Module Overview Financial Management

Module aim To enable students to recommend relevant options for financing a business, recognise and manage financial risks and make appropriate investment decisions. On completion of this module, students will be able to: identify capital requirements of businesses and assess financing options identify the financial risks facing a business and the principal methods of managing those risks apply appropriate investment appraisal techniques and recommend relevant methods of funding investments taking into account other factors affecting investment decisions. Specification grid This grid shows the relative weightings of subjects within this module and should guide the relative study time spent on each. Over time the marks available in the assessment will equate to the weightings below, while slight variations may occur in individual assessments to enable suitably rigorous questions to be set. Weighting (%) 35 30 35 100

1 Financing options 2 Managing financial risk 3 Investment and financing decisions

1 Financing options Candidates will be able to identify capital requirements of businesses and assess financing options. In the assessment, candidates may be required to: a. explain the general objectives of financial management and describe the financial strategy process for a business b. describe the impact of financial markets and other external factors on a businesss financial strategy, using appropriate examples to illustrate the impacts c. explain the characteristics, terms and conditions and role of alternative short, medium and long term sources of finance available to different businesses d. describe the implications of terms included in loan agreements in a given scenario (e.g. representations and warranties; covenants; guarantees) e. explain the processes by which businesses raise equity, capital and other long term finance f. explain the roles played by different stakeholders, advisors and financial institutions in the financial strategy selected by a business g. identify the possible conflicts of objectives between different stakeholders in a business h. compare the features of different means of making returns to owners and lenders, explain their effects on the business and its stakeholders, and recommend appropriate options in a given scenario i. identify and calculate a businesss future requirements for capital, taking into account current and planned activities j. assess the suitability of different financing options for a given business k. calculate and interpret the costs of different financing methods (before and after tax) and the weighted average cost of capital l. calculate and interpret the cost of capital of a business in a straightforward scenario

Extract from ACA Professional Stage syllabus 2009 Financial Management

m. n.

explain, in non-technical terms and using appropriate examples, the effect of capital gearing/leverage on investors perception of risk and reward describe options for reconstruction (e.g. group reconstruction, spin-off, purchase of own shares, use of distributable profits).

2 Managing financial risk Candidates will be able to identify the financial risks facing a business and the principal methods of managing those risks. In the assessment, candidates may be required to: a. identify and describe the key financial risks facing a business in a given scenario b. explain how financial instruments (e.g. derivatives, hedging instruments) can be utilised to manage financial risks and describe the characteristics of those instruments c. perform non-complex calculations relating to financial derivatives and other financial products and discuss the results d. explain different methods of managing interest rate exposure appropriate to a given situation and perform non-complex calculations to determine the cost of the hedge e. explain different methods of managing currency risks appropriate to a given situation and perform non-complex calculations to determine the cost of the hedge f. explain methods of managing other key financial risks and perform non-complex calculations to determine the cost of particular methods g. identify appropriate methods of financing exports, including: bills of exchange letters of credit export credit insurance 3 Investment and financing decisions Candidates will be able to apply appropriate investment appraisal techniques and recommend relevant methods of funding taking into account other factors affecting investment decisions. In the assessment, candidates may be required to: a. select and justify investment appraisal techniques which are appropriate to the objectives and circumstances of a given business b. explain the investment decision making process c. select and justify an appropriate discount or interest rate for use in selected investment appraisal techniques from information supplied d. choose appropriate values to be used in selected appraisal techniques from information supplied, taking account of inflation and tax e. identify environmental factors that may affect financing for investment in a different country f. apply appraisal techniques and demonstrate how the interpretation of results from the techniques can be influenced by an assessment of risk g. recognise how the results of the appraisal of projects or groups of projects are affected by the accuracy of the data on which they are based and factors which could not be included in the computational analysis h. calculate the optimal investment plan when capital is restricted i. recommend and justify a course of action which is based upon the results of investment appraisal and consideration of relevant non-financial factors and which takes account of the limitations of the techniques being used j. identify and calculate the financing options, costs and benefits of activities in a given situation, referring to levels of uncertainty and making reasonable assumptions which are consistent with the situation k. compare the financing costs and benefits (including those that are not separately quantifiable) of various courses of action, using appropriate appraisal techniques l. recommend relevant methods of funding for a given situation, stating their sources and justifying the selection m. draft a straightforward investment and financing plan for a given business scenario.

