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ACCA Paper P4 Advanced Financial Management Complete Text British library cataloguinginpublication data A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 9781784152215 © Kaplan Financial Limited, 2015 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. Printed and bound in Great Britain. Acknowledgements We are grateful to the Association of Chartered Certified Accountants and the Chartered Institute of Management Accountants for permission to reproduce past examination questions. The answers have been prepared by Kaplan Publishing. All 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 Kaplan Publishing. ii KAPLAN PUBLISHING Contents Page Chapter The role and responsibility of the financial manager Chapter Investment appraisal 53 Chapter The financing decision 91 Chapter The dividend decision 119 Chapter International operations and international investment appraisal 133 Chapter International operations – the financing decision 181 and the dividend decision Chapter Option pricing 211 Chapter The weighted average cost of capital (WACC) 247 Chapter Risk adjusted WACC and adjusted present value 281 Chapter 10 Corporate failure and reconstruction 309 Chapter 11 An introduction to risk management 365 Chapter 12 Hedging foreign exchange risk 407 Chapter 13 Hedging interest rate risk 451 Chapter 14 Strategic aspects of acquisitions 489 Chapter 15 Business valuation 529 Chapter 16 Topical issues in financial management 579 Chapter 17 Questions & Answers 603 KAPLAN PUBLISHING iii iv KAPLAN PUBLISHING chapter Introduction Paper Introduction v Introduction How to Use the Materials These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your examinations. 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Review your performance by key topics and chart your achievement through the course relative to your peer group Syllabus Paper background The aim of ACCA Paper P4, Advanced Financial Management, is to apply relevant knowledge, skills and to exercise professional judgement as expected of a senior financial executive or advisor, in taking or recommending decisions relating to the financial management of an organisation. Objectives of the syllabus viii • Explain the role and responsibility of the senior financial executive or advisor in meeting conflicting needs of stakeholders • Evaluate the impact of macroeconomics and recognise the role of international financial institutions in the financial management of multinationals • Evaluate potential investment decisions and assess their financial and strategic consequences, both domestically and internationally • Assess and plan acquisitions and mergers as an alternative growth strategy • Evaluate and advise on alternative corporate reorganisation strategies • Apply and evaluate alternative advanced treasury and risk management techniques • Identify and assess the potential impact of emerging issues in finance and financial management KAPLAN PUBLISHING Core areas of the syllabus • • • • • • • Role and responsibility towards stakeholders Advanced investment appraisal Acquisitions and mergers Corporate reconstruction and reorganisation Treasury and advanced risk management techniques Economic environment for multinationals Emerging issues in finance and financial management Syllabus objectives We have reproduced the ACCA’s syllabus below, showing where the objectives are explored within this book. Within the chapters, we have broken down the extensive information found in the syllabus into easily digestible and relevant sections, called Content Objectives. These correspond to the objectives at the beginning of each chapter. A ROLE AND RESPONSIBILITY TOWARDS STAKEHOLDERS The role and responsibility of senior financial executive/ advisor (a) Develop strategies for the achievement of the organisational goals in line with its agreed policy framework.[3] Ch (b) Recommend strategies for the management of the financial resources of the organisation such that they are utilised in an efficient, effective and transparent way.[3] Ch (c) Advise the board of directors or management of the organisation in setting the financial goals of the business and in its financial policy development [2] with particular reference to: [2] Ch 1 (i) investment selection and capital resource allocation (ii) minimising the cost of capital (iii) distribution and retention policy (iv) communicating financial policy and corporate goals to internal and external stakeholders (v) financial planning and control (vi) the management of risk KAPLAN PUBLISHING ix Introduction Financial strategy formulation (a) Assess corporate performance using methods such as ratios, trends, EVA (TM) and MVA.