BFD

Refresher Session
Why Poor Result in BFD?
 ‘Only’ subject of Financial
Management in all CA-Modules
 Completely based on Application
of Knowledge (and not just
Knowledge)
 Subject Requires:
 Good arithmetic
background/logical thinking
 High analytical skills
 Exam pressure of Module F
 Poor paper planning and
unstructured answers
The Institute should
• Introduce basic financial
management at Foundation
Level
• Improve suggested solutions
• Introduce reading time
Students need to:
• Work harder for BFD (to
ensure syllabus coverage)
• Break barriers of
conventional thinking
• Focus on basic arithmetic
skills/formulas
• Practice – concept focused &
not # focused
Preparation Guide
Practice
• ICAP Past Papers
• ACCA F9 - 3.7/P4 & CIMA P9
• 100 Q&A-CFL
Practice should be concept-focused not number focused
You don’t need to practice all areas from all books/kits

Helping material
• 2 Previous Evaluation tests and their solutions

• Some model solutions

• Summary of Prudential Regulations
PRs for Corporate/Commercial banking
PRs for Consumer Financing
Preparation Guide
 Basic Financial Management
(NPV/IRR, Capital Rationing, ACCA-F9 & CIMA-P9
Asset Replacement etc) & basic ICAP past papers
WACC computations

 Advanced Financial
ACCA-3.7/ P4
Management (including MM &
ICAP Past papers
Portfolio theories, CAPM, Risk
Adjusted WACC, APV etc)

 Mergers & Acquisitions & Share ACCA P4 & CFL 100 Q&A
valuation ICAP past papers

 Forex Basics (Exchange ACCA-F9/3.7 &

rates/Forward contracts/ Parity ICAP past papers
theories etc)

 Advanced Forex Areas ACCA-3.7/P4 & ICAP past papers

 Important areas for focus
Discounted Cash Flow Techniques (NPV/IRR)

Determination of Determination of
Cashflows Discount Rate
Exclude: Include:
Cost of capital (taken to be the
• All non-cash • Relevant costs stakeholders’ required return)
items
• Impact of tax Should confirm to cashflows first
• All sunk and depreciation and tax
• After-tax Rate (if cashflows
allocated costs payments/savings
are post-tax)
• All financing • Impact of inflation
• Nominal (if cashflows are
cashflows and (Real/nominal
nominal)
their tax impacts cashflows)
(WACC) Existing WACC only (if
• Working capital
Financial and Business Risk
changes (incremental same)
WC)
 Important areas for focus
• Appropriate use of Basic Arithmetic Formulas
• Calculation of Present Values & Future Values

 Simple Compound Interest Formula (used for discounting/future value

calculation of a single cashflow)

 Annuity Formula for Discounting (gives combined present value of all

constant cashflows – one period before the start of first cashflow)

 Discounting of perpetual cashflows (gives combined present value of all

constant cashflows till perpetuity – one period before the start of first
cashflow)

 Discounting of cashflows growing at a constant growth rate (dividend

growth model)

 Use of equivalent periodic rates for non-annual cashflows

 Important areas for focus
Determination of Discount Rate (for project appraisal)

If BR & FR (D/E If Financial Risk If only BR / (BR &

ratio) remain same changes (BR constant) FR) change

• Current WACC • Traditional Theory • Existing WACC is not

becomes equal to (WACC would change) relevant discount rate
Marginal Cost of • MM Theory • Ke changes with change in
Capital
• Without taxes business risk
• WACC before and (WACCu = WACCg)
after the project • With taxes
same (WACCu >WACCg)
• Existing WACC
should be used as • Use Risk Adjusted WACC
a Discount Rate • Use APV

Change in Business/FR Risk
Risk Adjusted
WACC
• Identify Business Risks of Project
(Beta Asset)
• Adjust the Beta Asset for Financial
Risk of the project (D/E ratio) and
find out Beta Equity (Adjusted)
• Use Beta Equity to calculate Ke
(Adjusted) via CAPM Formula
• Put values of Ke, Kd, D & E in
WACC formula to arrive at WACC
(Adjusted)
• Discount project cashflows with
Adjusted WACC
Important areas for focus
Adjusted Present Value
(application of MM Theory)
• Identify Business Risk of the Project
(Beta Asset of Project)
• Use Beta Asset to arrive at Keu (or
use MM formula to arrive at Keu)
• Discount using Keu to arrive at Base
Case NPV
• Adjust Base Case NPV to arrive at
APV

Risk Return Theories
Portfolio Theory
• Tells us how to measure risk and
return of a security/portfolio
• Helps primarily in comparative
decision making
• Doesn’t tell us what should be the
fair return of a security/portfolio
• Should be used by an investor
faced will both systematic &
unsystematic risk
Important areas for focus
CAPM
• Helps us determine ‘Fair’ return of a
security/portfolio for bearing
systematic risk
• Assumes the investor is diversified
and doesn’t require premium for
unsystematic risk
• Helps in absolute decision-making
through ‘alpha values’
 Important areas for focus
Others

Asset Replacement Decisions Capital Rationing

• Equivalent Annual Cost • When projects divisible – Decision on

• Compute cashflows of one cycle the basis of PI

• Calculate equivalent annual • When projects indivisible – then

cashflow of that cycle calculate NPVs of all possible
combinations of projects within
• To be used when there is no capital limit and compare them
inflation
• Surplus cash
Mutually exclusive means cannot be
• LCM/Finite Horizon Method undertaken simultaneously

Forex
Basics
• Discount Rates
• Buying/Selling (from the
perspective of Forex Dealer)
• Direct/Indirect Quote
• Discount/Premium for
determination of forward rates
• Interest Rate/Purchase Power
parity theories (interest and
inflation rates)
• Concept of Appreciation and
Depreciation of a currency
Important areas for focus
Hedging
Natural Hedging / Matching Receipts
and Payments
Hedging using any instrument (Doing
today whatever to be done in future
without material own-investment)
• Forward contracts – (close-out)
• Futures (buying/selling)
• Options (call/put) – & Swaps
In any mode – there are two parts:
• Hedge set-up
• Hedge outcome (on transaction
date)
 Important areas for focus
Free Cashflows

To company (WACC) To Equity Holders (Ke)

• Revenue xxx • Free Cashflows to company xxx

• Operating expenses (xxx) • Interest payment (xxx)
(excluding non-cash items) • Tax saving on interest xxx
• Taxes (excluding tax saving (xxx) • Debt repayment (xxx)
on interest of debt)
• Issue of Debt xxx
• Working Capital Changes xx/(xx)
• Capital Expenditure (xxx)
Free Cashflows to Equity xxx
(operations related)
Free Cashflows to Company xxx
 Thanks!

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