2014 ACCA p4 revision kit BPP advanced financial management

PAPER P4
ADVANCED FINANCIAL
MANAGEMENT

BPP Learning Media is the sole ACCA Platinum Approved Learning Partner – content
for the ACCA qualification. In this, the only Paper P4 Practice and Revision Kit to be
reviewed by the examiner:


We discuss the best strategies for revising and taking your ACCA exams



We show you how to be well prepared for your exam



We give you lots of great guidance on tackling questions



We show you how you can build your own exams



We provide you with three mock exams including the new Pilot paper

Our Passcard and i-Pass products also support this paper.

FOR EXAMS UP TO JUNE 2014

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First edition 2007
Seventh edition January 2013
ISBN 9781 4453 6654 8
(previous ISBN 9781 4453 8003 2)
e-ISBN 9781 4453 6957 0
British Library Cataloguing-in-Publication Data
A catalogue record for this book

is available from the British Library

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ii

©
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2013


Contents
Page

Finding questions
Using your BPP Learning Media products..................................................................................... ..... .............................iv
Question index .................................................................................................................................................................. v
Topic index .................................................................................................................................................................... viii

Helping you with your revision – the ONLY P4 Practice and
Revision Kit to be reviewed by the examiner! ........................................................................................ ix
Revising P4
Topics to revise................................................................................................................................................................. x
Question practice .............................................................................................................................................................. x
Passing the P4 exam........................................................................................................................................................ xi
Exam formulae ................................................................................................................................................................ xv
Exam information .......................................................................................................................................................... xvii
Useful websites ............................................................................................................................................................. xix

Planning your question practice
BPP Learning Media’s question plan............................................................................................................................... xx
Build your own exams...................................................................................................................................................xxiv

Questions and answers

Questions..........................................................................................................................................................................3
Answers ..........................................................................................................................................................................91

Exam practice
Mock exam 1

Questions ............................................................................................................................................................357

Plan of attack .......................................................................................................................................................367

Answers...............................................................................................................................................................369
Mock exam 2

Questions ............................................................................................................................................................389

Plan of attack .......................................................................................................................................................399

Answers...............................................................................................................................................................401
Mock exam 3 (Pilot Paper)

Questions ............................................................................................................................................................417

Plan of attack .......................................................................................................................................................427

Answers...............................................................................................................................................................429
ACCA examiner's answers

Pilot paper ...........................................................................................................................................................445

Mathematical tables and formulae............................................................................................................459

Review Form

iii


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Using your BPP Learning Media products
This Kit gives you the question practice and guidance you need in the exam. Our other products can also help you pass:


Learning to Learn Accountancy gives further valuable advice on revision



Passcards provide you with clear topic summaries and exam tips



Success CDs help you revise on the move



i-Pass CDs offer tests of knowledge against the clock



Underlying knowledge CD offers guidance on assumed knowledge for Options papers P4, P5, P6, P7

You can purchase these products by visiting />
iv

Finding questions

Question index
The headings in this checklist/index indicate the main topics of questions, but questions are expected to cover
several different topics. Questions have been amended to reflect the new format of the exam from June 2013.
Questions set under the old syllabus Paper 3.7 – Strategic Financial Management (SFM) and Paper 14 – Financial
Strategy (FS) are included as their style and/or content are similar to the questions that appear in Paper P4 –
Advanced Financial Management.
Part A: Role and responsibility towards stakeholders

