MindMap Gallery ACCA Financial Management

- 45

ACCA Financial Management refers to the knowledge and skills required for understanding and managing the financial aspects of an organization. This includes financial reporting, analysis, and decision-making to ensure the long-term success and sustainability of the business. Mastering ACCA Financial Management is vital for professionals to make informed financial decisions and contribute to the overall success of their organizations.

Edited at 2021-09-06 06:19:57- Recommended to you
- Outline

Financial Management

FM(Ch.1)

FM

effective and efficient utilisation of Financial resources

Profit Organisation

Wealth maximisation

TSR = (CG+Div)/P0

CG=P1-P0

NPO

Value for Money

Economy

Frugal

Efficiency

Input utilisation for max productive Output

Effectiveness

Output to objective

Accounting

Financial

Historical data

FS

Prescribed format

Mngt

customised

help mngt in decision making

Functions

Investment

Funds arranged to invested where

Financing

Funds to arranged from what sources

Dividend

to pay dividend or to plough back profits

Risk Mngt

Hedging of risk

Business

Financial

Operating

Subtopic

Stakeholders

Internal

Employees

Job security

Increments

Timely salary pyts

Mngt

Connected

SH

max of wealth

DH

interest and loan repayment

Creditors

timely pyt

Investors

hold, invest, sell

External

Govt

Taxes, Public welfare obj.

Society

Environment,Employment

Agency Theory

Divorce of mngt and O'ship

Mngt may not act in the benefit of SH

Achieve their own agendas

conflict of Interests

Remuneration Schemes

Rem based on Rev

To increase revenue, profitability may be compromised

Rem based on profits

Long term progress may be compromised for profitability

Rem based on EVA

based on increase in SH wealth

ESOP

participation of mngt. in oship will bring sense of responsibility

Corporate Governance

Internal controls, accountability,

Regulatory req.

Maximising & Satisficing

Maximising

seeking the maximum level of returns, even though it involves risk and high workloads

Satisficing

seeking adequate or satisfactory level of returns, avoiding risky ventures and reducing workloads.

Investment(Ch.2-6)

PV

PVF

(1+r)^-n

FV=PV(1+r)^n

Annuity

Normal

CF*AVF

use PV excel formula

Advance

CF0+CF1*AVF

use PV excel formula

Delayed

CF*AVF*PVF

PVF from t0 to T0

AVF : 1-(1+r)^-n/r

Perpetuity

wo Growth(g)

Normal

CF*1/r

Advance

CF(1+1/r)

Delayed

CF*(1/r)*PVF

with g

Normal

CF*1/r-g

NDCF

ARR

Avg. Profits/Avg. Invest*100

Calculate Profit if CF given

Depn

Allocated FC

Avg Profits : Total Profit/No. of years

Avg Invest= Initial+Scrap/2

PTR : in case Scrap value is 0, Average investment shall be 1/2 of Intital Invest

PB

Compute Cum CF

+ve CCF stop, Calculate PBP= No. of year to prior to +ve CCF + Bal of CCF b4 +ve value/CF of following year

to calculate months, multiply fraction by 12

DCF

DPB

Step 1 Calculate Discounted CF

Calculate DPB same as PB by computing CCF

NPV

Adjustments

FC

Incremental

Inflation

General

Use to deflate the Nominal CF

Specific

Use to inflate the Real CF

Nominal/Money

NR=RR(1+Inf R)+Inf R

Real/Current

Tax

Tax Pyt(OF)

Arrears

Advance

TS on Dep(IF)

TS on BC(IF)

WC

WC Intro/Withdrawal

End of Project

PV of OF- PV of IF

use NPV excel formula

IRR

PV of OF=PV of IF

use IRR excel formula

LR+PNPV/(PNPV-NNPV)*(HR-LR)

