Publishing P4 Study Text Advanced Financial Management ACCA Publishing ACCA Distance Learning Courses Learn quickly and efficiently Using a blended learning approach, our distance learning package will steer you towards exam success Our aim is to teach you all you need to know and give you plenty of practice, without bombarding you with excessive detail We therefore offer you the following tailored package: • Access to our dedicated distance learning website – where you’ll find a regular blog from the distance learning department – reminders, hints and tips, study advice and other ideas from tutors, writers and markers – as well as access to your course material • • Tutor support – by phone or by email, answered within 48 hours The handbook – outlining distance learning with us and helping you understand the ACCA course Study phase Revision phase • The key study text – covering the syllabus without excessive detail and containing a bank of practice questions for plenty of reinforcement of key topics • A key study guide – guiding you through the study text and helping you revise • An online question bank for additional reinforcement of knowledge • An exam kit – essential for exam preparation and packed with examstandard practice questions • tutor-marked mock exams to be sat during your studies • Key notes - highlighting the key topics in an easy-to-use format Total price: £160.95 Visit us at www.emilewoolfpublishing.com distancelearning@emilewoolfpublishing.com tel: +44(0) 1483 225746 ACCA ACCA Paper P4 Advanced Financial Management Welcome to Emile Woolf‘s study text for Paper P4 Advanced Financial Management which is: „ Written by tutors „ Comprehensive but concise „ In simple English „ Used around the world by Emile Woolf Colleges including China, Russia and the UK Publishing First edition published in Great Britain  Emile Woolf Publishing Limited  Crowthorne Enterprise Centre, Crowthorne Business Estate, Old Wokingham Road,   Crowthorne, Berkshire   RG45 6AW  Email: info@ewiglobal.com  www.emilewoolfpublishing.com       © Emile Woolf Publishing Limited, September 2010    All 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, scanning or otherwise, without the prior permission in writing of Emile Woolf  Publishing Limited, or as expressly permitted by law, or under the terms agreed with the  appropriate reprographics rights organisation.    You must not circulate this book in any other binding or cover and you must impose  the same condition on any acquirer.      Notice  Emile Woolf Publishing Limited has made every effort to ensure that at the time of  writing the contents of this study text are accurate, but neither Emile Woolf Publishing  Limited nor its directors or employees shall be under any liability whatsoever for any  inaccurate or misleading information this work could contain.      British Library Cataloguing in Publications Data  A catalogue record for this book is available from the British Library.      ISBN 978‐1‐905623‐44‐0      Printed and bound in Great Britain.        Acknowledgements  The syllabus and study guide are reproduced by kind permission of the Association of  Chartered Certified Accountants.  ii Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Paper P4 Advanced Financial Management c Contents Page Syllabus and study guide Formulae and tables 13 Chapter 1: The role and responsibilities of financial managers 19 Chapter 2: Impact of environmental issues on corporate objectives and governance 43 Chapter 3: Capital investment appraisal 55 Chapter 4: DCF: risk analysis 89 Chapter 5: Investing: portfolio theory and the CAPM 113 Chapter 6: Cost of capital 141 Chapter 7: Other aspects of capital investment appraisal 181 Chapter 8: International investment and financing decisions 209 Chapter 9: Mergers and acquisitions 229 Chapter 10: Corporate reconstruction and reorganisation 275 Chapter 11: The money markets The treasury function 289 Chapter 12: Foreign exchange risk and currency risk management 307 Chapter 13: Interest rate risk Hedging with FRAs and swaps 329 Chapter 14: Futures and hedging with futures 349 Chapter 15: Options and hedging with options 377 Chapter 16: Option pricing and delta hedging 399 Chapter 17: Financial management and multinationals 421 Practice questions © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 443 iii iv Answers 475 Index 521 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Paper P4 Advanced Financial Management S Syllabus and study guide Aim To apply relevant knowledge, skills and exercise professional judgement as expected of a senior financial executive or advisor, in taking or recommending decisions relating to the financial management of an organisation Main capabilities On