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Acca f9 ebook dec 2012


EXAM TOPICS
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EXAM TOPICS ........................................................................................................................................ 1 KEY TERMS ............................................................................................................................................ 3 INTENDED BENEFITS OF THE E-BOOK ............................................................................................... 8 AUTHORS PROFILE ............................................................................................................................ 21 IMPORTANT! ........................................................................................................................................ 22 USER GUIDE ........................................................................................................................................ 24 INTRODUCTION TO F9 FINANCIAL MANAGEMENT .......................................................................... 26 EXAMINER'S GUIDANCE ..................................................................................................................... 29 AUTHORS GUIDANCE ........................................................................................................................ 31 STUDY PLANNER................................................................................................................................. 32 FORMULA SHEET & TABLES .............................................................................................................. 33 PAST EXAM PAPERS ANALYSIS ....................................................................................................... 37 Exam Topic 1: FINANCIAL MANAGEMENT FUNCTION ...................................................................... 38 Exam Topic 2: FINANCIAL MANAGEMENT ENVIRONMENT .............................................................. 44 Exam Topic 3: THE NATURE, ELEMENTS & IMPORTANCE OF WORKING CAPITAL ...................... 54 Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS ................................................. 57 Exam Topic 5: DETERMINING WORKING CAPITAL NEEDS & FUNDING STRATEGIES .................. 93 Exam Topic 6: THE NATURE OF INVESTMENT DECISIONS & THE APPRAISAL PROCESS ........... 96 Exam Topic 7: NON DISCOUNTED CASH FLOW TECHNIQUES ........................................................ 97 Exam Topic 8: DISCOUNTED CASH FLOW (DCF) TECHNIQUES ...................................................... 98 Exam Topic 9: ALLOWING FOR INFLATION & TAXATION IN DCF ................................................... 101 Exam Topic 10: ADJUSTING FOR RISK & UNCERTAINTY IN INVESTMENT APPRAISAL .............. 103 Exam Topic 11: SPECIFIC INVESTMENT DECISIONS ...................................................................... 104 Exam Topic 12: SHORT & LONG TERM FINANCE ............................................................................ 108 Exam Topics 13: INTERNAL SOURCES OF FINANCE & DIVIDEND POLICY ................................... 112
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Exam Topic 14: GEARING & CAPITAL STRUCTURE CONSIDERATIONS ....................................... 114 Exam Topic 15: FINANCE FOR SMALL & MEDIUM SIZED ENTITIES (SMEs) .................................. 116 Exam Topic 16: ESTIMATING COST OF CAPITAL ............................................................................ 118 Exam Topic 17: RELATIONSHIP B/W COST OF CAPITAL, CAPITAL STRUCTURE & INVESTMENTS ............................................................................................................................................................ 121 Exam Topic 18: BUSINESS VALUATION TECHNIQUES ................................................................... 124 Exam Topic 19: EFFICIENT MARKET HYPOTHESIS ........................................................................ 127 Exam Topic 20: BASICS OF FINANCIAL RISK MANAGEMENT ........................................................ 128 Exam Topic 21: HEDGING TECHNIQUES FOR FOREIGN CURRENCY RISK ................................. 130 Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK ........................................... 133 RELATED PRODUCTS ....................................................................................................................... 136 FREE BLOGS...................................................................................................................................... 137 REPORT ABUSE................................................................................................................................. 138

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Ecommerce/Ebusiness/Make Money Online Tutorial, Implementation Guide, Training, Ebook Free Download & Buy. Ecommerce/Ebusiness/Make Money Online Implementation Guide Ebook is cheap & best tutorial & training to buy. ACCA study materials, Class, Lectures, Course, Notes for distance learning ACCA F9 Financial Management Study Text Ebook for Dec 2012 Exam | Page 3 of 138
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KEY TERMS
A Agency 34 Aggregate demand 42 Aggregate Supply 42 Agreement Date 124, 126 Annuity 94 Average Growth Rate 114 B Bad Debt Risk 64 Balance Of Payments 130 Barter Trade 75 Basis Risk 126, 129 Baumol Model 89 Benefits 36 Bill Of Exchange 73 Boom 48 Brand, Copyright & Patents 120 Business Angels 112 Business Cycle 47 Business Risk 117 Buying & Selling Rate 124 C Cap 129 Capital Asset Pricing Model (CAPM) 114 Capital Cash Flows 97 Clientele Effect 108 Collar 129 Combine Probability 98 Confidence 42 Contingent Assets 120 Contingent Liabilities 120 Contract Price 126 Contract Size 126 Conversion Premium 121 Convertible Loan Notes 105 Cost of Equity 114 Credit Control 60 Credit Insurance 74 Credit Or Customer Analysis 60 Credit Policy 60 Currency Option 127 Currency Swap 127 Current Asset Ratio 59 D Debt Finance 105 Deep Discount Bonds 105 Deflation 94 Deflationary Gap 47 Depression 47 Derivative 127 Development Expenditure 120 Direct Quote 124 Discount Rate 94 Discounted Payback Period 95 Discounting 94 Dividend Growth Model (DGM) 114

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Dividend Valuation Model (DVM) 120 Divisible Projects 101 E Earnings Per Share 118 Earnings Yield 118 Economic Risk 124 Efficient Market Hypothesis 122 Equity Beta 115 Equity Finance 104 Equity Risk Premium - 114 Equivalent Annual Cost (EAC) 101 Exchange Rate 44 Expectation Theory 130 Expected Values 98 Export Factoring 73 F Factoring 66 Finance Lease 100 Financial Cash Flows 97 Financial Risk 117 Fiscal Policy 41 Fixed Interest Rate Risk 129 Floatation 104 Floor 129 Floor Value 121 Fluctuating Assets 89 Foreign Exchange Risk 124 Forward Contract Hedge 126 Forward Rate 126 Forward Rate Agreements (FRAs) 129

Franchise 102 Free Cash Flows 95 Future Contract Hedge 126 Future Market 126 G Goal congruence 34 Goodwill 120 Gordons Growth Rate 114 Government Grants 102 Government Policy 42 H Hard Capital Rationing 101 Hedging 124 I Indirect Quote 124 Inflation 44, 94 Inflation Rate 94 Inflation Rate Parity Theory 126 Inflationary Gap 47 Initial Investment 97 Initial Public Offer (IPO) 104 Interest Rate 94 Interest Rate Option 129 Interest Rate Parity Theory 126 Interest Rate Risk 129 Interest Rate Swap 129 Invoice Discounting 72 Invoicing In Home Currency 124 Irredeemable Loan Notes 105

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J Joint Venture 102 Just in Time (JIT) 86 L Lapse 110 Lead & Lag Payment 124 Lease 100 Lesser & Lessee 100 Letter Of Credit 74 Liquidity 50 Liquidity Preference Theory 130 Liquidity Ratios 59 Loan Notes (Bonds or Debenture) 105 M Macro Economics 40 Macroeconomic Policy 40 Market Imperfection Theory 117 Market Rate Of Return 114 Market Segmentation Theory 130 Matching 124 Matching Policy 89 Micro Economics 40 Miller & Modigliani (M&M) Theory 117 Miller & Modigliani Theory 108 Miller-Orr Model 89 Monetary Policy 40, 130 Money Market Hedge 127 Mutually Exclusive Projects 102

N Negative Gap 129 Net Assets Valuation Model 120 Netting 124 Non Systematic Risk 114 Non-Recourse Factoring 67 O Operating Lease 100, 104 Optimal or Economic Order Quantity (EOQ) 80 Outsourcing 102 Overdraft 59 Overdrafts 104 Overtrading & Undertrading 89 P Par Value 105 Pecking Order Theory 117 Pension 36 Permanent Assets 89 Perpetuity 94 Placing 104 Positive Gap 129 Pre-Emption Right 104 Preference Share Capital 104 Present Value (PV) 94 Price Earnings Ratio 118 Probability Analysis 98 Profit Related Pay 35 Project Specific Fixed Cost 97

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Q Quick Asset Or Acid Test Ratio 59 R Real Return 130 Recession 48 Recourse Factoring 66 Recovery 48 Redeemable Loan Notes 105 Redemption Value 120 Redemption Yield 121 Renounce 110 Residual Value 97 Retained Earnings 104 Return Of Equity (ROE) 118 Return Of Investment (ROI) 117 Revenue Cash Flows 97 Risk 98 Risk Free Rate Of Return 114 S Sale & Lease Back 105 Script Dividend 108 Semi Strong Form Efficient 122 Sensitivity Analysis 98 Settlement Date 124, 127 Settlement On Net Basis 124 Share Based Payment 35 Share Options 36 Short Term Loan 104 Signalling Effect 108 Single Period Capital Rationing 101 Smoothing 129

Soft Capital Rationing 101 Spot Rate 126 Stagnation 46 Strong Form Efficient 122 Subscribe 110 Systematic Risk 114 T Tangible Assets 120 Tax Savings On Capital Allowance 97 Theoretical Ex-Right Share Price 110 Tick 126 Time Value of Money 94 Traditional View 108, 117 Transaction Risk 124 Translation Risk 124 U Uncertainty 98 Unemployment 46 V Variable Interest Rate Risk 129 Venture Capitalist 112 W Weak Form Efficient 122 Weighted Average Cost of Capital (WACC) 114 Weighted Average Cost Of Capital (WACC) 94

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Working Capital Cycle 53 Working Capital Investment 97 Y Yield Curve 130

Z Zero Coupon Bond 105

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INTENDED BENEFITS OF THE E-BOOK


Features & 1) Exam Focused: Benefits of ACCA Study Text Ebook Exam focused ACCA study text ebooks are aimed to help you passing exams by allowing you spend efforts and time smartly. ACCA study text books aim to educate you in the way you are expected to apply your knowledge in the exam. ACCA study text books are updated prior to each exam session and during the exam session in the light of recent information available such as examiner published an article in student accountant. In that case, you will receive updated version of relevant ACCA study text book via e-mail.
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Usually ACCA students look for ACCA exam tips at the end of exam session to learn important syllabus areas much better. Therefore, those ACCA students usually do exam focused study only 2 weeks or 1 month before. ACCA students can greatly improve the probability of passing exams if they do exam focused study from the beginning. Exam Focused ACCA Study Text Books bring all relevant information under one roof to eliminate information gathering on relevant ACCA
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exam paper and prevents the chances of omission of important information about the relevant ACCA exam paper. These study materials take account of examiners comments and reports, past exam papers, student accountant articles, tips from other tutors, syllabus areas examined by other professional accountancy bodies, publications in business magazines etc. 2) Examiner's Guidance: Examiner's Guidance are exam preparation tips given by the examiner in student accountant, examiner's interview and other documents. 3) Author's Guidance: Author's guidance are applicable to all syllabus areas. It also includes tips to enable you to prepare for exams and perform during exams effectively . 4) Exam Awareness: Exam Awareness shows the frequency and magnitude (marks) of each syllabus area. It also shows the relationship between various syllabus areas and how each syllabus area contributes toward passing exams. Exam Support provides guidance on application of knowledge in exam context. Just knowledge is not enough for passing exams rather you have to use it wisely in limited time available in the exams.
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5) Exam Support:

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6) Past Paper P1, P3):

Past paper analysis is given at the beginning of headings. Past paper analysis at the beginning of the study text enables you to practice past exam questions relevant to each syllabus area on ACCA global website. Therefore, you do not need to buy expensive practice kit or search for relevant questions to practice a particular syllabus area. Past paper analysis directly below each relevant heading gives an idea about the length, complexity of requirements and VERBS (Explain, Evaluate, Report etc) in which each syllabus area can be examined.

Analysis (F5, F9, the study text and also directly below relevant

7) Learning Objective (F2/FMA only):

Learning objective sets the knowledge and skills expected to be achieved after reading particular syllabus area. F2 Management Accounting exam format does not provide significant benefit from past paper analysis. In CBE (computer based exams) each candidate may be examined different set of questions. However, importance of each exam topic is discussed under exam awareness and exam support headings. Illustrations are simple numerical examples given to prepare students for more challenging exam standard questions.