Risk Vs Uncertainity

Risk

Earlier precedent

Can be expressed in mathematical terms

probabilities of certain outcome(s) can be assigned

Expected Value

Subtopic

Subtopic

Subtopic

Uncertainity

No earlier precedent

cant be mathematically expressed

Ex : COVID

Sensitivity Factor : NPV/PV of item concerned

SF means by what % change in the rescpective item the NPV shall be 0

OF

Increase

IF

Decrease

Dis R

Increase

Sales

NPV/ PV of Sales

VC

NPV/PV of VC

FC

NPV/PV of FC

Scrap

NPV/PV of Scrap

Sales Volume

NPV/PV of Cont

Disc Rate

Cal IRR

SF=IRR-DR/DR

Subtopic

Lease Vs Buy

Buy

OF- PP

IF - TS on Dep

TS on BC

Lease

OF-Lease Rent

IF-TS on LR

Use COD post tax rate for disc

Replacement

EAC/EAB

NPV for each option separately

calculate EAC : NPV/AF

Use Pmt formula

Capital Rationing

Types

Soft

Internal

Mngt. restriction, Lack of resources & skill,

Hard

External

Poor credit rating-Lender donot want to lend

Project Type

Divisible

PI : NPV/OF

Calculate PI for each project

Rank them on the basis of PI

Based on Investment available select the Rank 1 project and so on. When the proportion of capital is balance.Invest the proportionate amount

Indivisible

Combo

Make different combos based on Investment

Calculate NPV of each combo

Select the combo with highest NPV

In this case the proportionate investment not possible as project are indivisible

Exclusive

Combo

make different combos considering the investment constraint and the project(s) that are exclusive to each other i.e. such projects can not together appear in any combo

Calculate NPV for each combo

Select the combo with highest NPV

Working Capital(Ch.7-10)

WC

Types

Gross

CA

Net

CA-CL

Ratios

Current

CA/CL

Quick

CA-Inventory/CL

WC

Operating Cycle

DCP+ICP-CPP

TO Ratio

RMTO

PC/RM consumed

WIPTO

FC/WIP

FGTO

COGS/Avg.Stock

DTO

NCS/Avg Debtors

CTO

NCP/Avg Creditors

HP

DHP:12 or 365 or 52 /DTO

DHP: 12*Avg Debtors/NCS

IHP:12 or 365 or 52/ITO

CHP:12 or 365 or 52/CTO

Cost Sheet

RM Consumed

OP+PUR-CL

Prime Cost

DE+DL

Factory Cost

FACTORY OH+OP WIP-CL WIP

Cost of Production

OFFICE & ADMIN EXP

COGS

OP FG+CL FG

COS

SALES & DIST

Sales

PROFIT

Inventory

EOQ

Point at which Handling cost= Carrying cost

EOQ=SQRT(2DO/H)

DD pa

Order cost per order

HC pu for pa

Total Cost

PP

OC

HC: Q/2*HC pu pa

Assumptions

Subtopic

Subtopic

Subtopic

Subtopic

EOQ & Disc

Subtopic

ROL

Periodic Review

Debtors

Invoice Discounting

The invoices are discounted from bank

Company collcets the payment themselves

pays to the bank the amount

confidentiality maintained

Factoring

Kinds

wo recourse

bad debts borne by factor

with recourse

not borne by factor

Benefits

O/s of A/cs receivable

Improve in TO

Disadv

Confidentiality lost

Loss of goodwill

Customers discomfort

Credit Policy

Discount for early realisation

Annualised Cost

Disc R : Disc/Amt to be paid after disc

Period Saved : 12 or 365/Cr Period-Disc Period

Annual Cost=(1+DiscR)^n-1

Creditors

Cash

Baumol Model

Subtopic

Miller Orr

Subtopic

Subtopic

Subtopic

Economic Environment(Ch.11)

Macro environment

Policies

Monetary

controlling Money supply

Fiscal

related to tax collection & spendings

Exchange Rate

Controlling the exchnage rates to regulate Imports & Exports

Objectives

Economic growth

Balance of payments stability

High employment

Inflation Control

Fin.Mkt. & Treasury Function(Ch.12)

Treasury

Centralised

Meaning

Advantages

Disadvantages

Decentralised

Meaning

Advantages

Disadvantages

Financial Markets

Primary

Secondary

Euro

Foreign Exchange Risk(Ch.13)

Risk

Transaction

Subtopic

Subtopic

Translation

Subtopic

Subtopic

Economic

Subtopic

Subtopic

Theories

PPPT

Subtopic

Subtopic

IRPT

Subtopic

Subtopic

Hedging

Internal

Invoicing in HC

Leading & Lagging

Matching

Netting

External

Fwd Rate

Money Mkt

Receipts

Subtopic

Subtopic

Subtopic

Subtopic

Pyt

Subtopic

Subtopic

Subtopic

Subtopic

Futures

Options

Swaps

Interest Rate Risk(Ch.14)

