BPP House 142-144 Uxbridge Road London W12 8AA United Kingdom T 0845 075 1100 (UK) T +44 (0)20 8740 2211 (Overseas) E Learningmedia@bpp.com bpp.com/learningmedia • A user-friendly format for easy navigation • Exam focus points describing what the examining team will want you to • Regular Fast Forward summaries emphasising the key points in each chapter • Questions and quick quizzes to test your understanding • A practice question bank containing exam- standard questions with answers • A full index • All you need in one book For exams up to June 2015 Contact us In addition to ACCA examining team reviewed material you get: Study Text Paper F9 Financial Management This ACCA Study Text for Paper F9 Financial Management has been comprehensively reviewed by the ACCA examining team This review guarantees appropriate depth and breadth of content and comprehensive syllabus coverage Financial Management BPP Learning Media is dedicated to supporting aspiring business professionals with top-quality learning material as they study for demanding professional exams, often whilst working full time BPP Learning Media’s commitment to student success is shown by our record of quality, innovation and market leadership in paper-based and e-learning materials BPP Learning Media’s study materials are written by professionally qualified specialists who know from personal experience the importance of top-quality materials for exam success ACCA F9 ACCA approved content provider ACCA APPROVED CONTENT PROVIDER ACCA Approved Study Text Paper F9 Financial Management Study Text for exams up to June 2015 Free access to our Exam Success site Look inside June 2014 £32.00 ACF9ST14 (HO).indd 1-3 27/05/2014 17:40 S T U D Y PAPER F9 FINANCIAL MANAGEMENT BPP Learning Media is an ACCA Approved Learning Partner – content This means we work closely with ACCA to ensure this Study Text contains the information you need to pass your exam In this Study Text, which has been reviewed by the ACCA examination team, we:  Highlight the most important elements in the syllabus and the key skills you need  Signpost how each chapter links to the syllabus and the study guide  Provide lots of exam focus points demonstrating what is expected of you in the exam  Emphasise key points in regular fast forward summaries  Test your knowledge in quick quizzes  Examine your understanding in our practice question bank  Reference all the important topics in our full index BPP's Practice & Revision Kit and i-Pass products also support this paper FOR EXAMS IN DECEMBER 2014 AND JUNE 2015 T E X T First edition 2007 Seventh edition June 2014 ISBN 9781 4727 1084 (Previous ISBN 9781 4453 9652 1) e-ISBN 9781 4453 6739 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library All our rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd, unless otherwise stated Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA www.bpp.com/learningmedia Printed in the United Kingdom by Polestar Wheatons Hennock Road Marsh Barton Exeter EX2 8RP Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources © BPP Learning Media Ltd 2014 ii Contents Page Introduction Helping you to pass Studying F9 The exam paper and exam formulae Syllabus and study guide v vii ix xi Part A Financial management function Financial management and financial objectives Part B Financial management environment The economic environment for business Financial markets, money markets and institutions 37 57 Part C Working capital management Working capital Managing working capital Working capital finance 79 93 119 Part D Investment appraisal 10 11 Investment decisions Investment appraisal using DCF methods Allowing for inflation and taxation Project appraisal and risk Specific investment decisions 143 159 177 189 205 Part E Business finance 12 13 14 15 16 Sources of finance Dividend policy Gearing and capital structure The cost of capital Capital structure 225 259 269 289 315 Part F Business valuations 17 18 Business valuations Market efficiency 335 357 Part G Risk management 19 20 Foreign currency risk Interest rate risk 371 399 Mathematical tables 415 Practice question bank Practice answer bank Index 419 441 481 Review form Contents iii A note about copyright Dear Customer What does the little © mean and why does it matter? 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BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that If they act illegally and unethically in one area, can you really trust them? iv Helping you to pass BPP Learning Media – Approved Learning Partner – content As ACCA's Approved Learning Partner – content, BPP Learning Media gives you the opportunity to use study materials reviewed by the ACCA examination team By incorporating the examination team’s comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA-approved support for your studies The PER alert Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three year practical experience requirement (PER) To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the ‘PER alert’ feature You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement Your