8) Illustrations (if any):

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Illustrations depend on the type of ACCA paper. Discussion based ACCA papers may not include illustrations. 9) Explanations (if any): Explanations are given to explain the rationale (why & how) behind steps involved in calculations. Explanations depend on illustrations provided in the study text book. 10) Examples: Examples are given to explain technical theoretical knowledge in simple and understandable way. Technical jargons are used to prepare you for different technical terms used by the examiner to dodge you to ensure that you understood the text rather than rote learn the text. These technical jargons are explained in parenthesis or as separate example to make you understand the technical term and syllabus area as whole. It also shows the application of knowledge into practice. It is especially useful when you are expected to apply your knowledge to answer scenario based questions. Processing information meaningfully and logically leads to better retention of information. Linking new information to information already
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committed to your memory, such as every day experiences, is proven technique for learning new knowledge. It will also motivate you to learn harder, as you will understand the benefits of technical knowledge in your career as chartered accountant. 11) Diagrams: Diagrams are given to explain complex concepts and procedures, which are difficult to understand in words. Diagrams also lead to better memorization of knowledge. Diagrams lead to the use of right brain while text lead to the use of left brain. Combination of text and diagrams enables you to learn ACCA papers using both brains to avoid getting overstressed left part of the brain due to excessive reading. Left brain is responsible for reading, calculation, analysis. Right brain is responsible for establishing relationships, reading graphs & charts and dealing with non-financial aspects, such as motivation of managers and employees. 12) Practice Questions: Practice questions are exam standard questions to provide a clue about length complexity and format of questions likely to be asked in the exams.
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Solutions are given in a format that will save time, while solving questions during the exams. Time management is important during exam, ability to solve question but taking more than time available is of no use. You must be able to solve question within given time. Therefore, you must identify, which steps will be rewarded and which steps can be omitted without losing marks. In addition, you solution should be properly crossreferenced such as working 1, 2, 3 etc and labeled using descriptive text rather than abbreviations. Solution is supported with explanations to tell you why and how that particular step is performed. 13) Hyperlinks: Hyperlinks are links to other areas of study text book. In addition, table of exam topics are linked to exam topics and table of sub exam topics are linked to sub exam topics given at the beginning of each exam topic. Hyperlinks will save several minutes per day, which you may spend navigating through ordinary printed and ebooks. Hyperlinks will save large amount of time during the whole exam session. Bookmarks are given for reaching quickly to relevant syllabus area. It is an alternative to hyperlinks. 15) Key Terms: Table of key terms shows important terms across the study text book that you must understand in order to learn relevant topic and

14) Bookmarks:

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pass the exams. It allows you to reach to the place inside study text book, where you can develop basic understanding about particular term. 16) Colours: Colours are used for demarcation between essential text, supporting examples, exam support etc. It will enable you to find required ebook feature such as example, exam support, diagram etc easily. It also make learning interesting. Writing golden words without motivating reader to read it is of little use. 17) Annotations: You can highlight text and add comment anywhere in the study text book. Highlighting will enable you to highlight phrases and sentences you want to read again. Commenting will allow you to make a brief note in the study text book. You can use commenting to:

Save mnemonics. Mark as read important, unread, read, Revised etc.

However, most publishers do not allow these features to enforce their copyrights. 18) Readout Loud: Readout load enables students to listen written

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text. You can use any screen reader of your choice to convert text to speech. Those who have problem reading text can particularly benefit from this feature. Others can have a break from reading text. Listening involves the use of Right brain opposed reading, which involves the use of Left brain. Listening allows your Left brain to revitalize for future reading. It will also help revision of your syllabus before exams much faster. It is usually believed that listening is many times faster process than reading. You can adjust the speed according to your preference. Each point of theory is started from separate line to enable you to listen only the text of your interest. These study text books have legible fonts type & size and high contrast colours to enable you read easily without producing strain on your eyes. You do not need to zoom and then scroll horizontally to read study text. You can switch to two pages per screen layout to avoid frequent vertical scrolling, without compromising readability to significant extent. Study planner is a method allows you to plan for study within limited time available. It also allows you to track your progress
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19) Accessibility:

20) Study Planner:

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against plan; therefore, you can adjust your speed of study and study hours accordingly. Time management is specially important for professional students that you have to meet other commitment such as job, friends and family. 21) Printer Friendly: ACCA study text books are economical to print. Diagrams, tables and other formatting are made to keep the cost of printing to minimum. You may consider printing two pages side by side to save papers and cost, without compromising readability to significant extent. Most other publishers do not allow printing an ebook at all or just allow to printed 25% - 60% of the ebook pages. accasupport.com allows 100% printing of the ebook pages. It will also provide portability as you can easily carry it in our bags. 22) PDF File Format: PDF (Portable document format) files can be viewed using free adobe reader. Adobe reader is compatible with most operating systems such as windows, Mac, Android etc. You can also read ACCA study text ebook on tablets and cell phones supporting PDF format to take these ebooks on the way or at workplace in your pocket.

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Therefore, you also do not need to buy pocket notes too. It can be used on multiple computers and mobile device without any limitation imposed on the number of devices. PDF file format is widely used file format used to compress file size of electronic documents such as ebooks and takes very little time to load as compare to ebooks having EXE file format. ACCA study text ebook is searchable through any software having find and replace function. However, conversion of PDF into DOC, TXT etc format may distort structure of an ebook or make it unreadable at all. 23) Environment Friendly: Reading Ebooks on digital media such as PC, laptop, tablets, cell phones are among the best ways to save papers and therefore, environment from greenhouse effect. Millions of papers can save thousands of trees each day. It also prevents CO2 emission in traveling or delivery of printed books in addition to traveling or delivery cost and time. In addition, it is our moral duty to care for environment and society who lives in that environment. You can benefit from studying immediately after download. Step-by-step guidance is given for

24) Instant Download:

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downloading ebook for first time buyers. One step secured order form without any registration. All major credit cards & paypal accepted. No installation required of custom software design to enforce copyrights. Custom software may not work well with different PCs, laptops, mobile devices etc, as it is virtually impossible to test custom software against different hardware and software specifications. Some anti-virus softwares prevent unpopular softwares from running on the system. Therefore, you may need to disable anti-virus prior to executing the application. PDF file format is widely used file format for sharing documents online and offline. Therefore, it is very unlike to have issues with PDF file. There are numerous free PDF readers available to suit your needs. No licensing and online registration requirements. No waiting time for receiving password or ebook itself. Please! Note that ebook cannot be refunded due to instant download and no DRM (Digital Rights Management) protection software imposed, as others.

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25) Guaranteed Pass: (nothing to lose)

You will be granted 100% free study text ebook for subsequent exam session until you pass your exams. Unfortunately, if an ACCA student does not make a pass, then he/she has to send an e-mail along with ACCA result screen shot/PDF file and customer order number or transaction identification number. Most publishers do not involved writing and editing their books. They hire writers having expert knowledge on particular topic. However, they are not connected with ACCA training provision and therefore, not aware of practical challenges, jargons etc faced by students during the exams and areas of weakness on the part of students. It creates lack of harmony between different syllabus areas. Each syllabus area seems to be unrelated to each other while studying. However, most examiners require students to demonstrate the understanding of overlapping nature of the syllabus. This would not be a case, if entire syllabus of relevant ebook was written by one mentor. Many publishers using their study text books as marketing tool for other highly profitable activities such as tuition providing, recruitment agency, paid advertising etc. Ebook publishing is not their core competency. They tend to direct their resources towards more profitable activities, while quality of ebooks may suffer as a result. accasupport.com is devoted full time to ebook publishing and continuously acquire new skills (memory techniques, for example) and resources (word processing software, for example) to compile an ebook to support students in much better way.

26) Harmony

27) Core Activity

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28) Direct Access

You will have direct access to author & administrator, without having to wait for information to be transfer to and from more than one desk to reach the person responsible for making decision. It will result in quicker response to inquiries. In addition, you need to send only single email to resolve your all issues rather than dealing with different personnel for each issue, regarding purchasing and usage of ebooks. Many publishers provide money back guarantees and gifts etc. However, it is subject to hidden charges and conditions, which are not communicated on sales page and ebook description page. Instead, such policies are communicated on FAQs, Terms of Service, Delivery etc pages. accasupport.com has no such hidden polices. Refund policy is communicated at the bottom of home page and instant download feature.

29) No Hidden Policies

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AUTHORS PROFILE
Name: Murtaza Lanewala Career Status: Freelance writer & tutor for professional accountancy qualifications. Professional bodies include ACCA, CIMA and ICAEW. Author & CEO of accasupport.com E-mail: kabuli_52@hotmail.com or murtaza@accasupport.com

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IMPORTANT!
1 Disclaimer This study material is sold only through accasupport.com website. However, Clickbank.com is the credit card processing organization for collecting payments for this study material. This study material is not available offline (shops, schools etc.) in any form such as DVDs, CDs, Printed books etc. Study materials purchased from unauthorized source can be out of date and incomplete. In addition, you will not be able to receive free updates given to the buyers of original material. Demo version of this material is available free of cost, please take care, not to pay for demo version of this e-book to unauthorized sellers. This material is for ACCA examination Dec 2012 only. Students who are reading out-dated material are at risk, as it will not be representative of current examination format, terminologies and syllabus. Readers of this material will be solely responsible for the consequences of any decisions made in real life. Author & accasupport.com are not responsible to the readers of this material under any circumstances. Recommendations made of any kind are intelligent guesses to the best of authors knowledge. Names of individuals, organizations, countries, religions etc are used for educational purpose only. It is not intended to abuse, discriminate and heart anyone's feelings and dignity. 2 Copyright Notice This material is subject to copyright protection law. Infringement of copyright law results in criminal liability (fine or imprisonment or both). Copyright infringement is effectively theft of intellectual property; therefore, it is unethical from social viewpoint and sinful act from religious viewpoint as well. Copyright 2012 Murtaza Lanewala. All rights reserved.

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2.1 Do You can make a backup copy of this material. You can use parts of this material provided you quote the appropriate reference to the author and material. 2.2 Do Not You cannot publicly share this material in the form of hard copy or soft copy (physically and over the internet) for cash or for free. You cannot transform this material into other means of communication such as photocopy, video, audio etc. Unless needed for accessibility purpose or personal use. You cannot change the file format of this material or make it editable. You cannot resell this material unless you are selling the original copy purchased. You cannot use any part of this material in or with contents associated with violence, politics, religious and pornographic contents in any way. BE AN AFFILIATE BE A PARTNER

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USER GUIDE
E book features Past Papers Sub Exam Topics Exam Awareness Exam Support Example Illustration Explanation Formula Diagram Cross reference Highlighting Bookmarks Screen Shot: Details Past papers provides a clue about the verbs (Explain, Evaluate etc) and marks available in the exams. It provides list of main headings at the beginning of each exam topic. You have to click relevant heading in a list to reach there. It provides broad information on composition (theoretical v computational) and importance of each paper in exam context. Exam Support provides detailed information on application of theory and calculations in exam context. Example provides practical application of technical theoretical knowledge. Illustration provides numerical applications of theoretical knowledge. Explanations provide the reasons for correctness or un correctness of particular statements and calculation. Formula is mathematical equations and tabular formats. Diagrams are visual (Graph, Charts, Tree formats etc) presentations of theoretical knowledge. Cross-referencing are hyperlinks to other exam topics. Click previous view button to go back. Highlighting is used show the relationship or connection between words and figures. Click bookmark icon in the side bar (see below) to jump to specific exam topic in the e-book.

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If you not currently using adobe reader, then i recommend you to download adobe reader, to get most benefits from this e-book. Click http://get.adobe.com/reader/ to download.

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INTRODUCTION TO F9 FINANCIAL MANAGEMENT


1 Examiner Antony Head is examiner for Paper F9 Financial Management 2 Aim To develop the knowledge and skills expected of a finance manager, in relation to investment, financing, and dividend policy decisions. 3 Assumed Knowledge from Previous Papers You are expected to have knowledge from following papers for the purpose of this exam. F1 Accountant in Business. F2 Management Accounting. 4 Position of F9 Performance Management in ACCA Diagram:

5 Main Capabilities & Relationships Diagram:


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6 Exam Paper Format 4 questions are examinable for 25 mark each. All questions must be attempted. Questions could be comprised of many requirements (a, b, c, d, e etc). Mathematical questions are rewarded separately from text-based questions. If you get calculations wrong, you can still earn marks by commenting reasonably on wrong figures.