Int R risk exposure

Rise

Assets

If Fixed R deposits : than Co. cannot gain on Int R rise

Liab

If Borrowings are floating rate : int cost on Int R rise

Fall

Assets

If floating rate deposits : co. will lose int on Int R fall

Liab

If Fixed R borrowings: co will have to pay fixed int and cant take adv of fall in Int R

Kinds of Risk

Basis

Floating rate Assets and liabilites, the rate change for the two may be at different time as rate basis are different

Gap

risk arising due to IBA and IBL maturing at different dates. Say Invest of 1mn @5.5% maturing at 3m financed by Borrowing @5.25%. after 5m. For 2m there is gap and there is the risk that int rate may fall on Amt reinvested and loan have to be paid at agreed rate

Theories

Liquidity

general preference to hold cash, longer one is deprived of cash: higher is the expected return

Upward slope

Expectancy

Upward Slope

Interest rate expected to rise

Downward slope

Interest rate expected to fall

Segment

there are different market segments for different maturity. the DD & SS of each detemines the int yields. Pension funds are interested in long term invetments

Hedging

Internal

Smoothing

Mix of fixed and floating loans

Matching

IBA with IBL

External

Fwd Rate Agreement

Agreement where the Interest rate is fixed now for the future transaction

Int R rise

Pay Int at the rate prevailing(Higher R)

Bank will pay back the difference

Int R fall

Pay interest at the rate prevailing(Lower R)

pay addl. interest to bank (Agreed R-Lower R)

Interest to be calculated taking into consideration the TIME PERIOD

tailored or customised

No premium paid, no margin reqd

Int Option Agreement

Option to borrower to exercise the agreement in case int moves in his favour

Int R rise

Agreement exercised

Int R fall

Allow to Lapse

Premium

Costly

Futures

BS

Borrowing, Sell

If Int R rises

Extra Interest shall be loss

But the Future has been sold at high,buy at low : Gain from futures

if Int R falls

gain on account of Int R fall

Loss on future trn, as Sold at low and buy at High

DB

Deposits, Buy

Future price are inversely related to Int R.

If Int R rises, Future prices fall

if Int R falls, Future prices rise

Options

Swaps

Yield Curve

Expectancy

Upward

Int R rise

Rising

Downward

Int R fall

Inverse

Liquidity

Explains the upward slope

Segment

Wiggle in the yield curve

Collar, Cap, Floor

Collar

Sell Floor to Depositor and Buy CAP

To safegaurd from adverse interest movement

Cap

Borrower

PUT

Cap on max int payable

Floor

Depositor

CALL

cap on min int that can be earned

Basis points: 1.5% = 150 basis points

Sources of Finance(Ch.15)

Factors considered

Sources available

Time period for which reqd

Cost

Security

Risk

Sources

Short Term

Bank od

payable on DD

interest on amount utilised

against the security of floating assets such as Debtors & Inventory

Hard core OD can be converted to term loan

assets given on security allowed to be dealt

Bank loan

Interest payable

Fixed period

Security

Lease

Sale & Lease back

FA sold and lease back

Ownership rights lost

Depreciation cannot be claimed

Trade credit

Credit from suppliers

no security

for short term

Long Term

Equity

IPO

Subtopic

Debt

Debentures

Redeemable

Irredeemable

Convertible

Bonds

Deep Discount

Zero Coupon

Loan note with warrant

PSC

Worst of both worlds

Rights Issue

M1:TERP= (OS Value+Right Share Value)/No. of OS +No. of RS

Right not exercised

Loss

No. of OS* Ex MP after RI

No. of OS* Price before RI

Self Exercise

No loss

Value of Wealth after RI = No. of Shares*TERP

OF : No. of RS*Right IP

Value of Wealth Before RI

Wealth b4 RI=Wealth after RI

Fully Sold

No loss

Value of Wealth after RI

IF: RS* Value of Right

VOR : TERP-RIP

Part Self & Part Sold

No loss

Value after RI

OF

RE*RIP

IF

M2:TERP=OSP-{(OSP-RSP)/No. of OS+No. of RS}

Value of Right : TERP-RIP

Value of Right per Existing share : VOR/ OS share to be sacrificed for each right

