Escolar Documentos
Profissional Documentos
Cultura Documentos
------------------------------------------------------------------------------------------------------------
ACCA
F9
Financial Management
Key Point
Notes
June 2011
These notes are not intended to cover the whole syllabus, but target key examinable areas.
________________________________________________________________________
Sunilto
Copyright Bhandari – IAT
Intelligent Ltd
Accountancy Tutors Ltd
1
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
2
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Index
________________________________________________________________________
Sunil Bhandari – IAT Ltd
3
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
4
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
5
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
6
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
7
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
8
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Exam Technique
First 15 minutes
Read the questions carefully
________________________________________________________________________
Sunil Bhandari – IAT Ltd
9
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
General
Numerical Questions
State formula
Show method
Explain as you go
Written Questions
Check format – report / essay/ listed points
________________________________________________________________________
Sunil Bhandari – IAT Ltd
10
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Tips
These will be available via my website. Please download
from there.
________________________________________________________________________
Sunil Bhandari – IAT Ltd
11
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
12
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter One
Financial Objectives
1 Primary Financial Objective
Compute Using:-
1.4 Check the question very carefully for the size of the
company is it:-
Listed
Private Company
________________________________________________________________________
Sunil Bhandari – IAT Ltd
13
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
2 Indicators
Market Share
Customer Satisfaction
Quality Measures
________________________________________________________________________
Sunil Bhandari – IAT Ltd
15
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Directors pay
Taking high risk business decisions
Non-payment of dividends
Using debt finance (against the wishes of the
S/H)
Company Law
Corporate Governance (eg UK Combined Code)
Share Options (ESOPS)
3.3.4 ESOPS
________________________________________________________________________
Sunil Bhandari – IAT Ltd
16
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Investment
Finance
Dividend
4.2 Investment
Company Liquidity
Future Profits and Asset values
Business Risk Profile i.e. effect upon
variability of the cash flows and profits.
4.3 Finance
________________________________________________________________________
Sunil Bhandari – IAT Ltd
17
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
4.4 Dividends
________________________________________________________________________
Sunil Bhandari – IAT Ltd
18
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Efficiency - cost/pupil
- Number of pupils/teacher
________________________________________________________________________
Sunil Bhandari – IAT Ltd
19
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
20
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Two
Dividend Policy
1 Introduction
2 Theories
2.1 Residual – If spare cash exists at the end of the year pay
dividend.
Po= Do (1+g)
(re-g)
________________________________________________________________________
Sunil Bhandari – IAT Ltd
21
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
2.3 Irrelevancy
3 Practical Considerations
Availability of Cash
What dividends to S/H want (clientele effect)?
Signalling effect –payment of dividends indicates a
healthy company
Retaining cash is a key source of Finance.
Dividend growth should be greater than inflation
Tax impact upon S/H
Effect the dividend will have on dividend
cover(EPS/DPS)
Number of investment opportunities will restrict
dividend payments.
Risk-paying now is safer than promising to pay next
year
Is the dividend within the company law regulations?
4.1.2 This will allow the S/H to sell extra shares for cash and
the gain will be subject to CGT.
________________________________________________________________________
Sunil Bhandari – IAT Ltd
22
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
4.2.1 If the board has “one off” period of excess cash, they
could consider a share buy back.
4.2.2 Considerations:-
________________________________________________________________________
Sunil Bhandari – IAT Ltd
23
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
24
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Three
Cost of Capital
Ke=Cost of Equity
Kd=Should be “Kd(1-t)”=Cost of Debt
Ve=Market Value of Equity
Vd=Market Value of Debt
2 Market Values
________________________________________________________________________
Sunil Bhandari – IAT Ltd
25
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
3.2 CAPM
Ke=Rf+ (Rm-Rf)βe
3.3 DVM
Also note:-
________________________________________________________________________
Sunil Bhandari – IAT Ltd
26
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
b) Exam Tricks :
i. If there is no taxation
Kd (1-t) = Ints
PO
Time $
To Po (X) Take two guesses at
the Kd(1-t) like
T1-Tn Ints x (1-t) X 10% & 1% and
Perform IRR computation
Tn Capital Repayment* X
________________________________________________________________________
Sunil Bhandari – IAT Ltd
27
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
5.3 In all the past F9 exam questions, it has been very clear
within the question details that the conditions exist to
use the WACC. If the WACC can’t be used then the Risk
Adjusted Cost of Equity per Chapter 5 may be used.