successful completion of this paper, candidates should be able to: A Explain the role and responsibility of the senior financial executive or advisor in meeting conflicting needs of stakeholders B Evaluate potential investment decisions and assessing their financial and strategic consequences, both domestically and internationally C Assess and plan acquisitions and mergers as an alternative growth strategy D Evaluate and advise on alternative corporate re-organisation strategies E Apply and evaluate alternative advanced treasury and risk management techniques F Evaluate the impact of macro economics and recognise the role of international financial institutions in the financial management of multinationals G Identify and assess the potential impact of emerging issues in finance and financial management © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides Paper P4: Advanced Financial Management Syllabus A Role and responsibility towards stakeholders B Advanced investment appraisal C Management of international trade and finance Strategic business and financial planning for multinationals Emerging issues in finance and financial management The role of the treasury function in multinationals The use of financial derivatives to hedge against forex risk The use of financial derivatives to hedge against interest rate risk Other forms of risk Dividend policy in multinationals and transfer pricing Economic environment for multinationals G Predicting corporate failure Financial reconstruction Business re-organisation Treasury and advanced risk management techniques F Acquisitions and mergers versus other growth strategies Valuation for acquisitions and mergers Regulatory framework and processes Financing acquisitions and mergers Corporate reconstruction and re-organisation E Discounted cash flow techniques and the use of free cash flows Impact of financing on investment decisions and adjusted present values Application of option pricing theory in investment decisions International investment and financing decisions Impact of capital investment on financial reporting Acquisitions and mergers D Conflicting stakeholder interests The role and responsibility of senior financial executive/advisor Impact of environmental issues on corporate objectives and on governance Financial strategy formulation Ethical issues in financial management Developments in world financial markets Financial engineering and emerging derivative products Developments in international trade and finance Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Syllabus and study guide Approach to examining the syllabus The P4, Advanced Financial Management, paper builds upon the skills and knowledge examined in the F9, Financial Management, paper At this stage candidates will be expected to demonstrate an integrated knowledge of the subject and an ability to relate their technical understanding of the subject to issues of strategic importance to the firm The study guide specifies the wide range of contextual understanding that is required to achieve a satisfactory standard at this level In particular the ethical and managerial aspects of the role of the senior financial manager or advisor will regularly feature in examination papers Examination Structure The examination will be a three hour paper in two sections: Section A has two compulsory questions worth 60 marks in total This section will normally cover significant issues relevant to the senior financial manager or advisor and will be set in the form of a short case study or scenario The requirements of the section A questions are such that candidates will be expected to show a comprehensive understanding of issues from across the syllabus Each question will contain a mix of computational and discursive elements Normally, approximately 50 per cent of the marks will be apportioned to each of the two elements A maximum of 40 marks will be available for either question in Section A Section B questions are designed to provide a more focused test of the syllabus with, normally, at least one question being wholly discursive Candidates will be expected to provide answers in a specified form such as a short report or board memorandum commensurate with the professional level of the paper Section A: Section B: Answer both questions, total Answer two from three questions, 60 marks 20 marks each Total 100 marks Candidates will be provided with a formulae sheet as well as present value, annuity and standard normal distribution tables © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides Paper P4: Advanced Financial Management Study Guide This study guide provides more detailed guidance on the syllabus You should use this as the basis of your studies A