Islamic Finance

Sharia & Quran

Mudaraba

EQ

Subtopic

Musharaka

Venture Cap

Subtopic

Murabaha

Subtopic

Ijara

Subtopic

Subtopic

Sukuk

Subtopic

Subtopic

Gharar

Activities involving unceratinity such as Options,Gambling

Haram

Prohibited Activites

Porn

Drugs

Pork

Alcohol

Gambling

Arms

Riba

Interest not allowed

oppression of the poor

undue advantage

no use of efforts

Sharing of Profits& losses

Dividend Policy(Ch.16)

Dividends and share price growth are the two ways in which SH wealth is maximised . There is relation between dividends and share price growth. The companies have to decide on what fraction of earnings they should pay out to investors as dividends and what fraction of earnings to be retained

SH prefer dividend with continuous growth YOY basis, donot like fluctuating dividends

Certainity

Risk

Theories

M&M Theory

Assumptions

Perfect Mkt

Rational Investors

No Transaction cost

No tax

This theory states that dividend patterns have no effect on share values. Broadly it suggests that if a dividend is cut now then the extra retained earnings can be reinvested which will impact futures earnings and hence future dividends may grow. Dividend receipts by investors are lower now but same is offset by the increased future dividends.

SH are indifferent b/w Dividend & Capital Appreciation

SH wealth is affected by the projects which company undertakes and profit it makes and not How it distributes them.

no effect on current Share price and also on TSH wealth

Signalling

Management has the insider information which is not known to the market

Declaring dividends send the signal to the market about the future prospects of the company

Dividend declaration has implicit information in them about firm's future prospects

Dividend increase is +ve sign and decrease as -ve signal by Investors

Bird in Hand

Return Now

higher dividends increase a firm’s value

Clientelle Effect

Stick to one policy

The investors buy shares that ‘suit’ their needs. If they are looking for shares with high dividend, will invest in such co. If they are looking for capital appreciation, they will invest in co. where there is high capital appreciation.

Residual

It states that dividend should be paid only if there are any funds remaining after the firm has invested in all positive NPV projects (thereby increasing the potential for higher dividends in the future)

As per residual theory argues the PV of the dividend stream remains the same, the timing of the dividend payments is irrelevant.

Choice

Irregular Dividends

Investors do not prefer.

No certainity

Constant Dividend

Inflation will eat away the portion of the dividend

Inflation Linked Dividend

Risk expectancy, higher than inflation rate

Growing Dividend

Continuous growth, no fluctuations

No dividend

Scrip dividend

Shares in lieu of dividend when mngt do not want to compromise its liquidity

BuyBack

Scrip issue is Bonus issue where the SC is altered wo raising cash. Reserves converted to SC

Cost of Capital(Ch.17)

Equity(Ke)

DVM

wo g

D/P0

Ex MP=Current MP-Divi Due

with g

D1/P0+g

Historical Data

FV=PV(1+r)^n

Gordon growth

g=br

g= Retention rate * ROE

D1=D0(1+g)

CAPM

Rf+b(Rm-Rf)

Beta represents the Systematic risk measure

Rm-Rf : is premium required by ES over market risk free rate for addl. risk taken by investing in EQ

Risk

Systematic

Risk faced by all industries

Due to govt policies, economy,inflation etc.

cant be avoided. Beta represents the risk in security irt market portfolio

Unsystematic(unique)

Industry or Company specific

Strike or Industrial unrest

Can be reduced by Diversification of Investments

PSC(Kp)

D/P0

Debt(Kd)

Debentures

Irredeemable

I/MP

Pre Tax

I(1-t)/MP

Post Tax

Redeemable

IF0 : MP OF1 : Int.......OFn:Int+Red Val

Cal IRR

If post tax required : Int shall be post tax=i(1-t) for each year

Convertible

Compare Conversion Option with Redemption Option

Redemption value

Conversion value

Choose Highest of above and do computation as in Redeemable. The Redemption value shall be higher of the conversion or redemption value

If tax given, take the tax benefit into consideration while calculating Interest cost per year

Non Tradeable Debt (Bank/Term Loan)

Int(1-T)

Cost of debt

Investor

Pre tax

Int/MP

Company

Post tax

Int(1-T)/MP

WACC

Col. 1 : Desc of Sec : OS, PS, Loans

Col.2 : No. of Securities

Col. 3 : Cost of Capital

Col.4 : BV/MV= BV/MV pu * No.