[3] Ch 10 (b) Recommend the optimum capital mix and structure within a specified business context and capital asset structure.[3] Ch (c) Recommend appropriate distribution and retention policy.[3] Ch (d) Explain the theoretical and practical rationale for the management of risk.[3] Ch 11 (e) Assess the organisation's exposure to business and financial risk including operational, reputational, political, economic, regulatory and fiscal risk.[3] Ch 11 (f) Develop a framework for risk management comparing and contrasting risk mitigation, hedging and diversification strategies.[3] Ch 11 (g) Establish capital investment monitoring and risk management systems [3] Ch 11 Conflicting stakeholder interests (a) Assess the potential sources of the conflict within a given corporate governance/stakeholder framework informed by an understanding of the alternative theories of managerial behaviour.[3] Ch 1 Relevant underpinning theory for this assessment would be: (i) the separation of ownership and control (ii) transaction cost economics and comparative governance structures (iii) agency theory (b) Recommend, within specified problem domains, appropriate strategies for the resolution of stakeholder conflict and advise on alternative approaches that may be adopted.[3] Ch (c) Compare the different governance structures and policies (with particular emphasis upon the European stakeholder and the US/UK shareholder model) and with respect to the role of the financial manager.[3] Ch Ethical issues in financial management (a) Assess the ethical dimension within business issues and decisions and advise on best practice in the financial management of the organisation.[3] Ch (b) Demonstrate an understanding of the interconnectedness of the ethics of good business practice between all of the functional areas of the organisation.[2] Ch x KAPLAN PUBLISHING Questions & Answers (v) Control of patents and processes by the multinational might reduce risk, although patents are not recognised in all countries Governments or commercial agencies in multinationals’ home countries often offer insurance against political risk. Murwald (Interest rate hedging) (a) The treasury team believe that interest rates are more likely to increase than to decrease, and any hedging strategy will be based upon this assumption. There is also a requirement that interest payments do not increase by more than £10,000 from current interest rates Current expectations The current expectation is a £12m deficit in three months’ time for a sixmonth period. At current rates, the company could borrow at 6% + 1.5% = 7.5%. Interest costs at current borrowing rates would therefore be: £12m × 7.5% × 6/12 = £450,000. Alternative 1: Futures hedges Use June contracts to hedge a deficit of £12 million. To hedge against the risk of a rise in interest rates, the company should sell futures. Tutorial note: We sell futures because if interest rates do rise, the market price of the futures will fall. The company can then close its position by buying futures, and making a gain on the futures trading to offset the ‘loss’ from higher interest rates in the loans market. (i) If interest rates rise by 2% and the futures price moves by 1.80% As a six months hedge is required and each future is for a threemonth interest period, the number of contracts will be £12m/£500k × 6/3 = 48 contracts The tick value is £500,000 × 0.0001 × 3/12 = £12.50 648 KAPLAN PUBLISHING chapter 17 £ Cost of borrowing at current rate 450,000 Cost if rates rise 2% (£12m × 9.5% × 6/12) 570,000 ––––––– "Loss" from extra borrowing cost (120,000) Futures Sell 48 contracts at 93.10 Buy 48 contracts at (93.10 – 1.80) 91.30 ––––– Gain per contract 1.80 ––––– Value of gain 180 × 48 × £12.50 108,000 ––––––– Net additional cost with hedging (12,000) ––––––– (ii) If interest rates fall by 1% and the futures price moves by 0.9% £ Cost of borrowing at current rate 450,000 Cost if rates fall 1% (£12m × 6.5% × 6/12) 390,000 ––––––– "Gain" from fall in borrowing cost 60,000 Futures Sell 48 contracts at 93.10 Buy 48 contracts at (93.10 + 0.90) 94.00 ––––– Loss per contract 0.90 ––––– Value of loss 90 × 48 × £12.50 (54,000) ––––––– Net gain with hedging 6,000 ––––––– Based on these futures prices, hedging in the futures market does not allow the company to guarantee that