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Usually each question examines only one part of the syllabus. However, any question may examine many chapters from that part (A, B, C, D, E etc) of the syllabus. Example: Question examining Part A (Specialist cost and management accounting techniques) can cover chapters such as Absorption costing, Marginal costing and ABC costing as requirement a, b, c respectively. 7 Duration of Exam Total time: 3 hours 15 minutes 3 hours are writing and reading time. Additional 15 minutes are reading and planning time. However, you can annotate question paper only during that time. 8 Resources: http://www.accaglobal.com/en/student/qualification-resources/accaqualification/acca-exams/f9-exams.html http://www.accaglobal.com/en/student/Essentials/pass-exams.html http://updates.accasupport.com http://accasupport.com/blogs.htm

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EXAMINER'S GUIDANCE
1 What was done well? Nature, elements, importance of working capital (06/10) Management of inventory, etc. (12/09, 12/10) Management of trade receivables (06/10, 12/10) ROCE and payback calculations (06/09) NPV94 and IRR95 calculations (06/09, 12/09, 06/10, 12/10) Allowing for inflation and taxation (12/10) Specific investment decisions (12/09, 06/10) Calculating the cost of debt115 (12/09, 06/10, 12/10) WACC114 calculation (06/09, 12/09, 12/10) Project-specific cost of equity114 using CAPM114 (06/10, 2/10) Dividend growth model (06/10, 12/10) Discussion of market efficiency (12/10) Hedging124 exchange rate risk (06/09, 12/09) Causes of interest rate fluctuations (12/10) 2 What was not done well? Nature and purpose of financial management (06/10) Measuring achievement of objectives (06/09, 06/10) Role of financial intermediaries (12/09) Management of cash, etc. (06/09, 06/10) Working capital financing (06/09, 12/09) Stages in capital budgeting (06/09) Payback, ROCE discussion (12/10)
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Leasing evaluation (12/09) Long-term finance (06/09, 12/09, 06/10, 12/10) Dividend policy (12/09, 12/10) Impact of financing on financial position (06/09, 12/09, 06/10, 12/10) WACC114 calculation (06/10) Asset-based valuation methods (12/10) Income-based valuations method (06/09) Causes of interest rate fluctuations (12/09) 3 How to improve? Practice past examination questions Study examiners reports from previous examinations Prepare revision cards Plan written answers Write legibly Include all your workings and label them clearly

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AUTHORS GUIDANCE
1 Preparing for Exams 2 Exam Day Guidance Please! Buy Full Version

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STUDY PLANNER
Formula: Idle time can be incurred due to sickness, computer crash, social events etc. It depends on your daily activities and environment. I recommend you to make a printed copy to read when computer is not available. Formula:

Number of pages will include allowance for solving past paper questions, student accountant articles etc. Please note that different syllabus areas will take different amount of time. Calculations will take more time than theoretical areas. Therefore, it will give you only rough idea of your progress. Formula:

If revised number of page per day is > than originally plan, which means you are lagging behind and now you have to do study more per day. Study at time of day when you are fresh. This will enable you to learn more in available time. Consider skip reading examples, if you understood theory by reading main text. Study in the end sub exam topics, which is less likely to be examined in your exam session. You can see past paper analysis given below each sub exam topic.
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FORMULA SHEET & TABLES

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PAST EXAM PAPERS ANALYSIS


Key Exam Topics Financial management function Financial management environment The nature, elements & importance of working capital Management of working capital elements Determining working capital needs & funding strategies The nature of investment decisions & the appraisal process Non discounted cash flow techniques Discounted cash flow techniques accasupport.com Allowing for inflation & taxation in DCF Adjusting for risk & uncertainty in investment appraisal Specific investment decisions Short & long term finance Internal sources of finance & dividend policy Gearing & capital structure considerations Finance for small & medium sized entities Estimating cost of capital Relationship between cost of capital, capital structure & investments Business valuation techniques Efficient market hypothesis Basics of financial risk management Hedging techniques for foreign currency risk Hedging techniques for interest rate risk 06/12 12/11 06/11 12/10 06/10 12/09 06/09 12/08 06/08 12/07 P/P

Above analysis is given to emphasis the comparative importance of each topic. This analysis can be used as guide for allocating time to topics accordingly. Do not attempt to guess future question paper from this analysis, as this is historical data and it is not helpful for reading examiners mind at a time of setting exam paper. Also, see how different exam topics are examined together in single question.

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Ecommerce/Ebusiness/Make Money Online Tutorial, Implementation Guide, Training, Ebook Free Download & Buy. Ecommerce/Ebusiness/Make Money Online Implementation Guide Ebook is cheap & best tutorial & training to buy. ACCA study materials, Class, Lectures, Course, Notes for distance learning ACCA F9 Financial Management Study Text Ebook for Dec 2012 Exam | Page 38 of 138
Exam Topic 1: FINANCIAL MANAGEMENT FUNCTION

Exam Topic 1:

FINANCIAL MANAGEMENT FUNCTION


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Agency 2 Financial Objectives in Profit Vs Not-for-Profit Pg.no 34 37

Exam Awareness This chapter explains the objective and scope of financial management. accasupport.com Knowledge of this chapter is not frequently examined. However, it will help you to make reasonable and relevant discussion for other topics. See PAST EXAM PAPERS ANALYSIS to explore relationships between exam topics. You can use these relationships found out to write relevant points in order to answer requirements in the exam.

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Exam Topic 1: FINANCIAL MANAGEMENT FUNCTION

1 Agency Exam Q.no 12/08

06/12

Requirement Marks Explain the nature of the agency problem and discuss the use of share option schemes as a Q1:e 8 way of reducing the agency problem in a stockmarket listed company such as Dartig Co. Discuss the reasons why small and mediumsized entities (SMEs) might experience less Q3:a 4 conflict between the objectives of shareholders accasupport.com and directors than large listed companies.

1.1 Definition of Agency Relationship Agency is a relationship between principal and agent. Principal delegates some responsibility to be performed on behalf of principal. Principal also gives agent necessary decision-making authority. Agent can be responsible to more than one principal. Example: Shareholders delegate responsibility to board of directors to management day-to-day operations of organization. Directors are granted necessary authority through articles of association and accasupport.com employment contract. 1.2 Agency Problem In the context of company, directors are required to protect the interest of shareholders. Shareholders being too many in numbers and may not have technical knowledge of the companys operations would not be able to protect their interest themselves.
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Unfortunately, they have to rely on directors to look after their interest. Danger is that directors do not act in the best interest of shareholders. Directors acting other than in the interest of shareholders is an agency problem. Agency problem creates the need for building mechanism, which promotes goal congruence or Alignment of interest. 1.3 Goal Congruence Goal congruence means making directors act in the interest of shareholders. Directors have their own needs and desires, which may be different from shareholders needs and desires. Goal congruence can be

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Exam Topic 1: FINANCIAL MANAGEMENT FUNCTION

achieved by aligning the goals of directors in line with the goals of shareholders. 1.4 Ways to Reduce Agency Problem 1.5 Reward Schemes 1.5.1 Salary Salary is the most basic form of financial record given to directors and employees. It does not affect performance and risk attitudes of managers. 1.5.2 Bonus Bonus is financial reward given to motivate directors and employees in expectation that motivation will lead to improved performance. It does not ensure that directors focus on shareholders wealth maximization. accasupport.com It does not affect performance and risk attitudes of managers. 1.5.3 Profit Related Pay Directors remuneration based on profit encourages directors to focus their attention towards generating profit for the shareholders. Profit related pay could lead to directors undertaking excessive risky investment projects, which may be over and above the wish of shareholders. accasupport.com Profit related pay focuses directors attention on short-term performance rather than long-term performance. Financial management primary objective is to focus on long-term shareholder wealth maximization. 1.5.4 Share Based Payment Share based payment is the reward given to directors in the form of shares with a condition to hold those shares for certain period. Share based payment encourages directors to focus their attention on increasing share price. Increase in share price leads to increase in shareholders wealth. It is consistent with the primary objective of financial management i.e. maximization of shareholders wealth. Share based payment also encourages directors to take controlled risk in line with shareholders expectation.
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Exam Topic 1: FINANCIAL MANAGEMENT FUNCTION

1.5.5 Share Options Share options are incentive given to directors to buy shares in the company at specified future exercise date and at pre-defined exercise price. It encourages directors to increase share price of the company above the exercise price in order to realize gain through buying shares at lower share price than market price at exercise date. Share options direct management attention on primary objective of financial management i.e. maximization of shareholders wealth. Share option also encourages directors to take controlled risk in line with shareholder expectations. 1.5.6 Benefits Benefits are non-financial reward given to directors and employees. It is given to motivate directors so that work can be performed efficiently. Example: A car given to director so he/she can travel to workplace, attend meeting with bankers etc in time. accasupport.com It does not encourage directors to maximize shareholders wealth. 1.5.7 Pension Pension is the financial reward as a percentage of basic salary given to directors and employees when they retire. accasupport.com Security of pension funds depends on stability of the organization. Pension may not be realized if organization gets bankrupt. It encourages directors to take long-term view organizational performance. However, it has no contribution towards motivating directors to maximize shareholders wealth beyond existing level.

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Exam Topic 1: FINANCIAL MANAGEMENT FUNCTION

2 Financial Objectives in Profit Vs Not-for-Profit Exam Q.no Requirement Marks Compare and contrast the financial objectives of a stock exchange listed company such as Bar 12/11 Q4:d 11 Co and the financial objectives of a not-forprofit organisation such as a large charity. Financial objectives in not for profit and public organizations are different from financial objective in profit motive organizations. Profit motive organizations have profitability as its primary objective. Profit motive organization is legally accountable to shareholders/owners (primary stakeholder). On the other hand, not for profit organizations do not have profitability as its primary objective. However, not for profit organizations also need to focus on profitability for meeting day-to-day expenses. Example: Rent of the premises used as office of the organization. Payment of stipends (remuneration) to volunteers.
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Not for profit organization usually exists to provide services to the society. Society involves more than one legitimate stakeholder such as donors, users of services, government, public at large etc. Not for profit organization may have more than one objective such as providing quality service, providing services to greater number of people, efficient use of funds provided by donors etc. Stakeholders are interest holders, which can affect (claim) or be affected by organizational activities. It becomes difficult to decide which is the primary objective and deciding priority for rest of the secondary objectives. However, profit motive organization may also have objectives other than profit making. These objectives are necessary for achievement of primary financial objective. Example: Increase in number of products offered by organization by 30% in next 2 years. This objective supports the primary objective of profit making.
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Exam Topic 1: FINANCIAL MANAGEMENT FUNCTION

Existing customers may also prefer to buy related goods from the same organization. This will give cross selling (selling more than one product to same customer) benefits to organization. accasupport.com Performance of not for profit organization is usually measured against its ability to provide Value for money (economy, efficiency, effectiveness) to the users of services. However, performance of profit motive organization can also be assessed in terms of value for money. Profit motive organizations must provide value for money to its customers if it has to achieve its financial objectives in short term (such as profitability, liquidity) as well as long term (such as growth).

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Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT

Exam Topic 2:

FINANCIAL MANAGEMENT ENVIRONMENT


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Macro Vs Micro Economics 2 Macro-economic Policy 3 Macro-Economic Factors Affecting Business Activity Pg.no 40 40 42

Exam Awareness This exam topic introduces students with basic terminologies relevant to subsequent study. You may have already familiar with these terms from ACCA Paper F1 Accountant in Business. If you are running short of time, then i recommend you to just skim read it in the end if you have extra time. accasupport.com Screen Tip: Click previous view button to go back.

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Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT

1 Macro Vs Micro Economics 1.1 Macro-Economics Macro-economics is study of effects of total activities of households, firms & government on the national & international economy. Macro-economics include all the economic activities of private as well as public sector. 1.2 Micro-Economics Micro-economics is study of effects of separate activities of individuals, individual households and firms. Micro-economics refers to study of one economics entity at a time. 2 Macro-economic Policy Macro-economic policy is the government decisions on the operation of markets. Government may decide to operate market without any regulation as free market in the hope that free movement of capital will result in best economic growth. In practice, government generally intervenes through making regulations to promote economic growth. Macroeconomic policy has following objectives. Government has following two main policies to achieve its objectives. 2.1 Monetary Policy Monetary policy deals with the interest and exchange rates. Interest rate influences individual investment decisions. Government can encourage investment by reducing interest rates and conversely reduce investments by increasing interest rates. Reduction in interest rate changes public preference from savings to investment. Example: Reduction in interest rates leads to increased activity in stock market and bullion market. Exchange rate influences imports and export from/to the country. Government can encourage the use of imported goods by increasing
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Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT

exchange rate of home currency and conversely reduce the use of imported goods by decreasing exchange rate of home currency. Similarly, government can encourage exports from the country by reducing exchange rate of its home currency. Reduction in exchange rate will make goods produced by the country cheaper to foreign countries. Conversely, government can reduce exports from the country by increasing exchange rate of its home currency. Increase in exchange rate will make goods more expensive to foreign countries. 2.2 Fiscal Policy Fiscal policy deals with taxation and government spending. Taxation is the source of revenue for government. It influences public spending on consumer and capital goods by increasing or decreasing the level of disposable income for private sector. Increase in taxation results in decreased disposable income for spending on satisfaction of needs and capital investments. Conversely, decrease in taxation results in increased disposable income for spending. Disposable income is the earnings remaining after meeting all liabilities. Level of spending influences demand for goods or services and prices of goods or services. If demand exceeds in relation to supply then prices of goods or services arises (inflation). Conversely, if demand lacks in relation to supply then prices of goods or services reduces (deflation). Government spending also influences the demand for goods or services and prices of goods or services. Government can spend its income (taxation) on industries/sectors in which government wishes to raise supply of goods or services to provide goods or services to private sector and to control price inflation. Government spending can be used to reduce the economic imbalance between rich and poor by providing basic goods or services to society at subsidised or free of charge.
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Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT

3 Macro-Economic Factors Affecting Business Activity 3.1 Aggregate Demand Aggregate demand is the sum of demands for different goods or services produced in country. Formula:
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3.2 Aggregate Supply Aggregate supply is the sum of supplies for different goods or services produced in country. Formula:

Government aim is to equal aggregate demand and aggregate supply at a level where workforce is fully employed. Full employment is one of the objectives of the macroeconomic policy of government. 3.3 Confidence Confidence is psychological factor influencing economic activities. Confidence is the expectation of future stability and growth of economic activities.
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Confidence among consumers makes them to spend higher percentage of income on goods or services. Confidence among firms makes them invest more money in the business. Confidence depends on expectation of political, environmental, employment level, inflation, demand, expected future conditions etc. 3.4 Government Policy Government can encourage economic activities in following ways.