Col.5 : BV/MV* COC

WACC : Col.5/Col.4

Capital Structure(Ch.18)

Theories

Traditional

as Debt increases, the Cost of Equity also rises. There is a optimum point of debt & equity in CS

Modigilani & Milani (wo Tax)

The intorduction of more debt has no impact on the WACC and value of the firm as the rise in ke is compensated by the fall in the kd

M& M (with Tax)

The introduction of debt brings tax benefit so the WACC falls and the valu of the firm rises. So more and more debt should be introduced. Geared company has advantage of tax benefit over the ungeared company

Pecking Theory

There is a order in which the additional funds may be intoduced in the fim. Firstly from Internal resoursec, then debt and then equity

Beta calculations

Step 1 : Identify what beta given of the proxy co., if Beta e given of proxy co. Find beta A of proxy company

Consider Eq & debt of proxy co.

Be=Ba*E+D(1-t)/E

Ba=Be*E/E+D(1-t)

Be = Business Risk & Financial Risk

Ba= Risk

Step 2 : Find adjusted beta eq for required co. by using Be=Ba*E+D(1-T)/E

Consider Eq & Debt of reqd co.

Step 3 : Find Ke using CAPM Rf+(Rm-Rf)Be

Gearing

Operating

FC

Cont/EBIT

Financial

Interest

Debt/Equity

Financial Ratios(Ch.19)

Profitability

GPR

GP/NS*100

NPR

NP/NS*100

ROI/ROCE

PBIT/CE*100

CE=NCA+WC

CE=SC+Res+Long Term Debt

ROE

PATD/SHF*100

SHF=EQ+Res

ROA

EBIT/Total Assets*100

TO

WCTO

NS/WC

DTO

NCS/Avg Debtors

CTO

NCP/Avg Creditors

ITO

COGS/Avg Stock

Asset TO

NS/CE

Liquidity

CR

CA/CL

QR

CA-Invent/CL

Gearing

Debt Equity Ratio

Debt/Equity

Interest Coverage Ratio

PBIT/Int

Interest Yield

Int R/MV of One unit of Debt

Investor

Earning Based

EPS

Earning available for SH/no. of shares

PER

MP/EPS

Dividend Based

DPS

Total Dividend/No. of Shares

Dividend Yield

DPS/MP per share

Dividend Cover

Earning available for SH/Dividend

TSR

DPS+Change in Sh.Price/Share Price at start of year

Business Valuation & MEH(Ch.20)

Bus.Val.

Reqd For

Business Acquisition & Mergers

Divorce Settlement

Ascertain value of shares held by Retiring that are to be sold as per AOA

Listing purpose

Buy n hold decisions

Fiscal purpose

Approaches

Asset based

BV

NRV(Liquidation)

Min Price

Replacement Cost

Max price

Income/Earning Based

PER

MP/EPS

Share Price=EPS*PER

Value=Share Price*No.

Value=PAT*PER

PAT may be taken as Current PAT or Avg. PAT

In case of unlisted co.

Proxy or Industry Avg PER

Adjust PER

2/3 or 1/2 PER of Listed Co.

Earning Yield

CF

Market Capitalisation

O/s Shares* CMP

may be over or under valued

not necessarily true value

MEH

Weak

Semi Strong

Strong

Inefficient

Debt Valuation

PSC

Use Kp=Divi/MP

MP=Divi/Kp

Irredeemable

use Kd(1-t) = Int(1-t)/MV

MV=Int(1-t)/Kd(1-t)

Redeemable

for MV: calculate PV of OF at given rate

Convertible

Bond value wo conversion(Floor value)

PV of Redeemable Debt

Yr. 1 : Int.....Yr. n: Int+Redemption Amt

PVof above discounted at reqd rate

Bond value with conversion(MV)

Compounded value of Conversion in case of growth: Share price*(1+r)^n*Share rece on conversion

Calculate PV as in case of Redeemable Debt

Conversion Premium

MV-Conversion at current share price