6 What if’s?
Equity
Preference Capital
Bank loans
Traded Bonds
________________________________________________________________________
Sunil Bhandari – IAT Ltd
28
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
> Kp=D.P.S
Po
________________________________________________________________________
Sunil Bhandari – IAT Ltd
29
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
30
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Four
1 Bonds
2 Market Value
Po = Ints
Yield
Time $ Yield% PV
Ti-Tn Ints X X X
Tn Capital X X X
Repayment*
Po = XX
________________________________________________________________________
Sunil Bhandari – IAT Ltd
31
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Yield = Ints
Po
Time $
________________________________________________________________________
Sunil Bhandari – IAT Ltd
32
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Five
1 Uses
2 Process
________________________________________________________________________
Sunil Bhandari – IAT Ltd
33
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
3 Concerns
a) Does it exist?
b) Does the proxy company specialise in the non-
core field or does it have many different business
activities
c) If we are not listed-how do we gear up the βa
________________________________________________________________________
Sunil Bhandari – IAT Ltd
34
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
4 Examiners Article
________________________________________________________________________
Sunil Bhandari – IAT Ltd
35
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
36
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Six
CAPM
1 CAPM Equation
Take/Find βe
Put into CAPM
Minimum Return = Rf+(Rm-Rf)βe
Forecast a return for the investment (could use
past returns)
Forecast exceeds/equals
minimum return-Buy or Keep the share
________________________________________________________________________
Sunil Bhandari – IAT Ltd
37
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
c) Forecast exceeds/equals
minimum return-Buy or keep the portfolio.
3 Meaning of a βe
Macroeconomic variables
Political factors
TOTAL RISK
Total
Risk
Unsystematic
Risk
…………………………………………………………………………….
Systematic
Risk
________________________________________________________________________
Sunil Bhandari – IAT Ltd
39
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
4 Criticisms of CAPM
________________________________________________________________________
Sunil Bhandari – IAT Ltd
40
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
5 Examiners Articles
________________________________________________________________________
Sunil Bhandari – IAT Ltd
41
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
42
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
43
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
44
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
45
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
46
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Seven
Capital Structure
1 Introduction
2 Practical Issues
Debt/Equity+Debt OR Debt/Equity
________________________________________________________________________
Sunil Bhandari – IAT Ltd
47
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
a) Yield<Ke
b) Gearing causes Ke to rise
% Ke
Cost
Of
capital
WACC
Kd
0 X Gearing
Key Points:-
________________________________________________________________________
Sunil Bhandari – IAT Ltd
48
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
% Ke
Cost of
Capital
WACC
Kd
0 Gearing
Key points:-
________________________________________________________________________
Sunil Bhandari – IAT Ltd
49
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Internally-generated funds
Debt
New issue of equity
Debt
________________________________________________________________________
Sunil Bhandari – IAT Ltd
50
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Eight
Project Appraisal
a) Initial Investment
b) (Initial Investment +Scrap Value)
2
1.3 Decision rule is:-
Limitations
________________________________________________________________________
Sunil Bhandari – IAT Ltd
51
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Strengths
2 Payback
________________________________________________________________________
Sunil Bhandari – IAT Ltd
52
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Year 0 1 2 3 4 5
$000 $000 $000 $000 $000 $000
Receipts X X X X
Payments:
Wages (X) (X) (X) (X)
Materials (X) (X) (X) (X)
Variables/Fixed Overheads (X) (X) (X) (X)