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Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT

Government can increase demands for goods or services through fiscal policy (taxation and government spending) and monetary policy (exchange rates, interest rates and money supply). Government can provide infrastructure (transportation, roads, power, sewage, communication media etc) to boost economic activities. Government can boost confidence by providing security to the assets of individuals, household and firms. This can be done by making legislations and providing policing services. 3.5 Use of Resources Resources are factors of production, which enables production of goods or services. To promote maximum economic growth all the resources (labour, materials, money and machine) in an economy should be fully employed. Resources can be used more efficiently by provision of training and use of advanced technology. Economic growth depends on using resources to its maxim capacity and using it more efficiently. 3.6 Finance Finance enables us to employ other resources such as labour, material and workers. Financing decisions depend on the cost of using finance such as interest rate. If interest rate will rise individual and firms will reduce their borrowings and individual will consume less and firms will abandon their investment projects, which were previously attractive. As investment projects will reduce, demand for goods or services of suppliers to the firm will reduce, which lead to decrease in aggregate demand. accasupport.com If interest rate will fall individuals and firms will increase their borrowings and individual will consume more and firms will undertake investment project, which were previously unattractive. As investment projects will be undertaken, demand for goods or services of suppliers to the firm will increase, which lead to increase in aggregate demand.
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Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT

3.7 Exchange Rate Exchange rate is the rate at which home currency can be traded in return for other currency. Exchange rates can impact balance of payment (import versus export). Adverse balance of payments makes government to borrow foreign exchange for repayment. It affects credit rating of a country in the long term, as beyond certain level it can be difficult to borrow foreign exchange. accasupport.com Exchange rate need to be stable. Volatility in exchange rate increases risk of foreign exchange gains or losses and leads to increase in cost of Hedging124. Wide fluctuation in exchange rate also discourages investment by foreign firms in a country. It increases the risk of foreign exchange gain or losses in assets of the firms when assets are translated in their home currency. 3.8 Inflation Inflation is the increase in prices of goods or services for consumption and capital investment. Inflation results in reduced purchasing power of money.
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Certain percentage of inflation is considered as indication of economic growth. It is because demand is allowing the use of economic resources (labour, capital, natural resources and machinery) to its full capacity. Increase in prices (inflation) is considered as an indication of full employment of resources. Prices are increased to take the advantage of excess demand by providing goods or services to people that are able to pay more for limited goods or services. Inflation increases the economic imbalance between rich and poor by redistributing wealth in a society. Rich get richer as assets increase in market value and poor get poorer if he/she is not able to increase his/her service charges in proportion to inflation. Households require more money to continue consuming same quantity and quality of goods or services. Households with limited income (pension, government relief etc) have to limit their consumption. Thus, inflation results in reduced standard of living.
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Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT

Businesses having sound assets may enjoy capital gains on its asset. Similarly, businesses having greater liabilities with enjoy economic profits on repayment. As the money borrowed will have lesser value (purchasing power) when making repayment. Government aim is to control inflation to reduce the uneven distribution of wealth. It is possible to achieve economic growth in times of high inflation but this growth will not benefit all the members of the society in equal. Inflation has impact on other objectives of economic policy also. Inflation will lead to depreciation of exchange rates. Exchange rate depreciation will make imports expensive for a home country and exports cheaper for foreign countries. Expensive imports will result in less demand for imported goods and cheaper exports will result in more demand for goods to export. This will make balance of payment favourable. All these events will be beneficial for economic growth but benefits may not be evenly distributed among the members of society. In times of high inflation, people tend to invest their earnings as earlier as possible. Because keeping money in form of cash will erode the purchasing power of their earnings. High inflation leads to uncertainty about future economic wellbeing for individuals and firms. Individual tends consume less to save money for the future. Inflation has some additional drawbacks as well. Inflation makes planning and budgeting difficult for individuals and firms. More time have to spend on revising budgets and selling prices for goods or services. This will put additional cost burden on firms. Customers have to face frequently new prices, which forces them comparing price again and again. In times of high inflation, financial figures have little meaning in evaluating performance of managers and entire organization, which makes financial and resource allocating decisions difficult and less meaningful.
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Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT

3.9 Unemployment Unemployment is the unavailability of opportunities for individual to contribute their services to the economy. Rate of unemployment is determined by dividing unemployed labours with total labours. Unemployment means certain portion of countrys workforce (labour resource) is not utilized to promote economic growth. 3.9.1 Side Effects of Unemployment Unemployment will lead to reduced standard of living in the economy as whole. Crime rates and illiteracy increases with the increase in unemployment rate.
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Unemployment will also leads to reduction in wage rates. However, employment legislation has given some protection to labours by implementing minimum wage rate requirement. As the level of unemployment increases, bargaining power of employer also increase in comparison with employees.
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Unemployment may result in reduced demand for goods or services. This is put strain on business profitability and increase competition on the grounds of prices rather than quality among businesses. Quality may deteriorate to produce goods or services at reduced prices to attract price sensitive consumers. Unemployment for long period will result in loss of skill due to lack of work available to retain level of skill. Loss of skilled workforce is the loss of human capital to the country. Unemployment increases the government expenditure for providing benefits (support) to unemployed people. 3.9.2 Stagnation Stagnation is the period of significant slow economic growth of long period. 3.9.3 International Payments Disequilibrium International payments disequilibrium is the surplus or deficit in the balance of payments.
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Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT

Surplus results where total exports exceeds total imports. Deficit results where total imports exceeds total exports. 3.10 Inflationary Gap Inflationary gap is the excess of demand over supply when workforce is fully employed. It results in increased price. Supply cannot be increased using domestic factors of production (men, machine, material, money). Inflationary gap can be reduced by either reducing demand or by importing goods to satisfy demand. 3.11 Deflationary Gap Deflationary gap is lack of actual supply than fully employed workforce can supply, as aggregate demand is below the level required for the full employment of the workforce. Prices tend to remain constant or fall. 3.12 Business Cycle Business cycle has following four phases. Diagram: Boom
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Recession

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Recovery

Depression 3.12.1 Depression Depression is the extremely adverse economic condition. Demand, prices and employment level falls and at their bottom. Businesses tend to shut down and investors lose their confidence in the market.

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Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT

3.12.2 Recession Recession is the less serious economic condition than depression. If recession continues for long period time, it may turn in depression. However, government intervention and technological changes can rescue in situation. 3.12.3 Boom Boom is the extremely favourable economic condition. Demand, prices, employment level all increases and reaches at peak. Businesses launches new products and investors have optimistic view of the future economic growth. 3.12.4 Recovery Recovery is the period of medium growth and is a way to boom. Recovery is generally considered a slower process than recession.
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Exam Topic 3 THE NATURE ELEMENTS & IMPORTANCE OF WORKING CAPITAL

Exam Topic 3:

THE NATURE, ELEMENTS & IMPORTANCE OF WORKING CAPITAL


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Objectives of Working Capital Management Exam Awareness Working capital is regularly examined topic in F9 Financial Management. This exam topic sets purpose of working capital accasupport.com management and its relevance to F9 Financial Management. See PAST EXAM PAPERS ANALYSIS to explore relationships between exam topics. You can use these relationships found out to write relevant points in order to answer requirements in the exam. Pg.no 50

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Exam Topic 3 THE NATURE ELEMENTS & IMPORTANCE OF WORKING CAPITAL

1 Objectives of Working Capital Management Exam Q.no Requirement Marks Identify the objectives of working capital 12/07 Q4:a management and discuss the conflict that may 3 arise between them. Discuss whether profitability or liquidity is the 06/10 Q1:c primary objective of working capital 4 management. accasupport.com Working capital is material item in balance sheet of most organizations. Working capital is the blood of any organization without it cannot continue its operations regardless of how much fixed assets are owned by the organization. Working capital management has two main objectives. 1.1 Profitability Profitability is related to the primary objective of financial management i.e. maximization of shareholders wealth. Business must be profitable in the short term to add shareholder value in the long term. 1.2 Liquidity Liquidity is the ability to meet cash requirements for settling day-to-day expenses such as payment of wages and salaries, electricity bills, office rent etc. Liquidity is essential for survival and long-term profitability of the organization. Failure to meet day-to-day expenses can force organization into dissolution or liquidation by the creditors. Hence, without survival there will be no wealth maximizing opportunities available. Profitable organization may not have enough cash to day-to-day liabilities. It is due to the application of accrual accounting concept to arrive at profit for the year for financial reporting purpose. Profitability and liquidity are two conflicting objectives. Favourable performance at one objective inevitably leads to adverse performance at other objective.
accasupport.com accasupport.com

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Exam Topic 3 THE NATURE ELEMENTS & IMPORTANCE OF WORKING CAPITAL

Example: Maintaining higher cash balance will result in loss of sales to customers. It is due to cash is not used for producing or purchasing accasupport.com finished goods. Effective working capital management depends on achieving a balance between these two objectives.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Exam Topic 4:

MANAGEMENT OF WORKING CAPITAL ELEMENTS


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Working Capital Cycle 2 Working Capital Ratios 3 Liquidity Ratios 4 Account Receivable Management 5 Factors Affecting Trade Receivables Policy 6 Credit Policy Evaluation 7 Factoring 8 Evaluating Proposal for Factoring 9 Invoice Discounting 10 Foreign Trade Receivables 11 Calculating & Commenting Early Settlement Discounts 12 Discounts from Suppliers 13 Economic Order Quantity (EOQ) Model 14 Optimal or Economic Order Quantity (EOQ) 15 Optimal Reorder Quantity with Bulk Purchase Discount 16 Just in Time (JIT) Pg.no 53 55 59 60 61 61 66 67 72 73 75 78 80 80 84 86

Exam Awareness This exam topic is most important among all exam topics on working capital. Contents of this topic can be examined as complete 25 marks question. Please do not skip any ofaccasupport.com these sub-topics. These are extremely interrelated. Inventory, trade receivables & trade payable can be examined in single question. See PAST EXAM PAPERS ANALYSIS to explore relationships between exam topics. You can use these relationships found out to write relevant points in order to answer requirements in the exams.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

1 Working Capital Cycle Exam Q.no Requirement Calculate the size of the overdraft of FLG Co, 06/08 Q3:c the net working capital of the company and the total cost of financing its current assets. For HGR Co, calculate: (i) the bank balance in three months time if no action is taken; and (ii) the bank balance in three months time if 06/09 Q3:b the finance directors proposals are accasupport.com implemented. Comment on the forecast cash flow position of HGR Co and recommend a suitable course of action. Explain the meaning of the term cash operating cycle and discuss the relationship between the cash operating cycle and the level 12/11 Q2:a of investment in working capital. Your answer should include a discussion of relevant working capital policy and the nature of business operations. Working capital cycle is also called cash management cycle.

Marks 6

10

Working capital is fund required to finance trading activities organization. Trading activities can be payment of wages to workers, purchasing goods and selling for profit etc.
accasupport.com

Not for profit organization needs working capital in the same way as profit making organization. Working capital is as important for organizations as blood for human body. Working capital is excess of current assets over current liabilities.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Formula: Or
accasupport.com

Working capital is also called net current assets if current assets are greater than current liabilities or net current liabilities if current assets are less than current liabilities. Efficiency of working capital depends on efficient control over elements of working capital as above. Working capital requirement depends on time taken to pay suppliers and time taken to receive payment from customers. Example: Suppose, we pay supplier in 30 days, but we receive payment from customers in 40 days. We will need working capital (cash) for ten days to meet day to day trading expenses between 10 (40-30) days. This need can be fulfilled through personal savings or raising finance. If we pay suppliers in 25 days but we receive payment from customers in 20 days. We will have surplus cash for 5 (20-25) days after settling all liabilities. Surplus cash can be invested elsewhere to earn interest income. Therefore, longer working capital cycle requires more cash and cost of raising cash to finance working capital will erode profitability. Even, if personal savings are used to finance working capital it involves opportunity cost because of not being able to earn interest by investing it elsewhere. Diagram:
accasupport.com accasupport.com

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Credit purchase or Trade payables


accasupport.com

Credit sales or Trade receivables

Cash paid to suppliers

Working capital or cash requirement

Cash received from customers

2 Working Capital Ratios Exam Q.no Requirement Calculate the cash operating cycle of Bold Co. 12/11 Q2:b (Ignore the factors offer in this part of the question). Critically discuss the similarities and differences between working capital policies in 06/12 Q2:b the following areas: (i) Working capital investment; (ii) Working capital financing. Working capital cycle depends on the following: 2.1 Trade Receivables

Marks 4

Revision Trade receivable turnover is the average number of days customers take to repay their debts. Trade receivable balance given in the balance sheet is taken as accasupport.com representative of balance owed from customers at any point in time during the accounting period. Increase in trade receivables level increases working capital. Similarly, decrease in trade receivable level decrease working capital. If we assume credit sales are made as constant rate, then increase in trade receivable turnover in days increases trade receivables level and working capital requirement. Similarly, decrease in trade receivable turnover in days decreases trade receivables level and working capital requirement.
accasupport.com

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Trade receivable turnover depends on credit term offered by organization and effectiveness of credit control system. Credit sales for the year are $200,000. Trade receivable turnover in days is 40 days. Required: Calculate the change in trade receivable level if customers would have taken 45 days on average to pay their debts.