achievement of the PER should now be recorded in your on-line My Experience record Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success Developing exam awareness Our Texts are completely focused on helping you pass your exam Our advice on Studying F9 outlines the content of the paper, the necessary skills you are expected to be able to demonstrate and any brought forward knowledge you are expected to have Exam focus points are included within the chapters to highlight when and how specific topics were examined, or how they might be examined in the future Using the Syllabus and Study Guide You can find the syllabus and Study Guide on pages xi – xxi of this Study Text Testing what you can Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content Introduction v Chapter features Each chapter contains a number of helpful features to guide you through each topic Topic list Topic list Syllabus reference What you will be studying in this chapter and the relevant section numbers, together with ACCA syllabus references Introduction Puts the chapter content in the context of the syllabus as a whole Study Guide Links the chapter content with ACCA guidance Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined Knowledge brought forward from earlier studies What you are assumed to know from previous studies/exams FAST FORWARD Summarises the content of main chapter headings, allowing you to preview and review each section easily Examples Demonstrate how to apply key knowledge and techniques Key terms Definitions of important concepts that can often earn you easy marks in exams Exam focus points When and how specific topics were examined, or how they may be examined in the future Formula to learn Formulae that are not given in the exam but which have to be learnt Gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER) vi Introduction Question Gives you essential practice of techniques covered in the chapter Case Study Real world examples of theories and techniques Chapter Roundup A full list of the Fast Forwards included in the chapter, providing an easy source of review Quick Quiz A quick test of your knowledge of the main topics in the chapter Practice Question Bank Found at the back of the Study Text with more comprehensive chapter questions Cross referenced for easy navigation Studying F9 This paper examines a wide range of financial management topics, many of which will be completely new to you You will need to be competent at a range of quite tricky calculations as well as being able to explain and discuss financial management techniques and issues The F9 examiner The examiner expects you to be able to perform and comment on calculations, exercise critical abilities, clearly demonstrate understanding of the syllabus and use question information Syllabus update The F9 syllabus has been updated for the December 2014 sitting onwards The syllabus changes are summarised below Summary of changes to F9 There are no changes to the syllabus except rearrangement of syllabus sections The section on cost of capital is now part of the business finance section The format of the F9 exam has changed Introduction vii What F9 is about The aim of this syllabus is to develop the knowledge and skills expected of a finance manager, in relation to investment, financing and dividend policy decisions F9 is a middle level paper in the ACCA qualification structure There are some links to material you have covered in F2, particularly short-term decision making techniques The paper with a direct link following F9 is P4 which thinks strategically and considers wider environmental factors F9 requires you to be able to apply techniques and think about their impact on the organisation What skills are required?   You are expected to have a core of management accounting knowledge from Paper F2 You will be required to carry out calculations, with clear workings and a logical structure  You will be required to interpret data  You will be required to explain management accounting techniques and discuss whether they are appropriate for a particular organisation You must be able to apply your skills in a practical context  How to improve your chances of passing  There is no choice in this paper, all questions have to be answered You must therefore study the entire syllabus, there are no short-cuts  The first section of the paper consists of 20 multiple choice questions, worth two marks each These will inevitably cover a wide range of the syllabus Practising questions under timed conditions is essential BPP's Practice and Revision Kit contains mark, 10 mark and 15 mark questions to help you practise this Questions will be based on simple scenarios and answers to Section B questions must be focused and specific to the organisation        Answer plans in Section B will help you to focus on the requirements of the question and enable you to manage your time effectively Answer all parts of the questions in Section B Even if you cannot all of the calculation elements, you will still be able to gain marks in the discussion parts Make sure your answers