interest costs in the case of a deficit do not increase by more than £10,000. Alternative 2: Options hedges The expectation is for interest rates to rise, therefore put options on futures will be purchased. This will allow the company to sell futures contracts at the exercise price for the options. The company should buy 48 options, since this is the number of futures contracts that might be required. (If interest rates rise the value of the put options will also increase.) KAPLAN PUBLISHING 649 Questions & Answers For example using the 9400 exercise price: (i) If interest rates rise by 2% and the futures price moves by 1.8% Cost of borrowing at current rate Cost if rates rise 2% (£12m × 9.5% × 6/12) "Loss" from extra borrowing cost Options Buy 48 puts at Exercise – sell futures at (exercise price) Buy 48 futures contracts at (93.10 – 1.80) Gain per contract Value of gain 86 × 48 × £12.50 Net additional cost with hedging (1.84) 94.00 (91.30) ––––– 0.86 ––––– £ 450,000 570,000 ––––––– (120,000) 51,600 ––––––– (68,400) ––––––– In reality the options are likely to be sold rather than exercised. This is because they are June contracts, so they will still have time value that will be reflected in the option price. The gain from the options sale is therefore likely to be higher than the gain from exercising the options and selling futures. However, no data is provided on option prices on 1 June. (ii) If interest rates fall by 1% and the futures price moves by 0.9% £ Cost of borrowing at current rate 450,000 Cost if rates fall 1% (£12m × 6.5% × 6/12) 390,000 ––––––– "Gain" from fall in borrowing cost 60,000 Options Buy 48 puts at 1.84. Cost = 184 × 48 × (110,400) £12.50 ––––––– Net additional cost with hedging (50,400) ––––––– Different outcomes will exist for using options if different put option exercise prices are selected. The best exercise price to select if the put options are exercised will be the 9350 option. 650 KAPLAN PUBLISHING chapter 17 If interest rates rise by 2% and the futures price falls by 180 to 91.30, this will give a gain from the options of: 93.50 – 91.30 – 1.25 = 0.95 or 95 ticks 95 × 48 × £12.50 = £57,000 If interest rates fall by 1% and the futures price rises to the futures price moves to 94.00, the option will not be exercised. The loss from hedging with options will be the premium paid off: 125 × 48 × £12.5 = £75,000 Outcomes with options at 9350 2% increase: £(120,000) + £57,000 = £(63,000) 1% decrease: £60,000 – £75,000 = £(15,000). Neither futures nor options hedges can satisfy, with certainty, the requirement that the interest payment should not increase by more than £10,000. Collar However, one way to achieve this would be to use a collar option, whereby downside risk is protected, but potential gains are also limited. A collar effectively fixes a maximum and minimum interest rate. If a company expects to be borrowing and is worried about interest rate increases, a suitable collar can be achieved by buying put options and selling call options, to reduce the cost of protection. For example a collar could be achieved by buying forty eight 9400 put options at 1.84 and selling 9400 call options at 1.74, a net premium cost of 0.10 (other alternatives are possible). Murwald doesn't want interest to move adversely by more than £10,000 for a six month period on a £12 million loan. In annual terms this is a £10k/£12m × 2 = 0.167% A put option at the current interest rate (6%) and a total premium cost of less than 0.167% will satisfy the company's requirement. In the above example the total premium cost is 0.10%, and no matter what happens to interest rates Murwald can fix its borrowing cost at 7.6% (= 100 – 94.00 + 0.10 net option premium, plus the 1.5% premium over base rate for borrowing). KAPLAN PUBLISHING 651 Questions & Answers This satisfies the requirement. (Interest payments would be £12m × 7.6% × 0.5 = £456,000 which is £6,000 worse than current interest rates.) The use of a collar is the recommended hedging strategy, but the company should consider the implications of the collar if a cash surplus were to occur rather than a cash deficit. (i) Alternative interest rate hedges include: (i) Forward rate agreements (FRAs). (ii) OTC interest rate options – including interest rate guarantees. (iii) Interest rate swaps. (i) A forward rate agreement (FRA) is a contract to agree to pay a fixed interest rate that is effective at a future date. As such Murwald could fix now a rate of interest of 6.1% (for example) to be effective in