ROLE AND RESPONSIBILITY TOWARDS STAKEHOLDERS Conflicting stakeholder interests a) Assess the potential sources of the conflict within a given corporate governance/ stakeholder framework informed by an understanding of the alternative theories of managerial behaviour Relevant underpinning theory for this assessment would be: i) The Separation of Ownership and Control ii) Transaction cost economics and comparative governance structures iii) Agency Theory b) Recommend, within specified problem domains, appropriate strategies for the resolution of stakeholder conflict and advise on alternative approaches that may be adopted c) Compare the emerging governance structures and policies with respect to corporate governance (with particular emphasis upon the European stakeholder and the US/UK shareholder model) and with respect to the role of the financial manager The role and responsibility of senior financial executive/advisor a) b) c) d) e) f) Advise the board of directors of the firm in setting the financial goals of the business and in its financial policy development with particular reference to: i) Investment selection and capital resource allocation ii) Minimising the firm’s cost of capital iii) Distribution and retention policy iv) Communicating financial policy and corporate goals to internal and external stakeholders v) Financial planning and control vi) The management of risk Develop strategies for the achievement of the firm’s goals in line with its agreed policy framework Recommend strategies for the management of the financial resources of the firm such that they are utilised in an efficient, effective and transparent way Establish an ethical financial policy for the financial management of the firm which is grounded in good governance, the highest standards of probity and is fully aligned with the ethical principles of the Association Explore the areas within the ethical framework of the firm which may be undermined by agency effects and/or stakeholder conflicts and establish strategies for dealing with them Provide advice on personal finance to individual as well as groups of investors, covering areas such as investment and financing Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Answers (Note: This calculation of the profit ignores the time value of money The options are paid for when they are bought, but the profit is made only when the options are exercised) Traded equity options can be bought and sold on the exchange, and the investor is likely to sell the put options before they expire, making a profit on the sale As the options become increasingly in-the-money, their market value will increase 46 Currency options In September, the UK company will want to sell dollars and buy sterling (to convert its dollar receipts into sterling) Since it wants to buy sterling in six months’ time, it should buy call options with a September expiry If the strike price is $1.8500, the sterling equivalent of $2 million = £1,081,081 (2,000,000/1.85) The contract size is £31,250; therefore for a perfect hedge, the company would want to buy 34.6 contracts (1,081,081/31,250) Since this is not possible, it should buy either 34 or 35 contracts In the answer that follows, it is assumed that the company will buy 35 options Premium cost = 35 × 31,250 × $0.019 = $20,781.25 To pay the premium, the company would have to buy $20,781.25 spot, at a sterling cost of £11,340.38 At the expiry date, the options are in-the-money if the spot exchange rate is 1.9200 They will therefore be exercised, at a profit of $0.07 per £1 (1.9200 – 1.8500) Gain on exercise of 35 option contracts = 35 × 31,250 × $0.07 = $76,562.50 The total dollar income of the company will therefore be $2,076,562.50 This can be exchanged into sterling at the spot rate, to obtain £1,081,543 ($2,076,562.50/1.9200) The option premium cost was £11,340, therefore ignoring the time value of money, the net revenue for the company is £1,081,543 – £11,340 = £1,070,203 This gives an effective exchange rate for the $2 million dollar receipts of 1.8688 (2,000,000/1,070,203) © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 513 Paper P4: Advanced Financial Management 47 Interest rate hedge (a) Futures The company wants a hedge against the risk of a rise in two-month interest rates It should therefore sell futures Since the interest period will be months and futures are for a three-month deposit, the quantity of futures sold should be: (£21 million/£500,000) × 2/3 = 28 contracts The loan period will begin in mid-June; therefore sell 28 June contracts, at a price of 94.610 Options on futures The company will want options to sell futures; therefore it should buy put options on 28 June futures The premium cost will depend