ACCA paper f9 financial management FInal mock examination f9 study book

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economic environment on financial management • Discuss and apply working capital management techniques • Carry out effective investment appraisal • Identify and evaluate alternative sources of business finance • Explain and calculate cost of capital and the factors which affect it • Discuss and apply principles of business and asset valuations • Explain and apply risk management techniques in business Core areas of the syllabus • Financial management function • Financial management environment • Working capital management • Investment appraisal • Business finance • Cost of capital • Business valuations • Risk 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 Syllabus learning objective and Chapter reference: A FINANCIAL MANAGEMENT FUNCTION The nature and purpose of financial management (a) Explain the nature and purpose of financial management [1] Ch (b) Explain the relationship between financial management and financial and management accounting.[1] Ch 1 The financial management function Chapter learning objectives Upon completion of this chapter you will be able to: • explain the nature of financial management • explain all the purposes of financial management (raising finance, allocation of financial resources, maintaining control over resources) • define financial management, financial accounting and management accounting • distinguish between financial management and financial and management accounting and explain the relationship between them • define and distinguish between corporate strategy and corporate objectives • define and distinguish between financial strategy and financial objectives • describe the relationship between corporate strategy, corporate objectives and financial objectives • explain the features of the financial objective of shareholder wealth maximisation • distinguish between shareholder wealth maximisation and satisficing in a scenario • explain the features of the financial objective of profit maximisation • explain the features of the financial objective of earnings per share (EPS) growth The nature and purpose of financial management Key decisions for financial managers Financial management is concerned with the efficient acquisition and deployment of both shortand long-term financial resources, to ensure the objectives of the enterprise are achieved Key areas of focus: • identifying and setting appropriate corporate financial objectives • achieving financial objectives, by taking decisions in three key areas: – investment – should proposed investments (including potential acquisitions) be undertaken? – finance – from what sources should funds be raised? – dividends – how should cash funds be allocated to shareholders? An understanding of these three key areas is fundamental for the examination • Controlling resources to ensure efficient and effective use In all of the above areas the financial manager will need to take account of: • the broader economic environment in which the business operates • the potential risks associated with the decision and methods of managing that risk The F9 syllabus covers all these key aspects of financial management The balance sheet (statement of financial position) and financial management Expandable text • Investment appraisal considers the long-term plans of the business and identifies the right projects to adopt to ensure financial objectives are met The projects undertaken will nearly always involve the purchase of non-current assets at the start of the process • For a business to be successful, as well as identifying and implementing potentially successful projects, it must survive day to day Working capital management is concerned with the management of liquidity – ensuring debts are collected, inventory levels are kept at the minimum level compatible with efficient production, cash balances are invested appropriately and payables are paid on a timely basis • All businesses need finance A key financial management decision is the identification of the most appropriate sources, taking into account the requirements of the company, the likely demands of the investors and the amounts likely to be made available Financial management in context Wotton Inc Solution Show Answer • NPV ignores the development costs of $20,000, since they have already been incurred (they are sunk • ROCE includes the full 1,000 hours per annum of skilled labour required to make the sets The NPV a hours are paid for • The NPV approach recognises that in the first two years the true cost of using the coating room is not a total cost of $15/hour • The NPV approach recognises that the $2,000 cost of expanding the coating room would not be incur ignores this cost as it would be allocated to the old product • Depreciation and amortisation are not cash flows, so are not to be included in the NPV calculation • The fixed overheads will be incurred whether or not the project is undertaken, so are not to be include • ROCE brings in the asset transferred at its existing book value, whereas the NPV approach recognise sale of proceeds forgone • Presumably the 20% required return is a reflection of the cost of Wotton Inc’s finance and of the risk a branching out into a completely new market, a higher return may be required 10 Investment appraisal – further aspects of discounted cash flows (DCF) Howden plc Question 1: A Explain how inflation affects the rate of return required on an investment project, and the distinction be an investment project under inflation (6 marks) B Howden plc is contemplating investment in an additional production line to produce its range of compa consultants, has revealed