three months time for a period of six months. If interest rates were to rise above 6.1% the counterparty, usually a bank, would compensate Murwald for the difference between the actual rates and 6.1%. If interest rates were to fall below 6.1% Murwald would compensate the counterparty for the difference between 6.1% and the actual rate (ii) OTC options. Instead of market traded interest rate options such as those that are available on LIFFE, Murwald might use OTC options through a major bank. This would allow options to be tailored to the company's exact size and maturity requirements. An OTC collar would be possible, and the cost of this should be compared with the cost of using LIFFE options. Interest rate options for periods of less than one year are sometimes known as interest rate guarantees (iii) Interest rate swaps. Murwald expects to borrow at a floating rate of interest. It might be possible for Murwald to swap its floating rate interest stream for a fixed rate stream, pegging interest rates to approximately current levels (the terms of the swap would have to be negotiated). Interest rate swaps are normally for longer periods than six months 652 KAPLAN PUBLISHING chapter 17 Rayswood Inc Assumptions: (1) Share price is the present value of future cash flows i.e. the economic model (2) The stock market is weak and semi strong efficient most of the time, therefore once new information is communicated to the market it is rapidly reflected in the share price (3) In an efficient market shares are fairly priced i.e. a zero NPV transaction. They give investors the exact return to compensate them for the perceived level of systematic risk of the shares (4) If shares are zero NPV transactions, takeovers/mergers could only be successful due to value created as a result of the merger i.e. the synergies (5) Therefore it is absolutely essential that one undertakes an exhaustive review to identify all the synergies. In this question no synergies have been identified, therefore before any final advice would be given to the client one would request an immediate review of all synergies (6) The question will therefore have to be answered on the basis of the unrealistic assumption that there are no synergies. Post acquisition share price: The Add Company Approach: Market values: $m Rayswood – 40 × 3.2 = 128.0 Pondhill – 150 × 0.45 = 67.5 Value of combined company 195.5 ––––– No of shares: 65m Share price of the combined company 3.01 Rayswood buys Pondhill in a 1 for 6 shares for share exchange. Rayswood already has 40m shares and buys Pondhill for (150 × 1/6) = 25m shares, thus 65m shares in total. KAPLAN PUBLISHING 653 Questions & Answers Tutorial note: In fact the takeover has been a wealth decreasing decision in relation to the shareholders of Rayswood. The new share price of $3.01 is lower than current market price of $3.20. Which reflects the fact that premium payment to Pondhill’s shareholders has reduced the wealth of Rayswood’s shareholders. Calculation of the acquisition premium – Value per one share of Pondhill: Pondhill shareholders get 1 share in Rayswood ($3.01) for every 6 shares of Pondhill. (1 × 3.01)/6 = $0.50 (0.50 – 0.45)/0.45 = 11.11% Therefore before an acquisition premium is paid consideration should be given to ensure that it does not exceed the synergistic effects of the acquisition. Director’s comments: ‘As a result of this takeover we will diversify our operations and our earnings per share will rise by 13%, bringing great benefits to our shareholders.’ Risk diversification: One of the primary reasons put forward for all mergers is that the income of the combined entity will be less volatile (less risky) as its cash flows come from a wide variety of products and markets. However this is a reduction in total risk, but has little or no affect on the systematic risk. Will this benefit the shareholders? Basic answer: No. Shareholders should diversify for themselves, because a shareholder can more easily and cheaply eliminate unsystematic risk by purchasing an international unit trust. As the majority of investors in quoted companies have well diversified portfolios they are only exposed to systematic risk. Thus the reduction of total risk by the more expensive company diversification option is generally not recommended. The Director’s comment is incorrect. 