on the strike price chosen (Since the options are needed for two months, apply a factor of × 2/12) Strike price 94750 95000 Premium (£21,000,000 × 0.500% × 2/12) (£21,000,000 × 0.850% × 2/12) £17,500 £29,750 FRA The company should buy a 3v5 FRA, for a notional principal amount of £21 million The FRA rate will be 5.38% (Note: The FRA rate is more favourable than the futures rate of 5.39% (100 – 94.610) The company would therefore prefer to buy an FRA than sell futures However, it might prefer to buy put options on futures rather than buy an FRA) In mid-June, the company will borrow £21 million for two months If the LIBOR rate is 6%, it will borrow at 6.75% (LIBOR + 0.75%) for two months Futures The futures price in mid-June can be estimated as follows: June futures price in mid-March LIBOR rate in mid-March Basis in mid-March 94.610 95.000 0.390 In mid-March, there were 3.5 months to settlement of the June futures In midJune, there are 0.5 months remaining to settlement Basis is assumed to have reduced in size by mid-June to: (0.5/3.5) × 39 points = 5.6 points, say points LIBOR rate in mid-June Basis in mid-June Estimated futures price in mid-June 94.000 00.005 93.995 The company will close its position by buying 28 June futures at 93.995 Original selling price Buying price to close Gain (ticks) 514 94.610 93.995 00.615 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Answers The total gain on the futures position: = 28 contracts × 61.5 ticks per contract × £12.50 per tick = £21,525 (The gain on the futures position offsets the cost of the increase in the interest rate above the rate fixed by the futures contract (6% - 5.39% = 0.61%) The extra borrowing cost is £21 million × 0.61% × 2/12 = £21,350 The difference of £175 is due to the basis risk) Options on futures The company will exercise its options to sell futures at the strike price for the option, and will then close the futures position, giving a gain on closing the futures position Strike price 94750 Strike price 95000 Option strike price to sell Buying price to close Gain (ticks) 94.750 93.995 0.755 95.000 93.995 1.005 Total gain: 28 × 75.5 ticks × £12.50 28 × 100.5 ticks × £12.50 £26,425 £35,175 However, after taking into account the cost of the option premiums, the net gain is reduced FRA The company’s FRA bank will make a payment equivalent to (6% - 5.38%) = 0.62% per year on £21 million for two months, to settle the FRA The gain on the FRA will offset the higher interest cost of borrowing 48 Black-Scholes Step 1: Calculate d1 ⎛ 870 ⎞ ln ⎜ ⎟ + (0.05 × 0.5 ) 900 ⎠ d1 = ⎝ + 0.5c 0.09 × 0.5 0.09 × 0.5 ln (870/900) = ln 0.96667 Using a calculator, the natural logarithm of 0.96667 can be obtained This is – 0.0339 −0.0339 + 0.025 + 0.5 × 0.30 × 0.7071 0.30 × 0.7071 = (-0.0089/0.21213) + 0.106 d1 = =-0.042, say-0.04 © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 515 Paper P4: Advanced Financial Management Step 2: Calculate d2 d =d1 −σ t = −0.042 − ( 0.09 × 0.5 ) =-0.042-0.212 =-0.254, say –0.25 Step 3: Obtain values for N(d1) and N(d2) (a) N(d1) When d1 = 0.042, the corresponding value in the normal distribution table is 0.0160 The value of d1 is negative, so subtract from 0.50 N(d1) = 0.5000 – 0.0160 = 0.4840 (b) N(d2) When d2 = 0.25, the corresponding value in the normal distribution table is 0.0987 The value of d2 is negative, so subtract from 0.50 N(d2) = 0.5000 – 0.0987 = 0.4013 Step 4: Calculate the option price The value of e-rt The value of rt is (0.05)(0.5) = 0.025 The value of e-0.025 is the same as 1/e0.025 Using a calculator, the value of e0.025 can be obtained: this is 1.0253 Therefore e-0.025 = 1/1.0253 = 0.9753 Option price = PS N(d1) – X e-rt N(d2) = = = 870 (0.4840) 421 – 352 69 – 900 (0.9753) (0.4013) The option price is 69 49 Put-call parity Value of put option + Current share price = Value of call option + PV of exercise price The PV of the exercise price = 600 × 1/(1.04)0.5 = 600 × 0.9806 = 588 Value of put + 582 = 33 + 588 Value of put = 39 516 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Answers 50 Delta hedge (a) The bank should hold one share in TER for every call options (1/0.125) that it writes (Alternatively, if it buys call options, it should sell one share forward for settlement on the option expiry date for every options that it buys) (b) Calculate d1 ⎛ 258 ⎞ ln⎜ ⎟ + (0.04 x 0.5) ⎝ 260 ⎠ d1 = + 0.5 x 0.16 x 0.5 0.16 x 0.5 ln (258/260) = ln 0.9923 Using a calculator, the natural logarithm of 0.9923 can be obtained This is – 0.0077 d1 = −0.0077 + 0.02 + 0.5 x 0.40 x 0.7071 0.40 x 0.7071 =(0.0123/0.2828)+0.1414 =0.185 The bank should hold one share in BVZ for every 5.4 call options (1/0.185) that it writes (Alternatively, if it buys call options, it