MindMap Gallery ACCA Financial Management
- 25
ACCA Financial Management
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
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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