Extract from ACA Professional Stage syllabus 2009 Financial Management

Technical Knowledge Grids Introduction The tables contained in this section show the technical knowledge in the disciplines of financial reporting, assurance, taxation and business analysis covered in the ACA syllabus by module. For each individual topic / standard the level of knowledge required in the relevant Professional Stage module and the Advanced Stage content is shown. The knowledge levels are defined as follows: Level D An awareness of the scope of the subject matter. Level C A general knowledge with a basic understanding of the subject matter and training in the application thereof sufficient to identify significant issues and evaluate their potential implications or impact. Level B A working knowledge with a broad understanding of the subject matter and a level of experience in the application thereof sufficient to apply the subject matter in straightforward circumstances. Level A A thorough knowledge with a solid understanding of the subject matter and experience in the application thereof sufficient to exercise reasonable professional judgement in the application of the subject matter in those circumstances generally encountered by chartered accountants. Key to other symbols: the knowledge level reached at Professional Stage is assumed to be continued

Extract from ACA Professional Stage syllabus 2009 Financial Management

Business Analysis Professional Stage Topic

STRATEGIC ANALYSIS Environmental and market analysis tools PEST analysis Porters five forces Product life cycle Boston consulting group matrix Competitor analysis Positional and other analysis tools Resource audit Value chain analysis SWOT analysis Gap analysis Benchmarking Directional policy matrix Business process analysis Strategic risk analysis Balanced scorecard STRATEGIC CHOICE Strategy formulation, evaluation and choice Business risk management Financial analysis Objectives and stakeholders preferences STRATEGIC IMPLEMENTATION Business plans Organisational structure Information management Change management Project management COST ANALYSIS FOR DECISION MAKING Costing Cost classification Costing systems direct, marginal, absorption Activity based costing (ABC) Break even analysis Multi-product break even analysis Pricing Pricing decisions Transfer pricing BUSINESS AND SHAREHOLDER VALUE Valuation Techniques Income dividend yield Income P/E Income discounted cash flow Asset based measures Options approach Shareholder value Value based management (VBM) Value drivers Shareholder value analysis (SVA) Short and long term growth rates and terminal values

B B B B B B B B B B B B B B B B B B B B B B

A A A A A A A A A A B A A A A A A A A A A A A

A B C B

B A B

B B

A A A A B A A A A

Extract from ACA Professional Stage syllabus 2009 Financial Management

Professional Stage Topic

Economic profit Cash flow return on investment (CFROI) Total shareholder return (TSR) Market value added (MVA) INVESTMENT APPRAISAL AND BASIC RISK ANALYSIS Project appraisal NPV IRR Payback Adjusted present value (APV) Assessing risk Project appraisal and sensitivity analysis Project appraisal and simulation Expected values Scenario planning Gap analysis Continuous vs. event risk FINANCIAL ANALYSIS Cost of capital Cost of equity Cost of debt Cost of preference shares Cost of bank loans Weighted average cost of capital (WACC) Effective interest rates Splitting convertibles into equity and debt elements Public sector discount rates Portfolio theory and CAPM Portfolio theory CAPM APT and MCPM CAPM and cost of capital International cost of capital Bonds Bond pricing using NPV Yields to maturity Duration and price volatility Convexity Term structure of interest rates Corporate borrowing and default risk SOURCES OF FINANCE AND FINANCING ARRANGEMENTS Short, medium and long term sources of finance Loan agreement conditions (warranties; covenants; guarantees) Raising capital Financing reconstructions (eg: group reconstruction, spin off, purchase of own shares, use of distributable profits) FINANCIAL ENGINEERING Futures, options and swaps Options Interest rate futures Interest rate options Interest forward rate agreements (FRAs)

A A A A B B

A A A A

B B

B B B B B

B B B

B B B B

B B B B

Extract from ACA Professional Stage syllabus 2009 Financial Management

Advanced Stage

A A A A

A A A A A A A A A A A A A A A A A A A A A A A

A A A A

Professional Stage Topic

Interest rate swaps Foreign exchange Currency forward contracts Currency money market cover Currency options Currency swaps Theoretical determinants of foreign exchange rates Option value Value of a call and put option Black Scholes option pricing model Binomial Option Pricing Model Real options

B B B B B B C

Extract from ACA Professional Stage syllabus 2009 Financial Management

Advanced Stage

A A A A A A B B B B