Maximise Your Exam Success with BPP Learning Media’s Platinum Approved Materials LEARN Our Study Texts are the only Texts that have been reviewed by the examiner This ensures that our coverage of the syllabus is appropriate for your exam By choosing our Platinum Approved Study Text you are one step nearer to achieving the exam success you deserve PRACTISE AND APPLY Our Practice & Revision Kits are the only Kits that have been reviewed by the examiner Use our Kits and our i-Pass CD-ROMs to reinforce and apply your knowledge Kits are packed with past ACCA exam questions together with full solutions and handy tutor’s hints i-Pass contains approximately 300 questions, covering all important syllabus areas REVISE AND RETAIN Revise using our pocket-sized Passcards and then listen to our audio Success CD to give your revision a boost Our Interactive Passcards product takes the Passcards, adds additional tutorials, comments and lots of testing and links them to the Study Text The result is a truly interactive revision experience Revise using the on-screen Passcards and dip into the on-screen Study Text for more detail BPP LEARNING MEDIA CUSTOMER SERVICES Tel: 0845 075 1100 (UK) Email: learningmedia@bpp.com Tel: +44 (0)20 8740 2211 (Overseas) Website: www.bpp.com/learningmedia To help maximise your chances of passing, we’ve put together some exclusive additional ACCA resources To access the BPP ACCA online additional resources for this material please go to: http://accaresources.bpp.com/student n Create a user account if you don’t already have one Make sure you reply to the confirmation email n Log in using your registered username and password Select the paper you wish to access n Enter the code below when prompted You will only have to this once for each paper you are studying S T U D Y PAPER F9 FINANCIAL MANAGEMENT BPP Learning Media is the sole ACCA Platinum Approved Learning Partner – content for the ACCA qualification In this, the only Paper P1 study text to be reviewed by the examiner: We discuss the best strategies for studying for ACCA exams We highlight the most important elements in the syllabus and the key skills you will need We signpost how each chapter links to the syllabus and the study guide We provide lots of exam focus points demonstrating what the examiner will want you to We emphasise key points in regular fast forward summaries We test your knowledge of what you've studied in quick quizzes We examine your understanding in our exam question bank We reference all the important topics in our full index BPP's Practice & Revision Kit, i-Pass and Interactive Passcard products also support this paper FOR EXAMS UP TO JUNE 2014 T E X T First edition 2007 Sixth edition September 2012 ISBN 9781 4453 9652 (Previous ISBN 9781 4453 7766 7) e-ISBN 9781 4453 9212 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library All our rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd, unless otherwise stated Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA www.bpp.com/learningmedia Printed in the United Kingdom by Polestar Wheatons Hennock Road Marsh Barton Exeter EX2 8RP Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources © BPP Learning Media Ltd 2012 ii Contents Page Introduction Helping you to pass – the ONLY F9 Study Text reviewed by the examiner! Studying F9 The exam paper and exam formulae v vii x Part A Financial management function Financial management and financial objectives Part B Financial management environment The economic environment for business Financial markets and institutions 35 55 Part C Working capital management Working capital Managing working capital Working capital finance 75 89 115 Part D Investment appraisal 10 11 Investment decisions Investment appraisal using DCF methods Allowing for inflation and taxation Project appraisal and risk Specific investment decisions 139 155 173 187 201 Part E Business finance 12 13 14 Sources of finance Dividend policy Gearing and capital structure 221 253 263 Part F Cost of capital 15 16 The cost of capital Capital structure 285 309 Part G Business valuations 17 18 Business valuations Market efficiency 329 351 Part H Risk management 19 20 Foreign currency risk Interest rate risk 363 387 Mathematical tables 401 Exam question bank Exam answer bank Index 405 427 485 Review form Contents iii A note about copyright Dear Customer What does the little © mean and why does it matter? Your market-leading BPP books, course materials and elearning materials not write and update themselves People write them: on their own behalf or as employees of an organisation that invests in this activity Copyright law protects their livelihoods It does so by creating rights over the use of the content Breach of copyright is a form of theft – as well being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: Photocopying our materials is a breach of copyright Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright You can, of course, sell your books, in the form in which you have bought them – once you have finished with them (Is this fair to your fellow students? We update for a reason.) But the e-products are sold on a single user licence basis: we not supply ‘unlock’ codes to people who have bought them second hand And what about outside the UK? BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that If they act illegally and unethically in one area, can you really trust them? iv Helping you to pass – the ONLY F9 Study Text reviewed by the examiner! BPP Learning Media – the sole Platinum Approved Learning Partner - content As ACCA’s sole Platinum Approved Learning Partner – content, BPP Learning Media gives you the unique opportunity to use examiner-reviewed study materials for the 2013 exams By incorporating the examiner’s comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA-approved support for your studies The PER alert Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three year practical experience requirement (PER) To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the ‘PER alert’ feature You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success Developing exam awareness Our Texts are completely focused on helping you pass your exam Our advice on Studying F9 outlines the content of the paper, the necessary skills the examiner expects you to demonstrate and any brought forward knowledge you are expected to have Exam focus points are included within the chapters to highlight when and how specific topics were examined, or how they might be examined in the future Using the Syllabus and Study Guide You can find the syllabus and Study Guide on page xi of this Study Text Testing what you can Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt We include Questions – lots of them - both within chapters and in the Exam Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content Introduction v Chapter features Each chapter contains a number of helpful features to guide you through each topic Topic list Topic list Syllabus reference What you will be studying in this chapter and the relevant section numbers, together