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.
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
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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.
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 decision-making.’
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 main areas within the Corporate Financial Management syllabus and candidates will
need to prepare effectively for this examination.
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Financial governance; objectives and environment
Management performance measurement
Making distribution to shareholders
Long term investment decisions
Business combinations and share valuation
Capital investment appraisal
Capital markets and long-term financing decision
Working capital management and short-term financing
Share and loan capital
Corporate risk management
Sources of finance
International aspects
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Financial governance: objectives and environment
1.1.
Objective and governance
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Financial decision making
Types of company
Objectives of companies
Role of the finance function
Risk
Regulatory framework for companies
Company stakeholders
Agency theory: the principal-agent problem
The audit
Corporate governance : financial aspects
Objectives of public sector organizations
Charities
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Management performance measurement
2.1
Management performance measurement
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Principles of ratio analysis
Classification of accounting ratios
Value for money (VFM)
Economic Value Added (EVA)
Overtrading, financial distress and insolvency
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Making distributions to shareholders
3.1
Distribution
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Dividend policy and shareholder wealth
The importance of dividends
Factors determining the levels of dividends
Scrip dividends
Special dividends and share buy-backs
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Long term investment decisions
4.1
Investment appraisal
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4.2
The need for investment appraisal techniques
Relevant factors in project appraisal
Overview, methods of project appraisal
Payback period
Accounting rate of return (ARR)
Discounted cash flow techniques
Net present value (NPV)
Internal rate of return (IRR)
Discounted payback period
Taxation and investment appraisal
Inflation
Projects with unequal lives
Capital rationing
Approving and controlling investment projects
Project appraisal and risk
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4.3
Introduction
Risk preference
Sensitivity analysis
Scenario analysis
Simulations
Expected net present value (ENPV)
Event tree diagrams
Risk-adjusted discount rate (RADR)
Portfolio effect and risk reduction
Shareholder value analysis
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Shareholder value analysis (SVA)
Value creation
Economic Value Added (EVA)
Measuring value creation : total shareholder return (TSR)
Measuring value creation : market value added (MVA)
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Business combinations and share valuation
5.1
Business combinations
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Rationale for mergers and acquisitions
Economic justification for growth by acquisition
Methods of purchase consideration
Mergers and shareholder wealth
Resistance devices
Regulatory and procedural issues
Rationale for mergers and acquisitions
Valuation of a take-over target
Stock market methods
Cash flow and dividend based methods
Asset based methods
Divestment and de-merger activity
Capital Investment Appraisal
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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 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 balancing 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 operation leases
Contrast leasing with other methods of credit finance such as hire purchase
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Capital markets and long-term financing decisions
7.1
Financial markets and institutions
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Why do we have stock markets?
Financial markets
Other source of finance
Efficient market hypothesis (EMH)
Alternatives to the EMH
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7.2
Main source of long-term finance
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7.3
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7.4
Ordinary share capital (or equity)
Other types of share
Share warrants
Raising equity via retentions
Borrowing : debt and other forms of loan capital
Leasing
Hire purchase
Securitization of assets
Government assistance
Raising long term finance : identification of financing needs
Raising long-term finance : methods of issuing shares
Private Finance Initiative (PFI) and Public Private Partnership (PPP)
The cost of capital
The importance of the cost of capital
Cost of equity : the dividend valuation model and the dividend growth model
Cost of equity: the capital asset pricing model (CAPM)
Cost of preference shares
Cost of debt capital
Weighted average cost of capital (WACC)
Capital Structure
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7.5
The meaning of capital structure
Financial gearing and its effect on risk and return
Factors influencing the level of financial gearing
Measuring financial gearing
The capital structure debate
Business restructuring /reorganization
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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 buy-in
Predict the possibility of company failure using different models
Consider the reasons for divestment
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Working capital management and short – term financing
8.1
Working capital
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8.2
The nature and purpose of working capital
Working capital cycle
Working capital needs of different form of business
Ratios associated with the assessment of working capital
The financial impact of changes to working capital policies
The management of inventories
The management of receivables
The management of cash
The management of payables
Short term financing
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Bank lending and overdrafts
Bills of exchange
Customer credit
Retained profits and provisions
Reducing levels of inventory
Tighter credit control over trade receivables
Delaying payment to trade payables
Share and loan capital
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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 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
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Corporate risk management
10.1
Corporate risk management
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The nature of risk
Operating and financial risk
Key risk concepts
Risk responses
The relationship between risk and expected return
Risk management policies
Credit risk and market risk
Methods for hedging financial risk
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Sources of finance
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Understand the role of the primary and secondary financial markets
Explain the requirement 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.
International aspects
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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 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
Fundamentals of Corporate Finance(3rd Edition) by Jonathan Berk/Peter Demarzo/Jarrad Harford
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 organizations’ 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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