Administration/Distribution (X) (X) (X) (X)
Expenses
Taxable Operating Cash X X X X
Flows
Tax: Corporation Tax on (X) (X) (X) (X)
operating cash flows
X X X X
Initial Outlay (X)
Net Realisable Value X
Tax saved on TAD X X X X X
Working Capital (X) (X) (X) (X) X
Net Cash Flows (X) (X) X X X (X)
Discount Rate (e.g. 12%) 1 X X X X X
Present Value (X) X X X X (X)
________________________________________________________________________
Sunil Bhandari – IAT Ltd
53
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Format B
1) Compounding
Eg: Inflation is 5% pa
Real cash flow at time 7 is $250
Money cash flow =$250 x 1.057= $352
2) Discounting (tables)
3) Annuity (tables)
________________________________________________________________________
Sunil Bhandari – IAT Ltd
54
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
4) Delayed Annuity
5) Perpetuity
6) Delayed Perpetuity
________________________________________________________________________
Sunil Bhandari – IAT Ltd
55
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
1 x DF4 at 12%
(r-g)
1 x 0.636
(0.12-0.03)
= 7.067
________________________________________________________________________
Sunil Bhandari – IAT Ltd
56
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Exclude Inflation
i. Invest at To
ii. Adjust each year
iii. Close at end of the project.
T0 T1 T2 T3
- 300 350 375
Relevant (300) (50) (25) 375
CF’s
a) TAD-straight line.
eg: CAPEX is $1m.Scrap value at T4=$200K.TAD
is 4 years and tax rate is 30% (No delay)
________________________________________________________________________
Sunil Bhandari – IAT Ltd
57
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
b) TAD-Reducing Balance
eg: Asset is bought at T0 (1/1/10)cost
$1m.Sold at T4 for $200k.TAD is 25% reducing
balance. Tax is 30% (1 year delay).
________________________________________________________________________
Sunil Bhandari – IAT Ltd
58
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
59
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
5 Capital Rationing
5.2 Causes:
Hard Soft
Approach:-
3) Rank-High to Low PI
________________________________________________________________________
Sunil Bhandari – IAT Ltd
60
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Approach:-
6 Asset Replacement
6.2 Process
b) E.A.NPV = NPV
________________________________________________________________________
Sunil Bhandari – IAT Ltd
61
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
62
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
As a decision tree:-
P P
15,000 0.3 x 0.6 = 0.18
0.3
10,000 5,000 0.3 x 0.4 = 0.12
________________________________________________________________________
Sunil Bhandari – IAT Ltd
63
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Format
________________________________________________________________________
Sunil Bhandari – IAT Ltd
64
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
65
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
66
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Nine
Business Valuations
1 Equity
1.2 DGM/DVM
Po= Do (1+g)
(re-g)
2 Others
PO = D
rp
________________________________________________________________________
Sunil Bhandari – IAT Ltd
67
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
PO per $100:-
Time $ rd PV
T1-Tn Ints X X X
Tn Capital Repayment * X X X
PO X
________________________________________________________________________
Sunil Bhandari – IAT Ltd
68
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Weak
Semi-Strong
Strong
________________________________________________________________________
Sunil Bhandari – IAT Ltd
69
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
70
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Ten
Sources of Finance
1 Introduction
2.2 Carry the greatest risk but also the best possible
returns.
To existing shareholders:
________________________________________________________________________
Sunil Bhandari – IAT Ltd
71
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
To the company
Disadvantages of a listing
b) Issue Price
________________________________________________________________________
Sunil Bhandari – IAT Ltd
72
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
No £
3 at 600p 18.00
1 at 550p 5.50
4 £ 23.50
________________________________________________________________________
Sunil Bhandari – IAT Ltd
73
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
4 DEBT
b) Security via
• Fixed charged
• Floating charge
• Securitisation of future income.