should sell one share forward for settlement on the option expiry date for every 5.4 options that it buys) 51 Bonus scheme Bonus linked to EVA It is assumed that research and development costs should be capitalised The EVA in the year just ended is therefore as follows Sales Cost of sales Depreciation Tax: 44 + [(14 + 35) × 30%] NOPAT $ million 683.0 (421.0) (65.0) (58.7) 138.3 Interest should be calculated on the capital employed at the beginning of the year, adjusted to include the research and development costs in the previous three years that should be capitalised for the purpose of EVA calculations Capital employed (in $ million) = 525 + (14 × 3) = 567 Notional interest at 9% = $51.03 million, say $51.0 million NOPAT Notional interest EVA $ million 138.3 (51.0) 87.3 © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 517 Paper P4: Advanced Financial Management If the bonus payment is 0.5% of EVA, on the basis of the previous year’s EVA the executive could expect to receive $436,500 as a cash bonus Share options The share options would be call options Their value can be estimated from the value of a similar put option, using the put-call parity theorem Value of put = Value of call – Current market value + Strike price × e-rT 30 = Value of call – 140 + 140 × e-(0.05 × 1) 30 = Value of call – 140 + (140 × 0.951229) Value of call = 36.83cents The value of at-the-money call options on million shares, with an exercise date in one year, is therefore about $736,600 52 Delta neutral (a) Barn plc could either buy put options on Door plc shares, or could write call options With put options, the company would pay a premium to secure a worstpossible share price With call options, the company would receive income from selling the options but would be exposed to a risk of a rise in the share price above the exercise price The company should choose November options, and might consider a strike price of either 600 or 650 If Barn plc buys November put options, it will buy 4,000 contracts (1) If it buys put options at 600, the option premium payable will be 22.0 If the share price at the end of November is 580, the put options will be exercised for a gain of 20 (600 – 580) However, allowing for the premium, the net loss will be 2.0 pence per share or £80,000 in total compared with a strategy of not hedging the risk with options and selling the shares at the current market price of 580 (2) If it buys put options at 650, the option premium payable will be 47.5 If the share price at the end of November is 580, the put options will be exercised for a gain of 70 (650 – 580) Allowing for the premium, the net gain will be 22.5 pence per share or £900,000 in total compared with a strategy of not hedging the risk with options and selling the shares at the current market price of 580 (b) To establish a delta neutral position, the company should sell call options If the share price goes up, the value of the investment in million shares will rise, but this will be offset by the loss on the call options, leaving the net value of the investment unchanged If the share price falls, the loss in the value of the shares will be offset by a gain on the options position The option delta for the relevant option is 0.46, which means that for every share held, the company would sell 1/0.46 = 2.1739 call options on the shares, or 8,695,600 call options in total 518 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Answers A problem with establishing a delta neutral hedge is that ideally at-the-money options should be sold, but these are not normally available as traded options Another problem is that the option delta is only applicable over a fairly narrow range of prices for a share If the share price moves by more than a small amount, the option delta changes and options must be cancelled or written in order to reestablish a delta neutral hedge The position therefore needs continual monitoring and adjusting if the share price is volatile © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 519 Paper P4: Advanced Financial Management 520 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Paper P4 Advanced Financial Management i Index DC A   Accounting: economic model  47  Acquisitions 230 Adjusted present value method (APV) 186  Agency theory  22  All‐share consideration  271  Alpha factor  Altman’s Z score 136  277  Annual volatility of a project  103  Annuities  Asset beta  Audit committee 59  173  29   B   Bank for International Settlements (BIS) 439  Bankers’ acceptances  Base case NPV Base rates Basis Basis risk Beta factor of a portfolio Beta factor of a security Beta factor of a small portfolio Bid rate 295  187 292 357 358 129 133 135 313 Bill of exchange Black-Scholes option