Time

Page number

Marks

allocation
Mins

Question

Answer

1 Preparation question – Shareholders and bondholders

15

27

3

91

2 Preparation question – Capital structure (12/04)

15

27

3

92

3 Multimedia company

25

45

3

94

4 Agenda for change (12/07, amended)

25

45

4

97

5 Solar Supermarkets (12/08, amended)

25

45

5

100

6 Preparation question – International corporate governance
(SFM, 12/02)

15

27

5

102

7 Mezza Co (6/11, amended)

25

45

6

104

8 Kengai Co (12/11, amended)

25

45

7

107

9 International trade

25

45

8

109

10 Global financial markets

25

45

8

111

11 Boxless (SFM, 12/04, amended)

25

45

9

113

12 World Trade Organisation (SFM, 12/05, amended)

25

45

9

116

13 Pharmaceutical Co (6/09, amended)

25

45

10

119

14 PMU (12/10, amended)

25

45

10

120

15 Jonas Chemical Systems

25

45

12

123

16 CD

25

45

13

127

17 Slow Fashions Co (6/09, amended)

25

45

14

130

18 Your business (6/09, amended)

25

45

15

133

19 Kodiak Company (12/09, amended)

25

45

15

136

20 Tisa Co (6/12, amended)

25

45

17

139

21 GDW Co

25

45

17

141

22 Preparation question – Cathlynn

15

27

18

143

23 MMC (6/11, amended)

25

45

19

144

24 Marengo Co (12/10, amended)

25

45

19

146

25 Digunder (12/07, amended)

25

45

20

148

26 AVT (SFM, 12/01, amended)

25

45

21

151

27 Alaska Salvage Co (12/09, amended)

25

45

21

153

28 Strayer (SFM, 6/02, amended)

25

45

22

155

29 Neptune (6/08, amended)

25

45

22

157

Part A: Role and responsibility towards
stakeholders

Part B: Economic environment for multinationals

Part C: Advanced investment appraisal

Finding questions

v


Part A: Role and responsibility towards stakeholders

Time

Page number

Marks

allocation
Mins

Question

Answer

30 Airline Business (12/07, amended)

25

45

23

161

31 Fubuki (12/10)

25

45

24

164

32 Levante Co (12/11, amended)

25

45

25

167

33 Do-it-Yourself

25

45

26

170

34 AWP Co

25

45

27

174

35 Preparation question – Somax (FS, 6/96, amended)

12

22

28

176

36 Pondhills (FS, 6/01, amended)

25

45

29

178

37 Ennea (6/12)

25

45

30

179

38 Mercury Training (6/08, amended)

25

45

31

182

39 Saturn Systems (6/08, amended)

25

45

31

185

40 Minprice

25

45

32

187

41 Fly 4000

25

45

34

191

42 Burcolene (12/07, amended)

25

45

35

195

43 AIR

25

45

37

199

44 MandM Co (6/10, amended)

25

45

38

202

45 Proteus Co (12/11, amended)

25

45

38

204

46 BBS Stores (6/09, amended)

25

45

39

207

47 Troder (SFM, 6/03, amended)

25

45

42

211

48 MJY (SFM, 12/05, amended)

25

45

42

213

49 KYT (FS, 6/99, amended)

25

45

43

215

50 Asteroid Systems (6/08, amended)

25

45

44

217

51 Multidrop (6/10, amended)

25

45

44

220

52 NTC (SFM, 6/02, amended)

25

45

45

223

53 Casasophia Co (6/11, amended)

25

45

46

226

54 HYK (FS, 12/99, amended)

25

45

47

230

55 Phobos Co (12/08, amended)

25

45

48

232

56 Katmai Co (12/09, amended)

25

45

49

235

57 Sembilan Co (6/12, amended)

25

45

50

237

58 Lamri Co (12/10, amended)

25

45

50

240

59 Moose Co (12/09, amended)

25

45

52

243

60 GoSlo Motor Corp (6/10, amended)

25

45

52

245

61 Kilenc Co (6/12, amended)

25

45

53

247

62 NRD Co

25

45

54

250

Part D: Acquisitions and mergers

Part E: Corporate reconstruction and reorganisation

Part F: Treasury and advanced risk management
techniques

Part G: Emerging issues

vi

Finding questions


Part A: Role and responsibility towards stakeholders

Time

Page number

Marks