654 KAPLAN PUBLISHING chapter 17 Earnings per share will rise by 13%: Calculation of EPS: Rayswood Pondhill Enlarged Rayswood Profit available to ordinary shareholders ––––––––––––––––– EPS 7.8m ––––– 19.5c 6.5m ––––– 4.33c 14.3 ––––– 22c % increase in the Earnings per share: (22 – 19.5)/19.5 × 100 = 13% An increasing EPS does not automatically result in an increase share price, as the P/E ratio may fall to reflect the lower growth potential of the enlarged company. The P/E ratios: Share price ––––– EPS Rayswood 320 ––––– 19.5 16.41 Pondhill 45 ––––– 4.33 10.39 Enlarged Rayswood 301 ––––– 22 13.68 In the absence of synergy from the acquisition, purchasing Pondhill, with relatively low growth expectations, will depress the growth of the enlarged Rayswood’s post acquisition and thus the post acquisition P/E ratio falls. The Director’s comment is incorrect, the increasing earnings per shares does not bring great benefits to the shareholders, in fact it masks a potential decrease in the share price. Nonexecutive comments: “The share price of Rayswood will rapidly increase to $3.61 following the announcement of the bid.” Bootstrapping: A company is able to increase its EPS by merging with a company on a lower P/E ratio than its own. The bootstrapping argument states that the Share price of the enlarged Rayswood = Post acq EPS × Pre acq P/E ratio of Rayswood. $3.61 = 22c × 16.41 times KAPLAN PUBLISHING 655 Questions & Answers It contends that the market may believe that when that merger is completed that the management team of Rayswood can increase growth potential of Pondhill earnings to the same level as Rayswood earnings. It may then assign the Rayswood’s higher P/E ratio to the combined earnings of both companies (i.e. the post acquisition EPS). There has been some well documented cases of bootstrapping occurring in the 50s and 60s in America however as the stock markets have become more and more efficient it much less likely to occur today. The investors would request a detail analysis of the synergies so they could calculate the present value of future cash flows. If there are no synergies identified the higher post acquisition EPS simply results in a lower post acquisition P/E multiple as we have seen. Therefore the nonexecutive is also incorrect in his views. Predator Predator Inc The approaches to use for valuation are: (1) Net asset valuation (2) Dividend valuation model (3) P/E ratio valuation. (1) Net asset valuation Target is being purchased as a going concern, so realisable values are irrelevant. Net assets per accounts (1,892 – 768) Adjustment to freehold property (800 – 460) Adjustment to inventory Valuation 656 $000 1,124 340 (50) –––––– 1,414 –––––– Say $1.4m KAPLAN PUBLISHING chapter 17 (2) Dividend Valuation Model The average rate of growth in Target’s dividends over the last 4 years is 7.4% on a compound basis. The estimated value of Target using the dividend valuation model is therefore: Valuation $113,100 × 1.074/(0.15 – 0.074) = $1,598,281 Say $1.6m (3) P/E ratio Valuation A suitable P/E ratio for Target will be based on the P/E ratio of Predator as both companies are in the same industry. P/E of Predator (70m × $4.30)/$20.04m or 430/28.63 = 15.02 The adjustments: – Downwards by 20% or 0.20 i.e. multiply by 0.80. (1) Target is a private company and its shares may be less liquid (2) Target is a private company and it may have a less detailed compliance environment and therefore maybe more risky A suitable P/E ratio is therefore 15.02 × 0.80 = 12.02 (Multiplying by 0.80 results in the 20% reduction). Target’s PAT + Synergy after tax: $183,000 + ($40,000 × 67%) = $209,800. After adjusting for the savings in the director’s remuneration. The estimated value is therefore $209,800 × 12.02 = $2,521,796 Say $2.5m Advice to the board On the basis of its tangible assets the value of Target is $1.4m, which excludes any value for intangibles. The dividend valuation gives a value of around $1.6m. The earnings based valuation indicates a value of around $2.5m, which is based on the assumption, that not only will the current earnings be maintained, but that they will increase by the savings in the director’s remuneration. KAPLAN PUBLISHING 657 Questions & Answers On the basis of these valuations an offer of around $2m would appear to be most suitable, however a review of all potential synergies is recommended. The directors should, however, be prepared to increase the offer to maximum price. Maximum price comment It is worth noting that the maximum price Predator should be prepared to offer is: The maximum price Predator should pay for target is: PVTarget Company + PVSynergy The comment on the maximum price is particularly appropriate in this question, as this an example of horizontal acquisition where considerable synergies normally exist. 