scope to sell an additional output of 400,000 units p.a The study cost $0.1 The price and cost structure of a typical disc (net of royalties), is as follows: Price per unit Costs per unit of output Material cost per unit Direct labour cost per unit Variable overhead cost per unit Fixed overhead cost per unit Profit The fixed overhead represents an apportionment of central administrative and marketing costs These are The production line is expected to operate for five years and require a total cash outlay of $11m, including Howden plc Solution Show Answer A Investors invest capital in companies expecting a reward for both the delay in waiting for their returns (risk premium) In addition, if prices in general are rising, shareholders require compensation for the e I Inflate the future expected cash flows at the expected rate of inflation (allowing for inflation rates speci is the fully-inflated rate or ‘money terms’ approach II Strip out the inflation element from the market-determined rate and apply the resulting real rate of retu prices This is the ‘real terms’ approach B First, the relevant set-up cost needs identification The offer of $2m for the building, if rejected, represe predicted eventual resale value of $3m Cash flow profile Item Equipment Forgone sale of buildings Year $m $m (10.50) (2.00) Residual value of building Working capital* (0.50) Revenue 5.04 Materials (0.62) Labour and variable overhead (0.43) Relevant fixed overhead – (0.53) 11 Investment appraisal under uncertainty Sludgewater plc Question Sludgewater plc, a furniture manufacturer, has been reported to the anti-pollution authorities on several oc toxic discharges into the air Both the environmental lobby and Sludgewater’s shareholders have demande If no clean up takes place, Sludgewater estimates that the total fines it would incur over the next three yea expressed in present values) Level of fine $1.0m $1.8m $2.6m A firm of environmental consultants has advised that spray painting equipment can be installed at a cost o control equipment is tax-allowable via a 25% writing-down allowance (reducing balance, based on gross e The rate of corporation tax is 30%, paid with a one-year delay The equipment will have no scrap or resale ready for Sludgewater’s next financial year A European Union grant of 25% of gross expenditure is available, but with payment delayed by a year The production costs by 2% of sales revenue Current sales are $15 million per annum, and are expected to gr Sludgewater applies a discount rate of 10% after tax on investment projects of this nature All cash inflows Required: A Calculate the expected net present value of the investment Briefly comment on your results (15 marks) B Write a memorandum to Sludgewater’s management in respect of the potential investment taking into (10 marks) (Total: 25 marks) Sludgewater plc Solution Show Answer A The expected present value of the fines is equal to: Year $m Equipment purchase (4.0) European Union grant (25% of cost) Increased production costs Tax saving at 30% Tax saving on WDA (see note below) ––––– Net cash flow (4.0) ––––– Discount factor at 10% Present value of cash flow 1.000 (4.0) Net Present Value = ($2.756m) (1) The consultant’s charge has already been incurred and (as a committed cost) is therefore irrelevant to as a committed or sunk cost, it is not relevant to the current decision 12 Asset investment decisions and capital rationing Capital rationing Question 1: Basril Inc is reviewing investment proposals that have been submitted by divisional managers The investm of three possible investments, none of which can be delayed, are given below Project An investment of $300,000 in work station assessments Each assessment would be on an individual emp efficiency and from reduced absenteeism due to work-related illness Savings in labour costs from these a Year Cash flows ($000) 85 90 Project An investment of $450,000 in individual workstations for staff that is expected to reduce administration cos Project An investment of $400,000 in new ticket machines Net cash savings of $120,000 per annum are expected annum due to inflation during the five-year life of the machines Basril plc has a money cost of capital of 12% and taxation should be ignored Required: A Determine the best way for Basril plc to invest the available funds and calculate the resultant NPV: I on the assumption that each of the three projects is divisible; II on the assumption that none of the projects are divisible (10 marks) B Explain how the NPV investment appraisal method is applied in situations where capital is rationed (3 marks) C Discuss the reasons why capital rationing may arise (7 marks) D Discuss the meaning of the term ‘relevant cash flows’ in the context of investment appraisal, giving ex (5 marks) (Total: 25 marks) Capital rationing Solution Show Answer A (i) Project Discount factor at 12% Cash flow PV $ $ Initial investment 1.000 (300,000) Year 0.893 85,000 Year 0.797 90,000 Year 0.712 95,000 Year 0.636 100,000 Year 0.567 95,000 –––––– –––––– –––––– –––––– PV of savings NPV Profitability index 13 Sources of finance QueTirwen plc ... FINANCIAL MANAGEMENT FUNCTION The nature and purpose of financial management (a) Explain the nature and purpose of financial management [1] Ch (b) Explain the relationship between financial management. .. financial management • explain all the purposes of financial management (raising finance, allocation of financial resources, maintaining control over resources) • define financial management, financial. .. your peer group Syllabus Paper background The aim of ACCA Paper F9, Financial management, is to develop the knowledge and skills expected of a financial manager, relating to issues affecting investment,