________________________________________________________________________
Sunil Bhandari – IAT Ltd
74
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
c) Mezzanine Loan
a) Convertible Bonds
b) Loan plus a warrant –right to buy a share
in the future at a fixed price.
________________________________________________________________________
Sunil Bhandari – IAT Ltd
75
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
5 Leases
Terminology
a) Operating lease
b) Finance Lease
________________________________________________________________________
Sunil Bhandari – IAT Ltd
76
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
3 Step approach
________________________________________________________________________
Sunil Bhandari – IAT Ltd
77
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
78
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Eleven
Ratios
1.1 Investor
P/E = Po
EPS
________________________________________________________________________
Sunil Bhandari – IAT Ltd
79
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
1.2 Gearing
1.3 Profitability
1.4 Liquidity
________________________________________________________________________
Sunil Bhandari – IAT Ltd
80
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
2 Important
Solution
CA=1.25($260K)
CL=1.00(?)
CL=$260K=$208K
$1.25
Bank O/D=$208K-$108K
=$100K
________________________________________________________________________
Sunil Bhandari – IAT Ltd
81
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
82
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Twelve
Working Capital Management &
Financing
1 General
liquidity
profitability
________________________________________________________________________
Sunil Bhandari – IAT Ltd
83
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Trade payables
Bank Overdraft
$’000
Solution
________________________________________________________________________
Sunil Bhandari – IAT Ltd
84
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Thirteen
Inventory Control
1
INVENTORY MANAGEMENT
________________________________________________________________________
Sunil Bhandari – IAT Ltd
85
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
EOQ
Fixed order
3) Finally, calculate
costs the total annual
cost using the EOQ
calculated in 2)
EOQ Q AND the total
annual cost
ordering in
quantities higher
than the EOQ but
where greater
discounts are
available.
________________________________________________________________________
Sunil Bhandari – IAT Ltd
86
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Demand Driven
(1) No Finished (3)
Goods inventory
Close Link
with suppliers
JIT
(7)
(Factors)
No or Ltd JIT
Raw material Production (4)
Inventory(6) NO WIP(5)
________________________________________________________________________
Sunil Bhandari – IAT Ltd
87
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
88
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Fourteen
Receivables and Payables
1 Receivables
Invoice promptly
State terms on the invoice
Send out monthly statements
Call customers to chase payment
Consider legal proceedings as a last resort.
Solution
365 = 24.33
(45-30)
(1+0.01)24.33-1 x 100
=27.4%
________________________________________________________________________
Sunil Bhandari – IAT Ltd
90
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Annual
$’000
Bad debts saved xxx
Admin costs saved xxx
Discount given (xxx)
$’000
Finance cost of xxx
Original receivables
Finance cost of
New receivables xxx xxx /(xxx)
NET SAVINGS xxx
2 Payables
________________________________________________________________________
Sunil Bhandari – IAT Ltd
91
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
92
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Fifteen
Cash Management
1 GENERAL
Surpluses Deficits
Consider: -
• Amount Uses: -
• Time 1. Extend trade
• Access payables
• Return finance.
• Risk
2. Bank facils.
Investments
• Deposits 3. Factoring
• Building society companies.
a/c’s
• Inter bank
market
• Gilts
• AIM
• London SE
• Futures
________________________________________________________________________
Sunil Bhandari – IAT Ltd
93
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Receipts
Cash sales
Sale of assets
Payments
Cash purchases
Payments to creditors
Expenses
Purchase of assets
Tax
Dividends
Interest
Balance b/f
Balance c/f
________________________________________________________________________
Sunil Bhandari – IAT Ltd
94
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Exam Technique
Balancing figure
Cash Flow Statement
________________________________________________________________________
Sunil Bhandari – IAT Ltd
95
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
$’000
Operating Profit xxx
Add: Depreciation xxx
________________________________________________________________________
Sunil Bhandari – IAT Ltd
96
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
4 CASH MODELS
Max Bal
Spread
Min Bal
Time
________________________________________________________________________
Sunil Bhandari – IAT Ltd
97
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Max Bal
SPREAD
Return
Point
One third
of spread
Min Bal
Time
Formulae are:
________________________________________________________________________
Sunil Bhandari – IAT Ltd
98
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Sixteen
Foreign Currency Risk
1. Translation Exposure
2. Transaction Exposure
Change in the value of the spot rate over the short term
(less than a year) causing a cash gain or loss.