focus on practical applications of management accounting, common sense is essential! Keep an eye out for articles as the examination team will use Student Accountant to communicate with students Read journals etc to pick up on ways in which real organisations apply management accounting and think about your own organisation if that is relevant Brought forward knowledge You will need to have a good working knowledge of certain management accounting techniques from F2 In particular, you will need to be familiar with the capital budgeting process, and be able to apply the concepts of interest and discounting This includes being able to calculate annuities and perpetuities, and to use the discount and annuity tables to calculate net present values This Study Text revises these topics and brought forward knowledge is identified If you struggle with the examples and questions used, you must go back and revisit your previous work The examiner will assume you know this material and it may form part of an exam question viii Introduction The exam paper and exam formulae Format of the paper From December 2014, the exam is a three-hour paper divided into two sections Section A consists of 20 multiple choice questions of two marks each These questions can be on any part of the syllabus Section B consists of three questions of 10 marks each and two questions of 15 marks each The 10-mark questions can be on any part of the syllabus The 15-mark questions will cover Parts C, D and E of the syllabus All questions are compulsory In Section B, answers to the questions will require a mixture of calculations and discussion You also have 15 minutes for reading and planning The exam will cover as much of the syllabus as possible Exam formulae Set out below are the formulae you will be given in the exam If you are not sure what the symbols mean, or how the formulae are used, you should refer to the appropriate chapter in this Study Text Chapter in Study Text Economic order quantity = 2C0D Ch Miller-Orr Model Return point = Lower limit + (  spread) 3 3   transaction cos t  variance of cash flows  Spread =   int erest rate     The Capital Asset Pricing Model 15 E(ri) = Rf + ßi(E (rm) – Rf) The asset beta formula 16    Vd (1 T)  Ve ßa =  d  e  +   (Ve  Vd (1 T))   (Ve  Vd (1 T))  The Growth Model P0 = 15 D0 (1 g) (re  g) Gordon's growth approximation 15 g = bre Introduction ix Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Review Form – Paper F9 Financial Management (6/14) Please help us to ensure that the ACCA learning materials we produce remain as accurate and user-friendly as possible We cannot promise to answer every submission we receive, but we promise that it will be read and taken into account when we update this Study Text Name: Address: During the past six months you recall seeing/receiving any of the following? 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[...]...  9 The Fisher formula (1 + i) = (1 + r)(1 + h) Purchasing power parity and interest rate parity S1 = S0  x Introduction (1 hc ) (1 hb ) F0 = S0  (1 ic ) (1 ib ) 19 Syllabus and Study Guide The F9 syllabus and study guide can be found below Introduction xi xii Introduction Introduction xiii xiv Introduction Introduction xv xvi Introduction Introduction xvii xviii Introduction Introduction xix... this Study Text we examine the work of the financial management function and the framework within which it operates In this chapter, after introducing the nature and purpose of financial management, we consider the objectives of organisations We go on to examine the influence of stakeholders on stakeholder objectives The final part of this chapter examines objectives in not-for-profit organisations 3 Study. .. investment to provide for future growth and new investment opportunities? We shall be looking at various aspects of the investment, financing and dividend decisions of financial management throughout this Study Text Part A Financial management function  1: Financial management and financial objectives 5 Examples of different types of investment decision Decisions internal to the business enterprise   ... long-term, depending on the time horizon of the objective it is intended to achieve This definition also indicates that since strategy depends on objectives or targets, the obvious starting point for a study of strategy is the identification and formulation of objectives Key term Corporate strategy is concerned with the overall purpose and scope of the organisation and how value will be added to the ...S T U D Y PAPER F9 FINANCIAL MANAGEMENT BPP Learning Media is an ACCA Approved Learning Partner – content This means we work closely with ACCA to ensure this Study Text contains the information... pass BPP Learning Media – Approved Learning Partner – content As ACCA' s Approved Learning Partner – content, BPP Learning Media gives you the opportunity to use study materials reviewed by the ACCA. .. breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA- approved support for your studies The PER alert Before you can qualify as an ACCA member, you not only have