rather than
the strategies outlined in the exhibit, for which no credit could be awarded.
Professional skills – 5 marks
Analysis and Evaluation marks are awarded for clear, efficient and effective
numerical analysis in a way that can be used to support candidates’ discussion.
Generally, candidates who are technically proficient are better able to earn these
marks. As candidates generally struggled with the calculative element in this
question few of them earned as many Analysis and Evaluation marks as they could
have done. Candidates who provide annotations to their calculations, which make it
clear what it is they are trying to calculate, will always earn more of these marks
compared to candidates who just present a spreadsheet full of calculations with no
explanations.
Given that many candidates provided good answers to part (a) and perfectly
creditable answers to part (c) of the question, they were able to earn many of the
technical marks available and pick up professional Commercial Acumen marks for
using appropriate information from the real world in their explanations.
Scepticism marks were often earned in part (c) as candidates frequently discussed
whether the takeover defences suggested were realistic given the circumstances.
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Fewer scepticism marks tended to be earned in part a) as candidates tended to
focus on the positive aspects of each takeover target and hence were less sceptical.
Examiner’s report – AFM March/June 2024
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