allocation
Mins

Question

Answer

63 Vadener (SFM, 6/06, amended)

50

90

55

252

64 International Enterprises (12/07, amended)

50

90

56

256

65 McTee (SFM, 6/05, amended)

50

90

58

259

66 Wurrall (SFM, 6/04, amended)

50

90

59

265

67 Blipton International (12/08, amended)

50

90

61

270

68 Jupiter Co (12/08, amended)

50

90

62

275

69 Trosoft (SFM, 12/04, amended)

50

90

63

279

70 Your company (FS, 6/99, amended)

50

90

65

283

71 Omnikit (FS, 6/97, amended)

50

90

67

287

72 Intergrand (SFM, 12/02, amended)

50

90

68

293

73 Pursuit Co (6/11, amended)

50

90

70

298

74 Laceto (FS, 6/01, amended)

50

90

72

304

75 Anchorage Retail Co (12/09, amended)

50

90

73

309

76 Romage (FS, 6/00, amended)

50

90

75

314

77 Galeplus (SFM, 12/04, amended)

50

90

77

318

78 Polytot (SFM, 6/04, amended)

50

90

78

322

79 FNDC (SFM, 12/06, amended)

50

90

79

328

80 Nente Co (6/12, amended)

50

90

80

332

81 Seal Island (6/10, amended)

50

90

82

336

82 Sleepon (SFM, 12/05, amended)

50

90

84

341

83 Fuelit (FS, 12/00, amended)

50

90

85

345

84 Aggrochem Co (6/10, amended)

50

90

86

350

Part H: 50 mark questions

Mock exam 1
Questions 85 to 88

Mock exam 2
Questions 89 to 92

Mock exam 3 (Pilot paper)
Questions 93 to 96

Planning your question practice

Our guidance from page xx shows you how to organise your question practice, either by attempting questions from
each syllabus area or by building your own exams – tackling questions as a series of practice exams.

June and December 2013 exams
BPP’s answers for these exams along with additional questions will be available for free after the exams on
/>
Finding questions

vii


Topic index
Listed below are the key Paper P4 syllabus topics and the numbers of the questions in this Kit covering those
topics.
If you need to concentrate your practice and revision on certain topics or if you want to attempt all available
questions that refer to a particular subject, you will find this index useful.
Syllabus topic

Question numbers

Acquisitions - regulatory framework and processes

7, 39, 40, 63, 74, 80

Acquisitions and mergers versus other growth strategies

39, 42, 64, 67, 71, 72, 75, 82

Application of option pricing theory in investment decisions 17, 22, 23, 24, 25, 26, 27, 83, 84
Business re-organisation

38, 43, 44, 45, 46, 76, Mock 1 Q4, Mock 3 Q3

Conflicting stakeholder interests

1, 5, 6, 8, 11, Mock 1 Q1

Dividend policy in multinationals and transfer pricing

11, 12, 14, 58, 63, 64, 71, 78, Mock 2 Q4

Environmental issues

4, 7, 8, 73, 83, Mock 3 Q1

Ethical issues

3, 4, 5, 7, 13, 76

Financial planning for multinational organisations

10, 11, 14, 65, 67, 72, Mock 2 Q1

Financial reconstruction

43, 76, Mock 3 Q3

Financial strategy formulation

1, 3, 4, 5, 7, 37, 63, 64, 66, 68, 75, 80, Mock 2 Q4,

Mock 3 Q1

Financing acquisitions and mergers

40, 72, 74, 75

Foreign exchange risk hedging

48, 49, 50, 51, 52, 53, 65, 68, 77, 78, 84, Mock 1 Q2,
Mock 2 Q2

Impact of financing on investment decisions and adjusted 10, 27, 28, 29, 30, 31, 32, 33, 34, 35, 37, 38, 57, 65,
present values
66, 68, 69, 70, 81, Mock 3 Q4

viii

Interest rate risk hedging

27, 47, 49, 54, 55, 56, 57, 75, 77, 79, Mock 2 Q2,
Mock 3 Q2

International investment and financing decisions

16, 33, 71, 72, Mock 2 Q1, Mock 3 Q1

International trade and finance

60, 61, 70

Investment appraisal - discounted cash flow techniques

15, 16, 17, 18, 20, 21, 29, 56, 67, 68, 69, 81, 82, 83,
Mock 1 Q1, Mock 1 Q3, Mock 2 Q3