________________________________________________________________________
Sunil Bhandari – IAT Ltd
99
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
3. Economic Exposure
(Bid) (Offer)
$1.5000 - $1.5555 / £
Reciprocal and
cross over!!!!! £0.6429 - £0.6667 / $
(Bid) (Offer)
5.4 Netting
________________________________________________________________________
Sunil Bhandari – IAT Ltd
101
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
“Fix the rate today that will apply on a set future date”
Technique: -
Technique
Home Abroad
Today Today’s Spot
£Answer FX
1+ints home
÷ 1+ ints foreign
Future Date
£ Answer FX
FX
________________________________________________________________________
Sunil Bhandari – IAT Ltd
102
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Pros Cons
Forward Market
• Fixed Rate, certainty • Inflexible/contract
• Easy • Lose out on the
• Cheap upside potential or
• Tailored(Any size of gain
transaction) • Must ensure FX
receipts arrive
MMH
• Convert today • Complicated
• Cheap • May not apply for FX
• Tailored receipt as borrowing
• Flexible may not be possible
abroad
S0=Spot Today
S1=Spot 1 years time
hc=annual inflation rate foreign
hb=annual inflation rate base/home country
________________________________________________________________________
Sunil Bhandari – IAT Ltd
103
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
9.1 Futures
________________________________________________________________________
Sunil Bhandari – IAT Ltd
104
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
9.2 Options
With an option:-
________________________________________________________________________
Sunil Bhandari – IAT Ltd
105
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
106
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
Chapter Seventeen
Interest Rate Risk
1 ISSUES
________________________________________________________________________
Sunil Bhandari – IAT Ltd
107
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
5 years Years to
Maturity
________________________________________________________________________
Sunil Bhandari – IAT Ltd
108
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
No of years of maturity
3 Risk Management
________________________________________________________________________
Sunil Bhandari – IAT Ltd
109
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
4.1 FRA
4.3 Futures
5 Ceiling Rate
5.1 IRG
________________________________________________________________________
Sunil Bhandari – IAT Ltd
110
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
5.2 Option
________________________________________________________________________
Sunil Bhandari – IAT Ltd
111
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
112
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
114
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
________________________________________________________________________
Sunil Bhandari – IAT Ltd
115
ACCA F9 Financial Management Key Point Notes June 2011
------------------------------------------------------------------------------------------------------------
EQUITY MODES
a) Mudaraba
Mudaraba is a special kind of partnership where one partner
gives money to another for investing it in a commercial
enterpirse. The investment comes from the first partner
(who is called 'rab ul mal'), while the management and work
is an exclusive responsibility of the other (who is called
'mudarib').
The Mudaraba (profit sharing) is a contract, with one party
providing 100% of the capital and the other party providing
its specialist knowledge to invest the capital and manage the
investment project. Profits generated are shared between
the parties according to a pre-agreed ratio. In a Mudaraba
only the lender of the money has to take losses.
This arrangement is therefore most closely aligned with
equity finance.
b) Musharaka
Musharaka is a relationship between two or more parties,
who contribute capital to a business, and divide the net
profit and loss pro rata. It is most closely aligned with the
concept of venture capital. All providers of capital are
entitled to participate in management, but are not required
to do so. The profit is distributed among the partners in
pre-agreed ratios, while the loss is borne by each partner
strictly in proportion to their respective capital
________________________________________________________________________
Sunil Bhandari – IAT Ltd
116