pricing model Grabbe variant Board committees Board of directors 295 403 410 28 27  Bond duration  Bond futures Book value 67  375 240  Borrowers’ options  391  Bounded rationality  Business reorganisation 24  282      C   Calculating the NPV of a project Call options Capital allowances Capital asset pricing model (CAPM) advantages and disadvantages formula Capital rationing Capital reconstruction Caps Carbon neutrality 57 379 76 132 138 133 195 279 393 45  Carbon trading  Cash flow forecasting Cash management 52  298 298 © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 521 Paper P4: Advanced Financial Management Certificate of deposit (CDs) Closing positions Coefficient of variation Collars Commercial paper (CP) Commodity futures 296 354 116  395 296  350  Commodity option  378  Common markets  432  Communication with shareholders  Competition law Corporate code of ethics 30  235 35  Corporate failure prediction models  276  Corporate governance: improvement  27  Corporate governance: other countries  30  Corporate social responsibility  Cost of capital and gearing Cost of debt capital Cost of equity CAPM method Coupon-bearing instruments Coupon swap Countertrade Credit arbitrage Credit ratings Credit risk Cross rates Currency futures Currency options Currency risk Currency swaps Currency transaction exposures 21  158 148 144 147 294 339 306 343 153 300 320 362 386 211 345 308      D   DCF and inflation  DCF and taxation  DCF appraisal: investment in a developing country Delta Delta hedging Demergers Directors’ remuneration 522 81  75  222 419 416 282 29  Discount instruments Discount tables Discounted cash flow: net present value method 294 58 56 Discounted payback period  Disposal value Distribution tables Divestments Dividend growth model method Dividend policy monitoring Dividend valuation model method constant annual dividends constant rate of growth in annual dividends Documentary credits Duration 63  239 105 283 145 38 39 144 242 244 304 65      E   Ecological footprint 44 Economic model: accounting 47 Economic value added (EVA) 256 Efficient portfolio 125 Environmental audits 47, 50 Environmental footprint 44 Environmental reporting 47 Environmental risk 44, 46  Equity: cost 144 Estimating future spot exchange rates 217 Exercise price 380 Exchange controls 212 Exchange rate risk 211 Exchange rates and volatility 309 Exercising options 383 Expected value 91  Expiry date 379 Export factoring 305       Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Index F I     Financial futures  350  Imperfect hedges  34  Inflation and DCF  Inter-bank market 81  291  Interest costs and taxation  Interest rate option 75  390  Interest rate parity theory  219  Interest rate risk  Interest rate swap 330  338  30  69 438   Internal control and risk management  Internal rate of return (IRR) International Bank for Reconstruction and Development (IBRD) International bond markets International CAPM International Development Association (IDA) International equity International Fisher effect International lending International money markets International Monetary Fund (IMF) International sources of finance Investment portfolio: choice Investment risk Investor preferences: indifference theory Irredeemable fixed rate debt G   Financial management: ethical issues  Financial option  378  Financial risk management  300  Financial strategy formulation  32  Financial synergies 234 Fiscal risk 94, 215 reduction 95, 216 Fixed exchange rate policy 311 Floating rate debt 148 Floors 395 Foreign exchange risk 308 Foreign investment decisions: affecting 210 factors Forfaiting 305 Forward contracts 316 Forward rate agreement (FRA) 333 Forward rates 316 Free cash flow 253 Free floating 310 Free trade 432 Futures exchanges 350 Futures prices 351 FX risk 211 FX swaps 346      Gamma Gearing and cost of capital Going private Gordon growth model Gordon’s growth approximation Greeks, The 435 139 438 436 219 435 436 438 228 124 114 125 148    420 158 286 38  145 419      H Hedging risk Hedging with options Hostile takeover bid 360, 388  321 385 235  K KMV/Moody’s model 278      L   Lenders’ options Letters of credit Libor 392 304 291      © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 523 Paper P4: Advanced Financial Management M     Managed floating Management buyouts/ buy-ins Margin Market portfolio Market premium Market timing theory Market value added (MVA) Mergers Modified internal rate of return (MIRR) Modigliani-Miller Money cost of capital Money market hedge Money market instruments Money markets Monte Carlo simulation capital investment appraisal Multinational companies double taxation agreement tax planning tax rates withholding tax Multi-period capital rationing