Islamic financing

59, 62, 70

Management of international trade and finance

9, 11, 12, 13, 37, 63, 78

The role and responsibility of senior financial
executive/advisor

2, 3, 10, 13, 64, 66, Mock 1 Q1

Treasury function

48, 50, 78, 79

Valuation and the use of free cash flows

19, 41, 42, 66, 73, 80, 84, Mock 1 Q3

Valuation for acquisitions and mergers

40, 41, 42, 71, 72, 73, 74, 80, 84

World financial markets

59, 60, 61, 73

Finding questions


Helping you with your revision – the ONLY P4 Practice and
Revision Kit to be reviewed by the examiner!
BPP Learning Media – the sole Platinum Approved Learning Partner content
As ACCA’s sole Platinum Approved Learning Partner – content, BPP Learning Media gives you the unique
opportunity to use examiner-reviewed revision materials for the 2013 and June 2014 exams. By incorporating the
examiner’s comments and suggestions regarding syllabus coverage, the BPP Learning Media Practice and Revision
Kit provides excellent, ACCA-approved support for your revision.

Tackling revision and the exam
Using feedback obtained from ACCA examiners as part of their review:


We look at the dos and don’ts of revising for, and taking, ACCA exams



We focus on Paper P4; we discuss revising the syllabus, what to do (and what not to do) in the exam, how
to approach different types of question and ways of obtaining easy marks

Selecting questions
We provide signposts to help you plan your revision.


A full question index



A topic index listing all the questions that cover key topics, so that you can locate the questions that provide
practice on these topics, and see the different ways in which they might be examined



BPP's question plan highlighting the most important questions and explaining why you should attempt
them



Build your own exams, showing how you can practise questions in a series of exams

Making the most of question practice
At BPP Learning Media we realise that you need more than just questions and model answers to get the most from
your question practice.


Our Top tips included for certain questions provide essential advice on tackling questions, presenting
answers and the key points that answers need to include



We show you how you can pick up Easy marks on some questions, as we know that picking up all readily
available marks often can make the difference between passing and failing



We include marking guides to show you what the examiner rewards



We include examiners’ comments to show you where students struggled or performed well in the actual
exam



We refer to the 2012 BPP Study Text (for exams up to June 2014) for detailed coverage of the topics
covered in questions

Helping you with your revision

ix


Attempting mock exams
There are three mock exams that provide practice at coping with the pressures of the exam day. We strongly
recommend that you attempt them under exam conditions. Mock exams 1 and 2 reflect the question styles and
syllabus coverage of the exam; Mock exam 3 is the pilot paper.

Revising P4
Topics to revise
Any part of the syllabus could be tested in the compulsory Section A question, therefore it is essential that you learn
the entire syllabus to maximise your chances of passing. There are no short cuts – trying to spot topics is
dangerous and will significantly reduce the likelihood of success.
As this is an advanced level paper, it assumes knowledge of the topics covered in Paper F9 – Financial
Management, including the Capital Asset Pricing Model (CAPM), investment appraisal techniques (such as NPV and

IRR), cost of capital and risk management. You should revise these topics if necessary as they have a significant
impact on your understanding of the more advanced techniques.
It's also useful to keep reading the business pages during your revision period and not just narrowly focus on the
syllabus. Remember that the examiner has stressed that this paper is about how organisations respond to realworld issues, so the more you read, the more practical examples you will have of how organisations have tackled
real-life situations.

Question practice
You should use the Passcards and any brief notes you have to revise the syllabus, but you mustn't spend all your
revision time passively reading. Question practice is vital; doing as many questions as you can in full will help
develop your ability to analyse scenarios and produce relevant discussion and recommendations. The question plan
on page xxi tells you what questions cover so that you can choose questions covering a variety of syllabus areas.
Make sure you leave enough time in your revision schedule to practise the longer Section A questions, as such
questions are compulsory in the exam. The scenarios and requirements of Section A questions are more complex
and will integrate several parts of the syllabus, therefore practice is essential. Also ensure that you attempt all three
mock exams under exam conditions.

x

Revising P4


Passing the P4 exam
Displaying the right qualities
The examiner will expect you to display the following qualities.
Qualities required
Fulfilling the higher level
question requirements

This means that when you are asked to show higher level skills such as
assessment or evaluation, you will only score well if you demonstrate them.