To find trade receivables level or amount, we can manipulate the equation as follows: accasupport.com

Trade receivable level or amount is increased to $2,740 ($21,918$24,658) and working capital requirement to finance credit sales of $200,000 is increased by the same amount. It is because of increase in trade receivable turnover from 40 to 45 days. 2.2 Inventory Revision Inventory turnover is the average number of days inventory is held before it is sold to customers. Inventory balance given in the balance sheet is taken as representative of balance of inventory held at any point in time during the accounting period. Increase in inventory levels increases working capital. Similarly, decease in inventory level decreases working capital.
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

If we assume inventory is purchased at constant rate, then increase in inventory turnover in days will lead to increase in inventory levels and working capital requirement. Similarly, decrease in inventory turnover in days will lead to decrease in inventory levels and working capital requirement. Credit purchases for the year are $150,000. Inventory turnover in days is 30 days. Required: Calculate the change in inventory level if inventory is sold to customer after 25 days from the date of purchase.

To find inventory level or amount, we can manipulate the equation as follows


accasupport.com

Inventory level or amount is decreased to $2,055 ($12,329-$10,274) and working capital requirement decreased by the same amount. It is because of decrease in inventory turnover from 30 to 25 days. Inventory is converted to trade receivables 5 days earlier. 2.3 Trade Payables Revision Trade payable turnover is average number of days taken by organization to pay its suppliers. Trade payable balance given in the balance sheet is taken as representative of balance owed to customers at any point in time during the accounting period.
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Decrease in trade payable level increases working capital. Similarly, increase in trade payable level decreases working capital. If we assume credit purchases are made at constant rate, then increase in trade payable turnover in day increase trade payable level and decrease working capital requirement. Similarly, decrease in trade payable turnover in days decrease trade payable level and working capital requirement. Credit purchases for the year are $150,000. Account trade payables turnover in days is 50 days. Required: Calculate the change in trade payable level if trade payable is sold to customer after 60 days from the date of purchase.

To find trade payable level or amount, we can manipulate the equation as follows

Trade payable level or amount is increased to $4,110 ($20,548-$24,658) and working capital requirement is decreased by the same amount. It is because of increase in trade payable turnover from 50 to 60 days. Trade payable has inverse relationship with working capital. Increase in trade payable leads to decrease in working capital requirement. However, Trade receivables and inventory has direct relationship with working capital. Increase in trade receivables and inventory leads to increase in working capital requirement.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

2.4 Overdraft Overdraft is a current liability. It is used to makeup shortfall in working capital requirement. 3 Liquidity Ratios Working capital should be monitored for liquidity. Using current liabilities for financing working capital needs may work well for increasing profitability and it will deteriorate liquidity of the organization. Following ratios is calculated for determining liquidity position of the organization. 3.1 Current Asset Ratio Current asset ratio suggests the ability of organization to repay its debt when they fall due. Formula:
accasupport.com

Current asset ratio should not be interpreted in isolation it should be considered in combination with working capital ratio. Example: Trade payable turnover suggests how often suppliers demand their payment. If suppliers demand more often, then high levels of current assets should be available. We will have less time to arrange for payment.
accasupport.com

Trade receivable turnover suggests how often customers pay us. If customers pay us more often, then low levels of current assets will suffice. We can arrange cash for payment to supplier in lesser time. 3.2 Quick Asset or Acid Test Ratio Quick asset ratio suggests the ability of organization to convert its current assets into cash quickly.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Formula:

Inventory is excluded as it takes more time than other current assets to be converted into cash. Inventory is distant from cash in that it first has to be converted into receivables before it is converted into cash. 4 Account Receivable Management Exam Q.no Requirement Identify and explain the key areas of accounts P/P Q3:c receivable management. Discuss ways in which PKA Co could improve 12/07 Q4:c the management of domestic accounts accasupport.com receivable. There are four key areas of account receivable management.

Marks 6 7

4.1 Credit Policy Credit policy is a framework for managing accounts receivables in the business. An effective credit policy should consider following elements: In short, credit policy provides guidance for implementing below three key areas of account receivable management. 4.2 Credit or Customer Analysis The purpose of credit analysis is to ensure that goods or services are sold only to those customers that have goods credit rating. It means those customers who are reasonably likely to settle their debts within due date. Quality of credit analysis depends on the source and quality of information used to assess customer creditworthiness. Following sources of information would be helpful in performing credit analysis. 4.3 Credit Control Credit control involves monitoring customers to limit the risk of bad debts and cost of interest expense to the organization for financing increased requirement of working capital.
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Credit control involves the following tasks 4.4 Collection Procedures Funds collection procedures should ensure that organization receives funds from debtor within agreed terms and conditions and customers are aware and understand those terms and conditions. Issuing of invoice and collection of funds from customers is the responsibility of sales ledger staff. Sales ledger staff should ensure that customer understands the terms and conditions at the time of issuing invoice. Terms and conditions could include mode of payment, delivery date, early settlement discounts etc. They should send monthly statements to customers and ensure that any differences are reconciled in timely manner. They should also deal with any issues raised by customers in timely manner. Sales ledger staff should follow up overdue debts. Following are the actions that can be taken: Cost of debt collection should not exceed the amount of debt. 5 Factors Affecting Trade Receivables Policy/Credit Policy Exam Q.no Requirement Marks Identify and discuss the factors to be 06/10 Q1:b considered in formulating a trade receivables 8 management policy for ZSE Co. Discuss the factors that should be considered in 12/10 Q3:d formulating working capital policy on the 8 management of trade receivables. These are factors affecting the formulation of trade receivable management policy or credit policy. 6 Credit Policy Evaluation Exam Q.no Requirement Evaluate whether the proposed changes in P/P Q3:a credit policy will increase the profitability of accasupport.com Ulnad Co. Points to consider for evaluating credit policy are as follows.
accasupport.com

Marks 6

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

6.1 Incremental Cost/Savings of Financing Trade Receivables Support: Please keep reading till the end. You will probably do not understand the text below. However, illustration given at the end will make you accasupport.com understand the text below. Trade receivables need to be financed just like inventory and noncurrent assets. Trade receivables are usually financed through shortterm source of finance such as overdraft and short-term bank loan. Financing trade receivables involve financing cost such as interest charge on overdraft and bank loan. However, even if organization uses its own retained profits to finance trade receivables, then it has opportunity cost of not being used to generate interest through investment in marketable securities. In addition, time taken by customers to repay their debt have effect on the profitability of the organization. Interest expense incurred in financing trade receivables will erode profitability. Conversely, savings in interest expense will improve profitability Incremental financing cost is additional cost of interest incurred due to extending credit term. Reduction in financing cost is savings in cost of interest incurred due to reduction in credit term. Exam Support: Determining incremental cost of financing trade receivables is most complex calculation in the credit policy evaluation. It will probably attract highest marks in the evaluation. accasupport.com 6.1.1 Calculating Incremental Cost/Savings of Financing Trade Receivables 6.2 Administration Cost/Savings Receivables results in administration cost to the organization. Maintaining sales ledger and monitoring customers result in additional cost to the organization. Giving extended credit terms requires more frequent monitoring of customers to reduce the increased risk of bad debts associated with longer credit terms.
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

In addition, early settlement discounts give rise to more record keeping and reviewing cost. Customer may attempt to claim discounts even if they are not entitled. Incremental (additional) administration cost needs to be taken into account in the evaluation. Reduction is credit term usually leads to savings in administration cost. Formula:
( ) (
accasupport.com

6.3 Cost of Early Settlement Discount Early settlement discounts are given to encourage early payment by customer. It is done to improve working capital cycle. Early payment by customers results in savings in finance costs to the organization. However, it results in loss of revenue by the amount of discount offered. Reduction in early settlement discount leads to savings in finance cost. Saving in financing cost is already accounted for when calculating incremental cost of financing. Now, only incremental cost of early settlement discount should be included in evaluation. Formula: ( )
accasupport.com

6.4 Contribution from Sales Extending or contracting credit period can result in increased or decreased sales revenue respectively. Incremental contribution from additional sales needs to be taken account or loss of contribution from reduced sales should be taken into account. Later, can happen rarely, as organization would not evaluate credit policy that will obviously result in reduced sales. Only incremental contribution is relevant for the purpose of credit policy evaluation. Formula:
( ) ( )

Exam Support:

accasupport.com

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Contribution to sales ratio may be given. If not, you have to calculate using data given. 6.5 Bad Debt Expense/Savings Risk of bad debts increases with the increase in credit term. Organization may have estimates available for range of credit terms. Bad debt expense needs to be included in the evaluation of credit policy. If reduction in credit term is proposed, then bad debt expenses could be saved. Then these savings should be included in the evaluation of credit policy. Formula: ( ) (
accasupport.com accasupport.com

Exam Support:

Bad debts estimates may be given as percentage of sales revenue. Illustration: Ulnad Co has annual sales revenue of $6 million and all sales are on 30 days credit, although customers on average take ten day more than this to pay. Contribution represents 60% of sales and the company currently has no bad debts. Accounts receivable are financed by an overdraft at an annual interest rate of 7%. Ulnad Co plans to offer an early settlement discount of 1.5% for payment for payment within 15 days and to extend the maximum credit offered to 60 days. The company expects that these changes will increase annual credit sales by 5%, while also leading to additional incremental costs equal to 0.5% of turnover. The discount is expected to be taken by 30% of customers, with the remaining customers taking an average of 60 days to pay. Required: Evaluate whether the proposed changes in credit policy will increase the profitability of Ulnad Co.
accasupport.com

30 days are official and 10 days for delay by customers.


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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Accountable receivable turnover formula is manipulated to calculate account receivable amount.


accasupport.com

Weighted average is taken for 30% customers that would pay in 15 day and 70% customers that would pay in 60 days.

To account for new credit sales those are increased by 5% from existing sales.

New trade receivable level under new credit policy. ( (


accasupport.com

) )

$ Incremental in interest cost (10,155) Incremental administration costs ($6.3m x 0.5%) (31,500) Cost of discount ($6.3m x 1.5% x 30% (28,350) Contribution from increased sales ($6m x 5% x 60%) 180,000 Net benefit of credit policy change 109,995

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

7 Factoring Exam Q.no

Requirement Marks Discuss the ways in which factoring and invoice 06/08 Q3:b discounting can assist in the management of 6 accasupport.com accounts receivable. Comment on the financial acceptability of the 12/11 Q2:d factors offer and discuss the possible benefits 7 to Bold Co of factoring its trade receivables. Financial institution providing factoring services is known as factor. Generally, factoring services are provided by insurance companies and banks. Factor takes over organizations sales ledger administration. Factor performs following tasks on behalf on organization:
accasupport.com

Usually, factor provides advanced payment of up to 80% against sales made on credit. Rest of the 20% is paid upon receipt of payment from customer. Factor also deducts its flat fee and percentage of interest on advanced payment made by factor. Factoring transfers control of receivable management from organization to factor. Factor can use its own policies and procedures, which can upset customers, particularly those who have to pay their debt now earlier. Factoring service is obtained to improve the account receivable turnover.
accasupport.com

Factoring is particularly useful for organizations lacking expertise and experience of trade receivable management. Factoring is suitable for small sized organizations that have not enough resources and expertise. Factoring allows organization to direct their skills and resources toward core activities such as making sales to customer without having to worry for payment recovery. Factoring is of two types 7.1 Recourse Factoring In with-resource factoring, factor does not bear the risk of bad debts.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

7.2 Non-Recourse Factoring In non-resource factoring, factor bears the risk of the bad debts. Exam Support Look carefully in the exam which type of factoring (with recourse or without recourse) is under consideration by looking at the information accasupport.com provided in the scenario. 8 Evaluating Proposal for Factoring Exam Q.no Requirement Evaluate whether the proposal to factor trade receivables is financially acceptable. Assume an 12/08 Q2:c average cost of short-term finance in this part of the question only. Calculate the value of the factors offer: 12/11 Q2:c (i) on a with-recourse basis; accasupport.com (ii) on a non-recourse basis. Performa for evaluating proposal for factoring: Savings in finance cost of trade receivables (see working 1) Savings in administration cost of sales ledger per year Savings in bad debt expenses (non-recourse) per year Total benefit of factoring X Factoring fee per year (see workings 2) (x) Interest cost on cash received in advanced (see workings 3) (x) Total cost of factoring (X) accasupport.com Net benefit/cost of factoring X/(X) $ x x x

Marks 8

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Formulae:

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

The average variable overdraft interest rate in each year was 5%. The 8% bonds are redeemable in ten years time. A factor has offered to take over the administration of trade receivables on a non-recourse basis for an annual fee of 3% of credit sales. The factor will maintain a trade receivables collection period of 30 days and Gorwa Co will save $100,000 per year in administration costs and $350,000 per year in bad debts. A condition of the factoring agreement is that the factor would advance 80% of the face value of receivables at an annual interest rate of 7%. Required: Evaluate whether the proposal to factor trade receivables is financially acceptable. Assume an average cost of short-term finance in this part of the question only. $ 76,300

Savings in finance cost of trade receivables per year (see accasupport.com working 1) Savings in administration cost of sales ledger per year 100,000 Savings in bad debt expenses per year (non-recourse) 350,000 Total benefit of factoring per year 526,000 Factoring fee per year (see working 2) (1,122,000) Interest cost on cash received in advanced per year(see (49,184) working 3) Total cost of factoring per year (1,171,184) Net benefit/cost of factoring per year (644,884) Factoring is not worthwhile on financial grounds because cost of factoring exceeds benefits. In addition, non-financial aspects of factoring are also necessary to be considered such as impact on customers and reaction of shareholders. Shareholders may perceive factoring as lack of expertise of management in controlling trade receivables.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Factor has claimed that they will reduce credit period to 30 days. Therefore, we needed to determine new receivable balance for this new credit period.

