F9 – Financial Management

Formulae:

-Economic Order Quantity

-Miller Orr Model
-The Capital Asset Pricing Model
-The Asset Beta Formula
-The Growth Model
-Gordon’s Growth Approximation
-The Weighted Cost Of Capital (WACC)
-The Fisher Formula
-Purchasing Power Parity & Interest Rate Parity
-Present Value & Present Value Annuity Table

(1) Financial Management Objectives

.nature and scope of financial management

.relation between financial management, management accounting and financial accounting
.relation between financial objectives and organisational strategy
.stakeholders and objectives towards it
.objectives in the not-for-profit organisation: -not for profit
-fundamental components of value for
money

(2) The Financial Management Environment

.financial intermediation: -features of service provided

-other financial intermediaries
.credit creation by clearing banks
.the financial markets: -main capital markets
-money markets
.stock exchange operations: -functions & purpose of the stock exchange
-how are shares bought and sold?
-how are shares valued?
.financial market efficiency: -the efficient market hypothesis
-implications for financial managers
.money market interest rates: -factors determining interest rates
-yield curves
-explanation to the shape of the curves

(3) Management Of Working Capital (1)

.what is working capital

.investment in working capital
.financing of working capital
.working capital ratios: -liquidity ratios
-efficiency ratios
-problem with the use of ratios
.the operating cycle
.overcapitalisation and overtrading

(4) Management Of Working Capital (2) – Inventory

.the EOQ model
.costs involved: -purchase cost
-reorder cost
-inventory holding cost
.minimising costs (example 1)
.the EOQ formula (example 2)
.quantity discounts (example 3)
.the just-in-time system: -finished goods
-work in progress
-raw materials

(5) Management Of Working Capital (3) – Receivables & Payables

.receivables: -points to consider as part of efficient management

-invoice discounting and factories
-examination arithmetic on receivables management
(a) simple settlement discount (example 1)
(b) change of policy (example 2 & 3)
.payables (example 4 & 5)

(6) Management Of Working Capital (4) – Cash

.reasons for holding cash

.methods of dealing with cash shortages
.cash surpluses: -short term
-long term
.cash management model: -cash budgets
.cash budgets: -proforma (example 1)
-the Baumol model (example 2)
-the Miller Orr model (example 3)

(7) Investment Appraisal – Methods

.discounted cash flow – net present value (example 1 & 2)

.discounted cash flow – internal rate of return (example 3)
.discounted cash flow: -annuities (example 4 & 5)
-perpetuities (example 6 & 7)
.other approaches to investment appraisal: -accounting rate of return (example 8)
-payback period (example 9)

(8) Relevant Cash Flows For DCF

.relevant costs (example 1)

.working capital (example 2)
.taxation (example 3)
.inflation (example 4 & 5)

(9) Discounted Cash Flows – Further Aspects

.capital rationing: -infinitely divisible projects

 -non infinitely divisible projects (example 1)
.replacement (example 2)
.lease versus buy (example 3)

(10) Invest Appraisal Under Certainty

.sensitivity analysis (example 1)

.simulation
.expected values (example 2)
.risk adjustment discount rate

(11) Sources Of Finance – Equity

.methods of issuing shares: -new shares; quoted companies

-new shares; unquoted companies
.right issues (example 1 & 2)
.bonus issues / stock splits / scrip dividends
.internally generated finance: -dividend irrelevancy theory
-dividend policy in practice
-the clientele effect
-the signalling effect

(12) Sources Of Finance – Debt

.types of long term debt: -preference shares (advantages & disadvantages)

-debentures; loan stocks or bonds (advantages &
disadvantages)
-deep discounts bonds (or debentures)
-zero coupons bonds
.returns on debt: -interest yield
-redemption yield
.convertibles (example 1) & warrants
.short term finance
.SAA - business finance and the SME sector

(13) Capital Structure And Finance Ratios

.financial gearing; definition (example 1 & 2)

.operating gearing: -fixed operating cost (example 3)
-measures of operating gearing
.other financial ratios (example 4)

(14) The Valuation Of Securities – Theoretical Approach

.the valuation of equity – constant dividends (example 1 & 2)

.cum div / ex div values (example 3)
.the valuation of equity – non-constant dividends (example 4)
.the valuation of equity – constant growth rate in dividends (example 5 & 6)
.the valuation of debt
.the valuation of debt – irredeemable debt (example 7 & 8)
.the valuation of debt – redeemable debt (example 9 & 10)

(15) The Valuation Of Securities – Practical Issues

.limitations of the dividend valuation model: -main reasons for it

.financial accounts based on the valuations of equity: -net asset basis
-earnings basis

(16) The Cost Of Capital

.the cost of equity (example 1): -the formula (example 2 & 3)

.estimating the rate of growth in dividends: -post dividend growth (example 4)
-‘rb’ growth (example 5 & 6)
.the cost of debt: -irredeemable debt (example 7)
-redeemable debt (example 8)
.the weighted average cost of capital – WACC (example 9 & 10)

(17) When (And When Not!) To Use The WACC For Investment Appraisal

.the WACC
.when to use the WACC for investment appraisal
.what if the conditions for using the current WACC do not exist?

(18) The Cost of Capital – The Effect Of Changes In Gearing

.the ‘traditional theory’ of gearing: -views on it (example 1)

-illustration of it
-its implication
.Modigliani and Miller’s theory of gearing – ignoring taxes (example 2) [implication of their
results]
.M & M’s theory of gearing – with corporation tax (example 3) [graphical illustration
implications]
.M & M’s assumptions (main)
.pecking order theory: -order of preference

(19) Capital Asset Pricing Model

. What is business risk?

.two types of business risk
.measurement of systematic risk
.the determination of the required return from an investment (example 1, 2 & 3)
.using CAPM for investment appraisal (example 4)
.the limitations of CAPM

(20) CAPM And MM Combined

.the effect of gearing on the β (example 1)

.estimating a discount rate for an investment: -the steps (example 2)

(21) Forecasting Foreign Currency Exchange Rates

.factors affecting the exchange rate

.purchasing power parity (example 1 & 2)
.the Fisher effect
.interest rate parity

(22) Foreign Exchange Risk Management

.types of risk
.the foreign exchange market
.exchange rates (example 1 & 2)
.methods of hedging transaction exposure
.forward contracts (examples 3, 4 & 5)
.money market hedging (example 7)
.currency futures (example 8)
.options: -OTC options (example 9)
-traded options
.currency swaps

(23) Interest Rate Risk Management

.the nature of interest rate risk

.methods of managing interest rate risk
.forward rates agreements
.interest rate guarantees
.interest rate futures (example 1)
.interest rate options
.caps, floors & collars
.fixed or floating?
.interest rate swaps (example 2)