Merely describing something when you are asked to evaluate it will not earn
you the marks you need.

Identifying the most important
features of the organisation
and its environment

You must use your technical knowledge and business awareness to identify
the key features of the scenario.

Sorting the information in the
scenario

You will get a lot of information, particularly in the Section A scenario, and will
be expected to evaluate how useful it is and use it to support answers such as
comparisons and discussions.

Selecting relevant real-life
examples

You will gain credit for using good examples.

Arguing well

You may be expected to discuss both sides of a case, or present an argument
in favour or against something. You will gain marks for the quality and logical
flow of your arguments.

Making reasonable
recommendations

The measures you recommend must be appropriate for the organisation; you
may need to discuss their strengths and weaknesses, as there may be costs of
adopting them. The recommendations should clearly state what has to be done.

Avoiding weaknesses
Our experience of, and examiner feedback from, other higher level exams enables us to predict a number of
weaknesses that are likely to occur in many students’ answers. You will enhance your chances significantly if you ensure
you avoid these mistakes:


Failing to provide what the question verbs require (discussion, evaluation, recommendation) or to
write about the topics specified in the question requirements



Repeating the same material in different parts of answers



Stating theories and concepts rather than applying them



Quoting chunks of detail from the question that don't add any value



Forcing irrelevancies into answers, for example irrelevant definitions or theories, or examples that
don't relate to the scenario



Giving long lists or writing down all that's known about a broad subject area, and not caring
whether it's relevant or not



Focusing too narrowly on one area – for example only covering financial risks when other risks are
also important



Letting your personal views prevent you from answering the question – the question may require
you to construct an argument with which you personally don’t agree



Unrealistic or impractical recommendations



Vague recommendations - instead of just saying improve risk management procedures, you should
discuss precisely how you would improve them



Failing to answer sufficient questions, or all parts of a question, because of poor time management

Revising P4

xi


Using the reading time
We recommend that you spend the first part of the 15 minutes reading time choosing the Section B questions you
will do, on the basis of your knowledge of the syllabus areas being tested and whether you can fulfil all the question
requirements. Remember that Section B questions can cover different parts of the syllabus, and you should be
happy with all the areas that the questions you choose cover. We suggest that you should note on the paper any
ideas that come to you about these questions.
However don't spend all the reading time going through and analysing the Section B question requirements in
detail; leave that until the three hours’ writing time. Instead you should be looking to spend as much of the reading
time as possible looking at the Section A scenario, as this will be longer and more complex than the Section B
scenarios and cover more of the syllabus. You should highlight and annotate the key points of the scenario on the
question paper.

Choosing which questions to answer first
Spending most of your reading time on the compulsory Section A question will mean that you can get underway
with planning and writing your answer to the Section A question as soon as the three hours start. It will give you
more actual writing time during the one and a half hours you should allocate to it and it's writing time that you'll
need. Comments from examiners of other syllabuses that have similar exam formats suggest that students appear
less time-pressured if they do the big compulsory questions first.
During the second half of the exam, you can put Section A aside and concentrate on the two Section B questions
you’ve chosen.
However our recommendations are not inflexible. If you really think the Section A question looks a lot harder than
the Section B questions you’ve chosen, then do those first, but DON'T run over time on them. You must leave
yourself at least one hour and 30 minutes to tackle the Section A question. When you come back to it, having had
initial thoughts during the reading time, you should be able to generate more ideas and find the question is not as
bad as it looks.

Tackling questions
Scenario questions
You'll improve your chances by following a step-by-step approach to Section A scenarios along the following lines.

Step 1

Read the background
Usually the first couple of paragraphs will give some background on the company and what it is
aiming to achieve. By reading this carefully you will be better equipped to relate your answers to the
company as much as possible.