Factoring is always expected to decrease in trade receivables. If factoring is expected to increase trade receivable period then factoring is obviously worthless.

As discussed earlier, receivable requires to be financed somehow. Therefore, it incurs finance cost, which is the interest payable on overdraft at 5%. That is why; any reduction in receivable balance under this new credit period is savings to the organization. Interest will be saved at 5% because organization will no longer be required to pay interest on amount saved.

Factor has demanded 3% of credit sales as factoring fee. It is possible to come across question in the exam in which factor would demand flat fee.
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

5% of interest rate already been charged by the bank, it has to be incurred regardless of factoring proposal is accepted or not. Therefore, 5% of interest rate is irrelevant for decision-making purpose. Rise in interest rate due to factoring is 2% only not 7% and this 2% is relevant for evaluating proposal for factoring. After factoring average receivable balance of $3,074,000 will be outstanding during the year. Factor will advanced 80% of receivables on which interest is charged at 2% per year. Average receivable balance means receivables balance during the year will rise and fall such as due to seasonal demand for goods or services. However, if we take the average of those balances, then it will be equal to $3,074,000.
accasupport.com

9 Invoice Discounting Exam Q.no Requirement Marks Discuss the ways in which factoring and invoice 06/08 Q3:b discounting can assist in the management of 6 accasupport.com accounts receivable. Invoice discounting is raising cash through pledging sales invoices. In other words, invoice discounting is raising short-term loan by providing sales invoices (Receivables as an asset) as security to the invoice discounter (lender).
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Invoices are used to raise cash at discount. It means cash received will be lower than the total value of invoices. Usually, up to 75% of the invoices value can be received in cash. Invoice discounter pays rest of the amount when customers settle their debts and charges a percentage of interest on cash advanced. To be benefit from invoice discounting, organization must have good quality invoice. It is because invoices represent the security to the invoice discounter.
accasupport.com Risk of bad debt rests with the organization. If the customer defaults, organization has to repay the amount advanced by the invoice discounter. accasupport.com

Invoice discounting is one off transaction. Each time, invoice is discounted represents separate transaction. Unlike factoring, invoice discounting does not takeover administration of sales ledger. Invoice discounting does not setup customers. Customers only become aware of the arrangement when they default. Invoice discounting can be used to raise short-term finance. It can be used by organization having cash flow problem. In practice, those who provide factoring services also provide invoicediscounting services. 10 Foreign Trade Receivables Exam Q.no Requirement Discuss how risks arising from granting credit 06/09 Q3:c to foreign customers can be managed and accasupport.com reduced.
accasupport.com

Marks 8

10.1 Problems Involved In Foreign Trade Foreign trade receivables are considered having higher risk of bad debts In foreign trade, customers are given credit for longer period than in domestic trades.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Selling organization may not be able to monitor foreign customers financial position as closely as domestic customers. In the event of default, customers have to be pursued according to their own countries legislation.
accasupport.com

Foreign trade receivables require higher levels of investment in working capital due to cash is invested for longer period before it is received to make another sale transaction. 10.2 Reducing Risks Involved In Foreign Trade 10.2.1 Advance Payment It is insisting foreign customers to pay cash in advance or on delivery. Exam Support: Do not hesitate to write simple and obvious points. Even these points can attract marks in the exams. In addition, there is no negative marking. Therefore, it is better to write down all the points you think as relevant rather than thinking whether to write a particular point or accasupport.com not. 10.2.2 Export Factoring Export factoring can be used to reduce risk of foreign trade. Export factoring is same as domestic factoring with the only different is that factor is situated overseas in customers country. 10.2.3 Bill of exchange Bills of exchange are used primarily in international trade. Bill of exchange is unconditional order by issuer to his/her bank to pay the bearer a specified sum on a specific date written at the face of document. It is not frequently used credit instrument. Unconditional order means it does not require any action by the bearer to cash the bill of exchange.
accasupport.com

Bill of exchange can be dishonoured if the issuer does not have sufficient cash balance to accept the bill of exchange.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

10.2.4 Letter of Credit (LC) Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. Letter of credit is demanded by supplier from a customer. Bank guarantees to a beneficiary (supplier) to pay specified sum of money on completion of sales in accordance with agreed term and conditions on behalf on his client (customer).
accasupport.com

Letter of credit is sent to the supplier, which he/she can use to receive payment and send goods to customer according to term and conditions written on letter of credit. Bill of laden can be used as evidence of transfer of goods to customer. Issuing letter of credit is costly and time-consuming process. However, it is safer way to carry out foreign transaction. Unlike bill of exchange, which can be dishonoured, letter of credit involves guarantee by the bank to pay on behalf of client (customer) even he/she get bankrupt. It is not ideal for urgent sales orders. 10.2.5 Credit Insurance Credit insurance is risk management product used to used cover the risk of default by foreign customers. It covers the risk of default due to bankruptcy, death, deliberate non-payment etc. The cost of insurance is called premium. It can be continuous long-term contract or one off transaction insure against specific customer. 10.2.6 Barter Trade Barter trade is receiving goods rather than cash in return for selling goods. Goods are exchanged (despatched) at the same time so it reduces the risk of bad debt. Barter trade does not involve goods in exchange of promise to supply goods.
accasupport.com

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

11 Calculating & Commenting Early Settlement Discounts Exam Q.no Requirement Calculate and comment on whether the proposed changes in receivables management will be acceptable. Assuming that only 25% of 12/10 Q3:c customers take the early settlement discount, accasupport.com what is the maximum early settlement discount that could be offered? Early settlement discount is different from trade discount. Early settlement discount is given to reduce finance cost of trade receivables and improve working capital cycle.

Marks

accasupport.com Early settlement discount is given as percentage of sales. It is given to those who pay early within specified period before usual credit period.

WQZ Co is considering making the following changes in the area of working capital management: Inventory management It has been suggested that the order size for Product KN5 should be determined using the economic order quantity model (EOQ). WQZ Co forecasts that demand for Product KN5 will be 160.000 units in the coming year and it has traditionally ordered 10% of annual demand per order. The ordering cost is expected to be $400 per order while the holding cost is expected to be $512 per unit per year. A buffer inventory of 5.000 units of Product KN5 will be maintained, whether orders are made by the traditional method or using the economic ordering quantity model. Receivables management WQZ Co could introduce an early settlement discount of 1% for customers who pay within 30 days and at the same time, through improved operational procedures, maintain a maximum average payment period of 60 days for credit customers who do not take the discount. It is expected that 25% of credit customers will take the discount if it were offered.
accasupport.com

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

It is expected that administration and operating cost savings of $753000 per year will be made after improving operational procedures and introducing the early settlement discount. It is expected that administration and operating cost savings of $753,000 per year will be made after improving operational procedures and introducing the early settlement discount. Credit sales of WQZ Co are currently $876 million per year and trade receivables are currently $18 million. Credit sales are not expected to change as a result of the changes in receivables management. The company has a cost of short-term finance of 55% per year. Required: Calculate and comment on whether the proposed changes in receivables management will be acceptable. Assuming that only 25% of customers take the early settlement discount, what is the maximum early settlement discount that could be offered?

Currently customers take 75 days to repay their debts.


accasupport.com

Introduction of early settlement discount will result in 25% of customers paying within 30 days. Therefore, it means those customers that take 60 day on average will be 75%.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

$12.6m of cash will remain invested in trade receivables and working capital during the year according to revised trade receivable days of 52.5 days.

Reduction in trade receivable turnover from 75 to 52.5 days will result in decrease in trade receivable level by $5.4m ($18m-$12.6m).

As discussed earlier, trade receivables incurs finance cost, decrease in accasupport.com trade receivable level will require less working capital resulting in savings in finance cost.

Cost of early settlement discount is finance cost for the organization rather than admin or selling and distribution expense, because it is given for reducing the cost of financing trade receivables.

$ Savings in finance cost of trade receivables per year 297,000 Savings in administration and operating cost per year 753,000 Finance cost of early settlement discount (219,000) Total benefit of early settlement discount per year 831,000
accasupport.com

Maximum Early Settlement Discount Maximum early settlement discount should be the rate at which savings from giving early settlement discount becomes zero. If 25% of credit sales will receive early settlement discount, which is

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Then, maximum early settlement discount that could be offered is

It is because sales revenue could be lowered by 1,050,000 or 4.8% at max after, which savings will be zero. Screen Tip: Open new window and arrange both windows horizontally or vertically to view question & solution without having to toggle between windows. To toggle between windows Press ALT+TAB.

12 Discounts from Suppliers Exam Q.no Requirement Marks Determine whether accepting the discount 06/08 Q3:d(ii) offered by the supplier will minimise the total 3 cost of inventory for the raw material. Calculate if ZPS Co will benefit financially by accasupport.com accepting the offer of: 06/11 Q4:(ii) 7 (1) the early settlement discount; (2) the bulk purchase discount. ZPS Co places monthly orders with a supplier for 10,000 components that are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which ZPS Co meets, and the cost per component is $750. The cost of ordering is $200 per order, while the cost of holding components in inventory is $100 per component per year. The supplier has offered either a discount of O5% for payment in full within 30 days, or a discount of 36% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

components in inventory would increase to $220 per component per year due to the need for a larger storage facility. Assume that there are 365 days in the year and that ZPS Co can borrow short-term at 45% per year. Required: Calculate if ZPS Co will benefit financially by accepting the offer of the early settlement discount.

Obtaining early settlement discount will result in savings of $4,500 per year. It is considered as finance income.

Reduction in trade payables will require the use of other source of finance to makeup the short fall in working capital.

Trade payable is usually used as free source of finance because suppliers generally do not charge interest for late payment. Short-term finance will now be used for refinancing working capital, which will give rise to financing (interest) cost.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

$ Savings from early settlement discount 4,500 Refinancing cost of working capital (6,657) Net benefit/ cost of early settlement discount (2,157) Increase in financing cost exceeds benefits/savings from early settlement discount. Organization will be better by not taking early settlement discount.
accasupport.com

13 Economic Order Quantity (EOQ) Model Exam Q.no Requirement Calculate the cost of the current ordering policy and determine the saving that could be 12/07 Q4:b made by using the economic order quantity accasupport.com model. Calculate the total cost of inventory for the 06/08 Q3:d(i) raw material when using the economic order quantity. Calculate the cost of the current ordering policy and the change in the costs of inventory 12/10 Q3:a management that will arise if the economic order quantity is used to determine the optimum order size for Product KN5.

Marks 7

14 Optimal or Economic Order Quantity (EOQ) Economic order quantity is the quantity (order size) at which combine cost of inventory ordering and holding is minimized. Diagram:

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Ordering cost

Total cost

accasupport.com

Holding cost

EOQ

Reorder quantity 14.1 Calculating Economic Order Quantity Formula (given in the formula sheet): Where Co = ordering cost per order CH = holding cost per unit (for the duration of demand) D = total demand of the period

PKA Co is a European company that sells goods solely within Europe. The recently-appointed financial manager of PKA Co has been investigating the working capital management of the company and has gathered the following information: Inventory management The current policy is to order 100,000 units when the inventory level falls to 35,000 units. Forecast demand to meet production requirements during the next year is 625.000 units. The cost of placing and processing an order is 250, while the cost of holding a unit in stores is 050 per unit per year. Both costs are expected to be constant during the next
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

year. Orders are received two weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year. Required: Calculate the cost of the current ordering policy and determine the saving that could be made by using the economic order quantity model. Total cost under current ordering policy:
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Ordering inventory in batches of 100,000 units will require 6.25 (625,000/100,000) orders to fulfil annual demand of 625,000 units. However, it is not possible to place 0.25 order in practice.

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It is assumed that always half of the inventory ordered will be held in warehouse, which is the average of inventory getting at lower and higher levels during the year. Each unit will require of holding cost per year.