658 KAPLAN PUBLISHING Index Constraints A ACCA Code of Ethics 40 Accounting Rate of Return (ARR) Acquisition 19 19, 108 Altman’s Z score Annuities 285, 294, 559 325 Agency theory 252 Argenti’s failure model 321 Bank for International Settlements Basis 251 Bills 93 Credit spread 241, 259, 270, 567 591 266 100, 292 Debt finance 110, 566 Decision trees, see Probabilities Business risk Defences against takeover 218 Delta 111 225 Demerger 339 Derivative 398, 584 C Discount rate Calculated Intangible Value (CIV) Discounting 556 57, 273 57 Discounted cashflow valuation, see Valuation 213 Discounted payback period 468 Capital Asset Pricing Model (CAPM) 249, 266, 294 Diversification Dividend capacity Capital rationing Dividend cover 77 Divisible projects Non divisible projects 123, 192 316 Dividend decision 77 72 374 Capital market, see Stock exchange Capital structure 509 225 Delta hedge 283, 531 Business angels Cap 314 115 Debt beta 115, 186 Call option 260 153 Debt capacity Black-Scholes model Bonds 587 Debentures 286 425 Beta Credit crunch Dark pool trading 142 422,463 Basis risk 257 96 D 114,183 Base case NPV 249 Current ratio B Bank borrowings 248, 273 Cost of equity Cross rates 314 324 83 Cost of capital Creditworthiness Asset beta, see Ungeared beta Asset turnover Corporate reporting Covenants 57 6, 21, 146 Corporate reconstruction Cost of debt 321 Arbitrage pricing theory 311 Corporate governance Adjusted present value (APV) Agency problem 268 Corporate failure 491, 532 Administration 115 Convexity 256 491 Acquisition type 77 Convertibles 120 Dividend irrelevancy theory, see Modigliani and Miller 77 Dividend policy 97, 283, 315 122, 190 Carbon trading 45 Dividend yield 316 Clientele effect 120, 193 Dividend growth model, see Dividend valuation model Collar Dividend valuation model 469 Collateralised Debt Obligations (CDOs) Common markets 139 Company Voluntary Arrangement Comparative advantage Compounding 57 Conglomerate integration KAPLAN PUBLISHING 137 492 324 587 Duration 254, 258, 546 73, 267 E Earnings based valuation, see Valuation Earnings per share (EPS) Earnout Economic risk 550 513 150, 384, 409 I.1 Index Economic Value Added 314, 316, 545 Efficient market hypothesis (EMH) Environmental issues 494 Gearing drift 105 Gordon’s growth model Grabbe Variant 44 256 225 Equity beta, see Geared beta Gross redemption yield, see Yield To Maturity (YTM) Equity finance Growth estimates Ethics 110 39, 206 Eurocurrency loans Eurobonds 186 Euronotes 186 H 186 Hedging Exchange controls Inflation 160 58, 154 Initial Public Offering (IPO) 151, 409 F Definition 555 Valuation 556 Integrated reporting Finance Long term For international investments Inter company cash flows 183 Interest cover 311 Interest rate 92, 145 Financial performance measurement Financial reporting Financial risk Fiscal risk 314 283, 532 Intrinsic value 469 Flotation, see Initial Public Offering (IPO) 254, 542 151, 409 413 Forward rate agreements Free cash flow (FCF) 55, 164, 534 Free cash flow to equity (FCFE) Free trade 140 Funding, see Finance Futures contracts Currency Interest rate 399 418 459 G Investment appraisal 193, 539 Geared beta 55, 149 Irrelevancy theory, see Modigliani and Miller (M&M) Islamic finance 592 563 J Joint venture 193 L Lev’s knowledge earnings method Linear programming Liquidation Liquidity ratios Listing 227 315 258 Iterative procedures 454 142, 581 214 Inventory holding period Irredeemable debt Foreign investments, see International investments Forward contract 149 International Monetary Fund 387 Foreign currency 67 Modified, see Modified Internal Rate of Return (MIRR) International investments 92 Forecasting growth 458 Internal rate of return (IRR) 83 Financial system 151 151, 452 Interest rate guarantee Financial objectives, see Objectives 156 315 Interest rate parity Financial gearing, see Capital structure Financial markets 28 Intellectual capital, see Intangible assets 94, 110 Financial distress 111 Intangible assets Expected values, see Probabilities Gamma 492 I 589 EVA, see Economic Value Added Floor 374, 398, 412, 452 Horizontal integration Eurozone debt crisis Exchange rates 254 559 78 339 314 111 Loans, see Debt finance 251 Gearing Lock in rate 424, 463 Long term finance, see Finance Financial, see Capital structure Operating I.2 369 KAPLAN PUBLISHING Index Pecking order theory M Macauley duration Perpetuities 73, 267 Management