Multivariate discriminant analysis   311 284 352 126 128 184 261 230 72  159 81 325 294 290 96 99 422 425 427 425 425 196  276  P   Payback period  Pecking order theory 63  183  Perpetual bonds  148  Perpetuities  Preference shares  151  Primary corporate objective  Protectionism Political risk Portfolio theory Premiums and discounts Present value of the tax shield Private equity Project value at risk Project volatility Purchase consideration Purchasing power parity (PPP) theory Put call parity Put options 20  431 212 118 318 189 287 103 101 270 217 408 379        Q     N Quoting exchange rates      Net present value method of investment  56    appraisal  Netting R 321  Notional loans and deposits  335  Normal distribution  105      O Offer rate Open positions Opportunism Options Organisation: objectives  524 313 354 24  378  20  62  315    Real cost of capital 81 Real option 203, 378 valuation 207 Real options theory 204 Redeemable fixed rate bonds 149 Redeemable fixed rate debt 149 Reducing balance method 77 Regulatory framework for mergers 234 and acquisitions Repo market 292 Retained earnings 39  Revenue synergies 233 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Index Risk Risk and return in investments  90  114  Risk management and internal control  30  Risk management framework  34  Risk modelling  94      S Scenario analysis Sensitivity analysis Settlement dates Share buy-back Share repurchase scheme Shareholder value added Short-term interest rate future (STIR) Single period capital rationing Social footprint Sources of debt Sources of equity Sources of short-term finance Spot rates Spreads Standard normal distribution table Stakeholder interests: conflict resolution Static trade-off theory Stakeholder theory Straight line method Stress testing Sustainability reporting Swap rates Swaption Synergy Synthetic agreement for forward exchange (SAFE) Systematic risk securities 303 93 351 285 285 252 367 196 45  300 299 300 314 152 107 20 26  182 25 76 303 47 339 392 233 323 130 132  Taxation and DCF Taxation and international investment Tax-allowable depreciation Tax exhaustion Term structure of interest rates Theta Ticks Transaction cost economics (TCE) Transaction cost theory Transaction risk Translation risk Treasury bills 75 214 76 79 151 420 356 23 23  211 212 294 Treasury function Triple bottom line reports Two-asset portfolio 298 48 119      U   Uncertainty Unsystematic risk 90  130      V   Valuation assumptions  264  Valuation methods  Value at Risk models (VaR) 239  302  Variable rate debt  148  Vega  420  Venture capital finance  284      W   Weighted avergae cost of capital  142      calculation  155      capital investment appraisal  143  T   market value  World bank World Trade Organisation (WTO) 157  437 433 Takeover Code Takeovers 235 230 © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 525 Paper P4: Advanced Financial Management Y   Yield curve  151      Z   Z scores (Zeta scores) Zero cost dollars 526 276 395 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Publishing P4 Study Text - Advanced Financial Management A well-written and focused text, which will prepare you for the examination and which does not contain unnecessary information • Comprehensive but concise coverage of the examination syllabus • A focus on key topic areas identified by specialist tutors • Simple English with clear and attractive layout • A large bank of practice questions which test knowledge and application for each chapter • A full index • The text is written by Emile Woolf International’s Publishing division (EWIP) The only publishing company focused purely on the ACCA examinations • EWIP’s highly experienced tutors / writers produce study materials for the professional examinations of the ACCA • EWIP’s books are reliable and up-to-date with a user-friendly style and focused on what students need to know to pass the ACCA examinations • EWIP’s association with the world renowned Emile Woolf Colleges means it has incorporated student feedback from around the world including China, Russia and the UK For Distance Learning Programmes please visit our website at: www.ewipublishing.com ACCA ... www.emilewoolfpublishing.com distancelearning@emilewoolfpublishing.com tel: +44(0) 1483 225746 ACCA ACCA Paper P4 Advanced Financial Management Welcome to Emile Woolf‘s study text for Paper P4 Advanced. .. www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 11 Paper P4: Advanced Financial Management 13 12 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Paper P4 Advanced. .. for valuing high growth start-ups © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides Paper P4: Advanced Financial Management Regulatory framework and processes a) b) Financing