Inventory usage per week is 12,500 (625,000/50) units. If supplier takes 2 weeks, then inventory should be ordered when 25,000 (12,500 x 2) units remaining in stock to prevent stock outs. However, supplier may
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

delay delivery or unexpected demand can arise during the lead-time. Therefore, organization has kept 10,000 (35,000-25,000) units as buffer (safety) stock for unexpected situation.

Buffer stock is held in the warehouse during whole year. Each unit of buffer of stock will incur holding cost. Therefore, 10,000 units of inventory has incurred

Total cost under EOQ model:

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)(

Orders in smaller quantity than under current ordering policy increased ordering cost by ( ) because of more frequent ordering from 6.25 orders to 25 (625,000/25,000) orders.

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

( ( )

Ordering as per EOQ resulted in decrease in holding cost of ( ). It is due to reduction in average inventory level.

15 Optimal Reorder Quantity with Bulk Purchase Discount Exam Q.no Requirement Marks Calculate if ZPS Co will benefit financially by accepting the offer of: accasupport.com 06/11 Q4:b(ii) 7 (1) the early settlement discount; (2) the bulk purchase discount. EOQ cannot be used when supplier offers bulk purchase discount for ordering above certain quantity. We must find out economical order size through trial and error. If, supplier offers different discount rate for different order size we have to calculate total cost of purchasing for each order size. Formula:
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ZPS Co places monthly orders with a supplier for 10,000 components that are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which ZPS Co meets, and the cost per component is $750. The cost of ordering is $200 per order, while the cost of holding components in inventory is $100 per component per year.
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

The supplier has offered a discount of 3.6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $220 per component per year due to the need for a larger storage facility. Assume that there are 365 days in the year and that ZPS Co can borrow short-term at 45% per year. Required: Calculate if ZPS Co will benefit financially by accepting the offer of the bulk purchase discount. Total purchase cost of current order size at 10,000 units :

Total purchase cost of revised order size at 30,000 units:

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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

Savings due to obtaining bulk purchase discount is $6,000 (907,600901,400) per year.

16 Just in Time (JIT) Exam Q.no Requirement Marks Briefly describe the benefits of a just-in-time 12/10 Q3:b 5 (JIT) procurement policy. accasupport.com Just in time is modern inventory management philosophy. It means inventory should only be produced or purchase when there is customer available for it. Ideally, inventory level is assumed $0. However, in practice, some butter stock is maintained to meet unexpected demand. 16.1 Benefits JIT reduces inventory-holding costs. However, it increases inventoryordering costs but these are not so high because of application of information technology. Inventory does not generate revenue until it is sold. Cash invested in inventory can be used to earn interest on short-term investments. JIT results in no or little inventory level. Inventory occupies floor area. Floor area is valuable asset of the organization, which can be used for producing other products. Inventory possesses a risk of theft and deterioration due to dust, water, fire, storm etc. Some kind of inventory is perishable in nature such as groceries and chemicals. Inventory may become obsolete or out of fashion as people tastes and behaviour changes over time. JIT saves cost of inventory obsolesces.
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Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS

16.2 Limitations JIT is not suitable for organizations operating in health and safety and rescue services sector. Cost of stock outs far more exceeds benefits in such sectors. Example: Stock out of life saving drug in a hospital can be disastrous. In this situation, cost of holding inventory is justified against the risk involved in stock outs. Organization may not be able to meet unexpected demand and suffer lost sales from both existing and potential customer. At worst, customer may turn to buy competitors product and may not return. Efficient operation of JIT depends on reliable suppliers, location and distance of organization premises from suppliers and infrastructure available for communication and delivery of goods.

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 5:

DETERMINING WORKING CAPITAL NEEDS & FUNDING STRATEGIES


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Cash Management Models 2 Funding Working Capital Requirement 3 Level of Investment in Working Capital 4 Symptoms of Overtrading Pg.no 89 89 89 89

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Cash Management Models 1.1 Miller-Orr Model 1.1.1 Benefits 1.1.2 Limitations 1.2 Baumol Model 1.2.1 Benefits 1.2.2 Limitations 2 Funding Working Capital Requirement 2.1 Non-Current Assets 2.2 Permanent Assets 2.3 Fluctuating Assets 2.4 Matching Policy 2.5 Aggressive Working Capital Policy 2.6 Conservative Working Capital Policy 3 Level of Investment in Working Capital 3.1 Length of Working Capital Cycle 3.2 Terms of Trade 3.3 Level of Risk Acceptable to Organization 3.4 Industry in Which Organization Operates 4 Overtrading & Undertrading 4.1 Symptoms of Overtrading 4.1.1 Working Capital to Sales Ratio 4.1.2 Increase in Trade Receivable Turnover
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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

4.1.3 Increase in Inventory Turnover 4.1.4 Increase in Trade Payable Turnover 4.1.5 Overdraft 4.1.6 Liquidity Ratios

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 6:

THE NATURE OF INVESTMENT DECISIONS & THE APPRAISAL PROCESS


Sub Exam Topics Headings (click the cross-ref below for easy navigation) S.no 1 Capital Investment Process 1 Capital Investment Process 1.1 Identifying Investment Opportunities 1.2 Screening Investment Proposals 1.3 Analysing & Evaluating Investment Proposals 1.4 Approving Investment Proposals 1.5 Implementing, Monitoring & Reviewing Investments Pg.no 91

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 7:

NON DISCOUNTED CASH FLOW TECHNIQUES


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Accounting Rate of Return (ARR) 2 Payback Period 1 Accounting Rate of Return (ARR) 1.1 Benefits & Limitations of ARR 2 Payback Period 2.1 Benefits & Limitations of Payback Period Pg.no 92 92

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 8:

DISCOUNTED CASH FLOW (DCF) TECHNIQUES


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Time Value of Money 2 Present Value (PV) 3 Discount Rate 4 Discounting 5 Annuity 6 Perpetuity 7 Conventional & Non-conventional Cash flows 8 Net Present Value (NPV) 9 Benefits & Limitations of Net Present Value (NPV) 10 Internal Rate of Return (IRR) 11 Benefits & Limitations of Internal Rate of Return (IRR) 12 IRR & Non-Conventional Cash flows 13 Discounted Payback Period 14 Commenting on Investment Proposals 15 Free Cash Flows Pg.no 94 94 94 94 94 94 94 94 94 95 95 95 95 95 95

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Time Value of Money 1.1 Inflation or Deflation 1.2 Postponing Consumption 1.3 Risk 2 Present Value (PV) 3 Discount Rate 3.1 Inflation Rate 3.2 Interest Rate 3.3 Weighted Average Cost of Capital (WACC) 4 Discounting 4.1 Calculating Discount Factor 5 Annuity 5.1 Calculating Annuity Factor 6 Perpetuity

7 Conventional & Non-conventional Cash flows 8 Net Present Value (NPV) 8.1 Performa for Calculating NPV 9 Benefits & Limitations of Net Present Value (NPV) 9.1 Benefits 9.2 Limitations
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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

10 Internal Rate of Return (IRR) 11 Benefits & Limitations of Internal Rate of Return (IRR) 11.1 Benefits 11.2 Limitations 12 IRR & Non-Conventional Cash flows 13 Discounted Payback Period 14 Commenting on Investment Proposals 15 Free Cash Flows

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 9:

ALLOWING FOR INFLATION & TAXATION IN DCF


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Discounting & Timing Of Cash Flows 2 Capital & Revenue Cash Flows 3 Nominal & Real Cash flows 4 Nominal & Real Discount Rate 5 Cash flows & Discount Rate Pg.no 97 97 97 97 97

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Discounting & Timing Of Cash Flows 2 Capital & Revenue Cash Flows 2.1 Capital Cash Flows 2.2 Initial Investment 2.3 Residual Value 2.4 Tax Savings on Capital Allowance 2.5 With No Delay in Tax Payment 2.6 With Delay in Tax Payment 2.7 Revenue Cash Flows 2.7.1 Sales Revenue 2.7.2 Variable Cost 2.7.3 Project Specific Fixed Cost 2.7.4 Tax Payments 2.7.5 Working Capital Investment 2.8 Financial Cash Flows 3 Nominal & Real Cash flows 4 Nominal & Real Discount Rate 5 Cash flows & Discount Rate

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 10:

ADJUSTING FOR RISK & UNCERTAINTY IN INVESTMENT APPRAISAL


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Adjusting Risk for Investment Appraisal 2 Risk & Uncertainty 3 Sensitivity Analysis 4 Probability Analysis Pg.no 98 98 98 98

1 Adjusting Risk for Investment Appraisal 2 Risk & Uncertainty 2.1 Risk 2.2 Uncertainty 3 Sensitivity Analysis 3.1 Benefits 3.2 Limitations 4 Probability Analysis 4.1 Expected Values 4.2 Benefits of Expected Values 4.3 Limitations of Expected Values 4.4 Combine Probability 4.5 Probability of Negative & Positive Outcome 4.6 Probability of Specific Condition
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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 11:

SPECIFIC INVESTMENT DECISIONS


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Lease 2 Types of Lease 3 Buying 4 Lease or Buy 5 Approaches Investment Appraisal 6 Asset Replacement Decisions 7 Capital Rationing 8 Investment Decisions & Capital Rationing 9 Relaxing Capital Rationing Pg.no 100 100 100 100 100 101 101 101 102

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Lease 1.1 Timing of Lease Rental Payments 1.2 Lessor & Lessee 1.3 Benefits of Lease 1.4 Limitations of Lease 2 Types of Lease 2.1 Finance Lease 2.1.1 Benefits & Limitations of Finance Lease 2.1.2 Benefits for Lessee 2.1.3 Limitations for Lessee 2.2 Treatment of Financial Lease 2.3 Operating Lease 2.4 Benefits & Limitations of Operating Lease 2.4.1 Benefits for Lessee 2.4.2 Limitations for Lessee 2.5 Treatment of Operating Lease 3 Buying Formula: 3.1 Benefits 3.2 Limitations 4 Lease or Buy 5 Approaches Investment Appraisal

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

6 Asset Replacement Decisions 6.1 Financial Factors to Consider 6.1.1 Efficiency & Economy 6.1.2 Resale Value 6.1.3 Tax Savings 6.2 Non-Financial Factors to Consider 6.2.1 Competitive Advantage 6.2.2 Compatibility 6.3 Equivalent Annual Cost (EAC) 6.4 Benefits 6.5 Limitations 6.6 Equivalent Annual Benefit (EAB) 7 Capital Rationing 7.1 Hard Capital Rationing 7.2 Soft Capital Rationing 8 Investment Decisions & Capital Rationing 8.1 Single Period Capital Rationing 8.1.1 Divisible Projects 8.1.1.1 Non-Postponing Projects Required: 8.1.1.2 Limitations of Profitability Index 8.1.1.3 Postponing Projects

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

8.1.2 Non Divisible Projects (Non-Postponing Projects) 8.1.3 Mutually Exclusive Projects (Non-Postponing Projects) 9 Relaxing Capital Rationing 9.1 Outsourcing 9.2 Joint Venture 9.3 Franchise 9.4 Working Capital Management 9.5 Government Grant 9.6 Leasing

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 12:

SHORT & LONG TERM FINANCE


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Short Term Sources of Finance 2 Long Term Sources of Finance 3 Role of Intermediaries 4 Sources of Finance & Investment Appraisal Pg.no 104 104 105 105

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Short Term Sources of Finance 1.1 Account Payables 1.2 Overdrafts 1.3 Short Term Loan 1.4 Operating Lease 2 Long Term Sources of Finance 2.1 Finance Lease 2.2 Retained Earnings 2.3 Equity Finance 2.3.1 Benefits 2.3.2 Limitations 2.4 Ways of Raising Equity Finance 2.4.1 Initial Public Offer (IPO) 2.4.2 Placing 2.4.3 Floatation 2.4.4 Right Issue 2.4.4.1 Pre-Emption Right 2.4.5 Benefits 2.4.6 Limitations 2.4.7 Summary 2.5 Preference Share Capital 2.5.1 Cumulative & Non-Cumulative Preference Shares 2.5.2 Convertible & Non-Convertible Preference Shares 2.5.3 Benefits 2.5.4 Limitations
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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

2.6 Debt Finance 2.6.1 Benefits 2.6.2 Limitation 2.7 Ways of Raising Of Debt Finance 2.7.1 Loan Notes (Bonds or Debenture) 2.7.1.1 Par Value 2.7.1.2 Issue or Redemption at Discount 2.7.1.3 Issue or Redemption at Premium 2.8 Types of Loan Notes 2.8.1 Redeemable Loan Notes 2.8.2 Irredeemable Loan Notes 2.8.3 Convertible Loan Notes 2.8.4 Deep Discount Bonds 2.8.5 Zero Coupon Bond 2.8.6 Summary 2.9 Long Term Bank Loans 2.10 Sale & Lease Back 2.10.1 2.10.2 Benefits Limitations

3 Role of Intermediaries 4 Sources of Finance & Investment Appraisal 4.1 Risk 4.2 Duration 4.3 Volatility
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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