buyout (MBO) Market capitalisation 549 Market to book ratio 553 Maximising shareholder wealth Merger Modified duration Private equity 111 Probabilities 115 Expected values Modified internal rate of return (MIRR) 69 Modigliani and Miller (M & M Dividend irrelevancy theory Gearing theory 98, 256 Money cost of capital 58 120 581 389 Profitability index (PI) Profitability ratios Public issue of shares 136, 190 N Net asset based valuation, see Valuation Netting 56, 150 434 Nominal cost of capital, see Money cost of capital Normal distribution 111 Purchasing power parity Put option 151 213 Rate of return Accounting (ARR) Internal (IRR) Net present value (NPV) 77 314 R 415 Multinational companies 315, 549 114 Private placing 76, 267 Money market hedge 250 Price earnings ratio (P/E) 18 32 Money laundering 147, 378 Preference shares, see Share capital 491 Mezzanine finance 534 Portfolio theory 316 413, 434 Mendelow’s matrix 111 Planning horizon Political risk Market Value Added (MVA) Matching Placing 339 102 57 219, 271 O 256 67 Modified Internal (MIRR) On assets Ratchet patterns 126 Ratio analysis 314 Real cost of capital Real options 58 229 Receivables collection period Objectives Redeemable debt Operating cycle Operating gearing, see Gearing 259 Regulation 39, 386, 581 Operating leverage, see Operating gearing Mergers and acquisitions Operating profit margin Regulatory bodies Options 213 Return on Capital Employed (ROCE) 464 213, 425 Risk 213 Ordinary shares, see Share capital Overvaluation 495 249 249 284 241, 249, 264 Roles of the financial manager Payables payment period KAPLAN PUBLISHING 111 Unsystematic Risk free rate 570 314 12, 367 Risk adjusted WACC P Payback period 158, 193 227 Systematic 213, 426 Organic growth Rho Rights issue 229 Traded 57 Restrictive covenants, see Covenants 425 Over the Counter Share Relevant costs 519 146 Remittances, international investments Interest rate Real 314 214 Currency 315 Redemption yield, see Yield To Maturity (YTM) 315 Option pricing 69 557 315 72 I.3 Index Trade barriers S Scenario analysis 585 Scrip dividends Sell off 587 339 Sensitivity analysis 390 Methods of raising Share buyback 128 39 Unbundling 339 Ungeared beta 587 339 251 V Valuation 151 Free cash flow Spot yield curve 264 Stakeholders Stock exchange Black Scholes model 101 Value at risk 111 Variance Vega Venture capital 586 Subsidised loans 432 Synergy Working capital cycle, see Operating cycle 471 Working capital 477 Syndicated loan 115, 187 World Bank 492, 501 Tax havens Yield To Maturity (YTM) 227 Toxic assets 63, 155 Yield curve 259 264, 567 Z 400 Tobin’s Q 141 Y 203 Taxation in investment appraisal Zeta score 553 321 587 Trade agreements I.4 142 World Trade Organisation Takeover, see Acquisition Tick 161 Working capital ratios, see Liquidity ratios T Theta 492 Weighted average cost of capital (WACC), see Cost of capital 429 Interest rate 114 W Swap Currency 227 Vertical integration 291 237 396, 585 Strategy 5, 36 554 218 Stock market, see Stock exchange Stress testing 549 Net asset based methods 218 Static trade off theory 534 Market based methods 10, 18, 329 Standard deviation Swaptions 46 Uncertainty, see Risk 392 Forex 16 14 UK City Code 105, 120 Spot rate 151, 410 14 U 512 Special Purpose Vehicle (SPV) Spin off Translation risk Triple Bottom Line reporting 22, 95 Short term finance, see Finance Simulation 156, 196 Roles Shares, see share capital Signalling Transfer pricing Profit centre v cost centre 111 Share exchange 150, 409 111 Preference shares 24 Transaction risk Treasury Share capital Ordinary shares 97 Transaction cost economics 126 Securitisation 139 Traditional view of gearing 139 KAPLAN PUBLISHING ... Detailed study guide and syllabus objectives (2) Description of the examination (3) Study skills and revision guidance (4) Complete text or essential text (5) Question practice The sections on the study guide, the syllabus objectives, the examination ... are designed to familiarise you with the nature and content of the examination and give you tips on how to best to approach your learning. The complete text or essential text comprises the main learning materials and gives guidance as to the importance of topics and where ... therefore also contain, learning covered in earlier papers. Expandable Text – Expandable text provides you with additional information about a topic area and may help you gain a better understanding of the core content. Essential text users can access this
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