the ACCA syllabus references Introduction Puts the chapter content in the context of the syllabus as a whole Study Guide Links the chapter content with ACCA guidance Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined Knowledge brought forward from earlier studies What you are assumed to know from previous studies/exams FAST FORWARD Summarises the content of main chapter headings, allowing you to preview and review each section easily Examples Demonstrate how to apply key knowledge and techniques Key terms Definitions of important concepts that can often earn you easy marks in exams Exam focus points When and how specific topics were examined, or how they may be examined in the future Formula to learn Formulae that are not given in the exam but which have to be learnt Gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER) vi Introduction Question Gives you essential practice of techniques covered in the chapter Case Study Real world examples of theories and techniques Chapter Roundup A full list of the Fast Forwards included in the chapter, providing an easy source of review Quick Quiz A quick test of your knowledge of the main topics in the chapter Exam Question Bank Found at the back of the Study Text with more comprehensive chapter questions Cross referenced for easy navigation Studying F9 This paper examines a wide range of financial management topics, many of which will be completely new to you You will need to be competent at a range of quite tricky calculations as well as able to explain and discuss financial management techniques and issues The F9 examiner The examiner is Tony Head He expects you to be able to perform and comment on calculations, exercise critical abilities, clearly demonstrate understanding of the syllabus and use question information Syllabus update The F9 syllabus has been updated for the June 2013 sitting onwards The syllabus changes are summarised below Summary of changes to F9 ACCA periodically reviews its qualification syllabuses so that they fully meet the needs of stakeholders such as employers, students, regulatory and advisory bodies and learning providers The changes to the F9 syllabus are summarised below The additions to the syllabus consist of two topics previously examined in the higher-level P4 paper which are now included at the F9 level There are also two topics which have been deleted, as they will be assumed knowledge from F2 and FMA Table – Additions to F9 Section and subject area Syllabus content B3 – The treasury function (a) Describe the role of money markets in: (i) Providing short-term liquidity to industry and the public sector (ii) Providing short-term trade finance (iii) Allowing an organisation to manage its exposure to foreign currency risk and interest rate risk (b) Explain the role of banks and other financial institutions in the operation of the money markets (c) Explain the characteristics and role of the principal money market instruments: (i) Interest-bearing instruments (ii) Discount instruments (iii) Derivative products F2 – Estimating the cost of equity (b) Explain and discuss systematic and unsystematic risk, and the relationship between portfolio theory and the capital asset pricing model (CAPM) Introduction vii Table – Deletion from F9 Section and subject area Syllabus content D1 – The nature of investment decisions and the appraisal process (a) Distinguish between capital and revenue expenditure, and between non-current assets and working capital investment (b) Explain the role of investment appraisal in the capital budgeting process (c) Discuss the stages of the capital budgeting process in relation to corporate strategy D3 – Discounted cash flow (DCF) techniques (a) Explain and apply concepts relating to interest and discounting, including: (i) The relationship between interest rates and inflation, and between real and nominal interest rates (ii) The calculation of future values and the application of the annuity formula (iii) The calculation of present values, including the present value of an annuity and perpetuity, and the use of discount and annuity tables (iv) The time value of money and the role of cost of capital in appraising investments viii Introduction Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Review Form – Paper F9 Financial management (8/12) Please help us to ensure that the ACCA learning materials we produce remain as accurate and user-friendly as possible We cannot promise to answer every submission we receive, but we promise that it will be read and taken into account when we update this Study Text Name: Address: During the past six months you recall seeing/receiving any of the following? (Tick as many boxes as are relevant) How have you used this Study Text? (Tick one box only) Home study (book only) On a course: college Our advertisement in ACCA Student Accountant With 'correspondence' package Our advertisement in PQ Other Our brochure with a letter through the post Our website www.bpp.com Why did you decide to purchase this Study Text? (Tick one box only) Which (if any) aspects of our advertising you find useful? (Tick as many boxes as are relevant) Have used BPP Texts in the past Recommendation by friend/colleague Prices and publication dates of new editions Recommendation by a lecturer at college Information on Text content Saw information on BPP website Facility to order books off-the-page Saw advertising None of the above Other Which BPP products have you used? Text Success CD Kit i-Pass Passcard Interactive Passcard Your ratings, comments and suggestions would be appreciated on the following areas Very useful Useful Not useful Good Adeqate Poor Introductory section Chapter introductions Key terms Quality of explanations Case studies and other examples Exam focus points Questions and answers in each chapter Fast forwards and chapter roundups Quick quizzes Question Bank Answer Bank Index Overall opinion of this Study Text Excellent Yes No Do you intend to continue using BPP products? On the reverse of this page is space for you to write your comments about our Study Text We welcome your feedback The BPP Learning Media author of this edition can be e-mailed at: Yen-peiChen@bpp.com Please return this form to: Nick Weller, ACCA Publishing Manager, BPP Learning Media Ltd, FREEPOST, London, W12 8BR TELL US WHAT YOU THINK Please note any further comments and suggestions/errors below For example, was the text accurate, readable, concise, user-friendly and comprehensive? ... reviewed by the examiner! Studying F9 The exam paper and exam formulae v vii x Part A Financial management function Financial management and financial objectives Part B Financial management environment... with shareholders 1: Financial management and financial objectives Part A Financial management function The nature and purpose of financial management FAST FORWARD Financial management decisions... investment, financing and dividend decisions of financial management throughout this Study Text Part A Financial management function 1: Financial management and financial objectives Examples of different