4.4 Trend

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topics 13:

INTERNAL SOURCES OF FINANCE & DIVIDEND POLICY


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Dividend Policy 2 Factors Affecting level of Dividend 3 Script Dividend 4 Ex-dividend or Cum-divided Share Price Pg.no 108 108 108 108

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Dividend Policy 1.1 Miller & Modigliani Theory 1.2 Traditional View 1.3 Tax 1.4 Transaction Cost 1.5 Preference for Dividends 1.6 Clientele Effect 1.7 Signalling Effect 1.8 Financing 2 Factors Affecting level of Dividend 2.1 Liquidity 2.2 Consistency 2.3 Financing Needs 2.4 Legal Restrictions 2.5 Gearing 2.6 Signalling Effect 3 Script Dividend 3.1 Benefits 3.2 Limitations 4 Ex-dividend or Cum-divided Share Price

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 14:

GEARING & CAPITAL STRUCTURE CONSIDERATIONS


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Evaluating Sources of Finance 2 Theoretical Ex-Right Share Price 3 Calculating Theoretical Ex-Right Share Price 4 Impact of Right Issue on Shareholders Wealth Pg.no 110 110 110 110

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Evaluating Sources of Finance 2 Theoretical Ex-Right Share Price 3 Calculating Theoretical Ex-Right Share Price 4 Impact of Right Issue on Shareholders Wealth 4.1 Subscribe 4.2 Renounce 4.3 Lapse

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 15:

FINANCE FOR SMALL & MEDIUM SIZED ENTITIES (SMEs)


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 SMEs (Small & Medium Sized Entities) 2 Sources of Finance for SMEs 3 Islamic Finance 4 Islamic Financial Instruments Pg.no 112 112 112 112

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 SMEs (Small & Medium Sized Entities) 2 Sources of Finance for SMEs 2.1 Business Angels 2.2 Venture Capitalist (Joint Venture) 2.3 Leasing 2.4 Borrowing From Family & Friends 2.5 Government Aid 2.6 Bank Loan 3 Islamic Finance 3.1 Riba 3.1.1 Limitations of Riba 3.2 Dain 4 Islamic Financial Instruments 4.1 Murabaha (Trade credit) 4.2 Musharakah (Venture Capital) 4.3 Mudarabah 4.4 Ijarah (Operating Lease) 4.5 Ijarah Thumma Al Bai (Hire Purchase) 4.6 Ijarah-Wal-Iqtina (Finance Lease) 4.7 Musharakah (Joint Venture) 4.8 Sukuk (Debt Finance)

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 16:

ESTIMATING COST OF CAPITAL


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Weighted Average Cost of Capital (WACC) 2 Calculating Market Value of Equity & Debt 3 Cost of Equity 4 Systematic Risk & Non Systematic Risk 5 Capital Asset Pricing Model (CAPM) 6 Gearing & Ungearing Betas 7 Benefits & Limitations of CAPM 8 Calculating Cost of Debt 9 Calculating Weighted Average Cost of Capital Pg.no 114 114 114 114 114 115 115 115 115

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Weighted Average Cost of Capital (WACC) 2 Calculating Market Value of Equity & Debt 2.1 Benefits & Limitations of WACC 2.1.1 Benefits 2.1.2 Limitations 3 Cost of Equity 3.1 Dividend Growth Model (DGM) 3.2 Calculating Growth Rate 3.2.1 Average Growth Rate 3.2.1.1 Limitations 3.2.2 Gordons Growth Rate 3.2.2.1 Limitations 3.3 Benefits & Limitations of DGM 3.3.1 Benefits 3.3.2 Limitations 3.4 Assumptions (also limitations) 4 Systematic Risk & Non Systematic Risk 4.1 Systematic Risk 4.2 Non Systematic Risk 5 Capital Asset Pricing Model (CAPM) 5.1 Risk Free Rate of Return 5.2 Market Rate of Return 5.3 Equity Risk Premium ( )

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

5.4 Equity Beta

6 Gearing & Ungearing Betas 7 Benefits & Limitations of CAPM 7.1 Benefits 7.2 Limitations 8 Calculating Cost of Debt 9 Calculating Weighted Average Cost of Capital

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 17:

RELATIONSHIP B/W COST OF CAPITAL, CAPITAL STRUCTURE & INVESTMENTS


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Financial Risk & Business Risk 2 WACC & Investment Appraisal 3 CAPM & Investment Appraisal 4 WACC & Capital Structure 5 Pecking Order Theory 6 Impact of Sources of Finance on Key Ratios Pg.no 117 117 117 117 117 117

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Financial Risk & Business Risk 1.1 Financial Risk 1.2 Business Risk 2 WACC & Investment Appraisal 3 CAPM & Investment Appraisal 3.1 Conclusion 4 WACC & Capital Structure 4.1 Traditional View 4.1.1 Assumptions 4.2 Miller & Modigliani (M&M) Theory 4.2.1 Assumptions 4.3 Market Imperfection Theory 4.4 Conclusion 5 Pecking Order Theory 5.1 Retained Earnings 5.2 Debt 5.3 Convertible Debt 5.4 Preference Shares 5.5 Equity 6 Impact of Sources of Finance on Key Ratios 6.1 Profitability Ratios 6.1.1 Return of Investment (ROI)
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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

6.1.2 Return of Equity (ROE) 6.2 Liquidity Ratios 6.3 Current Asset Ratio 6.4 Quick Asset Ratio 6.5 Gearing Ratios 6.5.1 Interest Cover 6.5.2 Debt to Equity Ratio 6.5.3 Debt to Debt Plus Equity Ratio 6.6 Investor Ratios 6.6.1 Dividend Cover 6.6.2 Dividend Yield 6.6.3 Earnings Yield 6.6.4 Earnings Per Share 6.6.5 Price Earnings Ratio 6.6.6 Capital Gain 6.6.7 Wealth Generated

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 18:

BUSINESS VALUATION TECHNIQUES


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Business Valuation 2 Net Assets Valuation Model 3 Price Earnings (P/E) Ratio Method 4 Earnings Yield Valuation Method 5 Dividend Valuation Model (DVM) 6 Valuation of Debt & other Financial Assets 7 Evaluating Financial Performance 8 Preparing Forecast Financial Statements Pg.no 120 120 120 120 120 120 121 121

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Business Valuation 2 Net Assets Valuation Model 2.1 Assets Excluded 2.1.1 Goodwill 2.1.2 Development Expenditure 2.1.3 Contingent Assets 2.2 Assets & Liabilities Included 2.2.1 Brand, Copyright & Patents 2.2.2 Tangible Assets 2.2.3 Contingent Liabilities 2.3 Benefits & Limitations 2.3.1 Benefits 2.3.2 Limitations 3 Price Earnings (P/E) Ratio Method 3.1 Benefits 3.2 Limitations 4 Earnings Yield Valuation Method 5 Dividend Valuation Model (DVM) 5.1 Benefits & Limitations of DVM 5.1.1 Benefits 5.1.2 Limitations 6 Valuation of Debt & other Financial Assets 6.1 Redemption Value
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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

6.2 Redemption Yield 6.3 Floor Value 6.4 Conversion Premium 7 Evaluating Financial Performance 8 Preparing Forecast Financial Statements

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 19:

EFFICIENT MARKET HYPOTHESIS


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Features of Efficient Markets 2 Benefits of Efficient Markets 3 Efficient Market Hypothesis 1 Features of Efficient Markets 2 Benefits of Efficient Markets 3 Efficient Market Hypothesis 3.1 Weak Form Efficient 3.1.1 Published Financial Statements 3.1.2 Past Dividend Payments 3.1.3 Past Reputation 3.2 Semi Strong Form Efficient 3.3 Strong Form Efficient Pg.no 122 122 122

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 20:

BASICS OF FINANCIAL RISK MANAGEMENT


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Direct Vs Indirect Quote 2 Buying & Selling Rate 3 Agreement & Settlement Date 4 Foreign Exchange Risk 5 Types of Foreign Exchange Risk 6 Managing Foreign Exchange Risk 7 Netting 8 Lead & Lag Payment Pg.no 124 124 124 124 124 124 124 124

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Direct Vs Indirect Quote 1.1 Direct Quote 1.2 Indirect Quote 2 Buying & Selling Rate 2.1 Direct Quote 2.2 Indirect Quote 3 Agreement & Settlement Date 3.1 Agreement Date 3.2 Settlement Date 4 Foreign Exchange Risk 5 Types of Foreign Exchange Risk 5.1 Transaction Risk 5.2 Translation Risk 5.3 Economic Risk 6 Managing Foreign Exchange Risk 6.1 Hedging 6.1.1 Settlement on Net Basis 6.2 Invoicing in Home Currency 6.3 Matching 7 Netting 8 Lead & Lag Payment
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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 21:

HEDGING TECHNIQUES FOR FOREIGN CURRENCY RISK


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Step by Step Solution 2 Spot & Forward rate 3 Inflation Rate Parity Theory 4 Interest Rate Parity Theory 5 Forward Contract Hedge 6 Future Contract Hedge 7 Money Market Hedge 8 Currency Option 9 Currency Swap 10 Derivative Pg.no 126 126 126 126 126 126 127 127 127 127

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Step by Step Solution

2 Spot & Forward rate 2.1 Spot Rate 2.2 Forward Rate 3 Inflation Rate Parity Theory 4 Interest Rate Parity Theory 5 Forward Contract Hedge 5.1 Receipt 5.1.1 Scenario 1 (Gain on Forward Contract) 5.1.2 Scenario 2 (Loss on Forward Contract) 5.2 Payment 5.2.1 Scenario 3 (Loss on Forward Contract) 5.2.2 Scenario 4 (Gain on Forward Contract) 5.3 Benefits 5.4 Limitations 6 Future Contract Hedge 6.1 Future Market 6.2 Contract Price 6.3 Contract Size 6.4 Basis Risk 6.5 Tick 6.6 Agreement Date
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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

6.7 Settlement Date 6.8 Benefits 6.9 Limitations 7 Money Market Hedge 7.1 Step By Step Process 7.1.1 Money Market Hedge for Receipt 7.1.2 Money Market Hedge for Payment 7.2 Benefits 7.3 Limitations 8 Currency Option 8.1 Benefits 8.2 Limitations 9 Currency Swap 10 Derivative

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Exam Topic 22:

HEDGING TECHNIQUES FOR INTEREST RATE RISK


Sub Exam Topics S.no Headings (click the cross-ref below for easy navigation) 1 Interest Rate Risk 2 Types of Interest Rate Risk 3 Managing Interest Rate Risk 4 Forward Rate Agreements (FRAs) 5 Future Contracts 6 Interest Rate Option 7 Interest Rate Swap 8 Effects of Interest Rate on Performance 9 Factor Affecting Interest Rates 10 Yield Curve 11 Macroeconomic Factors Affecting Interest Rates Pg.no 129 129 129 129 129 129 129 129 130 130 130

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Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Interest Rate Risk 2 Types of Interest Rate Risk 2.1 Variable Interest Rate Risk 2.2 Basis Risk 2.3 Negative Gap 2.4 Positive Gap 2.5 Fixed Interest Rate Risk 3 Managing Interest Rate Risk 3.1 Matching 3.2 Smoothing 3.3 Hedging 4 Forward Rate Agreements (FRAs) 5 Future Contracts 6 Interest Rate Option 6.1 Cap 6.2 Floor 6.3 Collar 7 Interest Rate Swap 7.1 Switching Between Types of Interest Rate 7.2 Borrow Loan at More Competitive Terms 8 Effects of Interest Rate on Performance
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Ecommerce/Ebusiness/Make Money Online Tutorial, Implementation Guide, Training, Ebook Free Download & Buy. Ecommerce/Ebusiness/Make Money Online Implementation Guide Ebook is cheap & best tutorial & training to buy. ACCA study materials, Class, Lectures, Course, Notes for distance learning ACCA F9 Financial Management Study Text Ebook for Dec 2012 Exam | Page 135 of 138
Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

9 Factor Affecting Interest Rates 9.1 Risk 9.2 Level of Gearing 9.3 Spread on Interest Rate 9.4 Size of Loan 9.5 Flexibility & Marketability 9.6 Liquidity Preference Theory 9.7 Expectation Theory 9.8 Market Segmentation Theory 9.9 Government Policy 10 Yield Curve 11 Macroeconomic Factors Affecting Interest Rates 11.1 Inflation 11.2 Real Return 11.3 Volatile or Stable Economic Conditions 11.4 Monetary Policy 11.5 Foreign Interest Rates 11.6 Balance Of Payments

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Ecommerce/Ebusiness/Make Money Online Tutorial, Implementation Guide, Training, Ebook Free Download & Buy. Ecommerce/Ebusiness/Make Money Online Implementation Guide Ebook is cheap & best tutorial & training to buy. ACCA study materials, Class, Lectures, Course, Notes for distance learning ACCA F9 Financial Management Study Text Ebook for Dec 2012 Exam | Page 136 of 138
Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

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