Step 2

Read the requirements
There is no point reading the detailed information in the question until you know what it is going to
be used for. Don’t panic if some of the requirements look challenging – identify the elements you are
able to do and look for links between requirements, as well as possible indications of the syllabus
areas the question is covering.

xii

Revising P4


Step 3

Highlight the action verbs that are used in each requirement
These convey the level of skill you need to exhibit and also the structure your answer should have. A
lower level verb such as define will require a more descriptive answer; a higher level verb such as
evaluate will require a more applied, critical answer. Approximately 75% of the syllabus will be tested

at intellectual level 3 (synthesis), 20% at intellectual level 2 (application) and 5% at level one
(knowledge). Action verbs that are likely to be frequently used in this exam are listed below, together
with their intellectual levels and guidance on their meaning.
Intellectual
level
1
2

3

Step 4

Identify/describe

State the meaning of

Calculate

Perform a specific mathematical technique

Discuss

Examine in detail by argument

Analyse

Examine in detail the structure of…

Evaluate

Use your judgement to assess the value of…

Advise

Use judgement to recommend a course of action

Report

Present/justify valid recommendations

Estimate

Make an approximate judgement or calculation

Check the mark allocation to each part
This shows you the depth anticipated and helps allocate time.

Step 5

Read the question slowly, focusing on the initial requirements
Once you know what you are expected to do in the first requirement, read the question in detail,
trying to focus on the information that will be needed for your first task.

Step 6

Read the scenario carefully
Put points under headings related to requirements (eg by noting in the margin to what part of the
question the scenario detail relates).

Step 7

Consider the consequences of the points you’ve identified
You will often have to provide recommendations based on the information you've been given. Be
prepared to criticize the code, framework or model that you’ve been told to use if required. You may
have also to bring in wider issues or viewpoints, for example the views of different stakeholders.

Step 8

Write a brief plan
You may be able to do this on the question paper as often there will be at least one blank page in the
question booklet. However any plan you make should be reproduced in the answer booklet when
writing time begins. Make sure you identify all the requirements of the question in your plan – each
requirement may have sub-requirements that must also be addressed. If there are professional
marks available, highlight in your plan where these may be gained (such as preparing a report).

Step 9

Write the answer
Make every effort to present your answer clearly. The pilot paper and exam papers so far indicate that
the examiner will be looking for you to make a number of clear points. The best way to demonstrate
what you’re doing is to put points into separate paragraphs with clear headers.

Revising P4

xiii


Discussion questions
Do not be tempted to write all you know about a particular topic in a discussion question. Markers can easily spot
when a student is ‘waffling’ and you will receive little or no credit for this approach. Keep referring back to the

question requirement to ensure you are not straying from the point.
To make it easier for the marker to determine the relevance of the points you are making, you could explain what
you mean in one sentence and then why this point is relevant in another.
Remember that depth of discussion will be important. Always bear in mind how many marks are available for the
discussion as this will give you an indication of the depth that is required. Ask yourself the following questions as
you are tackling a discussion question:




Have I made a point in a coherent sentence?
Have I explained the point (to answer the ‘so what’ or ‘why’ queries)?
Have I related the point to the company in the scenario?

Gaining the easy marks
Knowledge of the core topics that we list under topics to revise should present you with some easy marks. The pilot
paper suggests that there will be some marks available on certain part questions for definitions, explanations or
descriptions that don’t have to be related to the scenario. However don’t assume that you can ignore all the
scenarios and still pass!
As P4 is a Professional level paper, 4 professional level marks will be awarded. Some of these should be easy to
obtain. The examiner has stated that some marks may be available for presenting your answer in the form of a
letter, presentation, memo, report or briefing notes. You may also be able to obtain marks for the style and layout of
your answer.
Reports should always have an appropriate title. They should be formally written, with an introductory paragraph
setting out the aims of the report. You should use short paragraphs and appropriate headings, with a summary of
findings as a conclusion.
Memorandums should have the following information at the beginning:
Subject; name of recipient; name of author; date
The language can be less formal than a report but the content should still have an introduction and conclusion, and
be divided into small paragraphs with appropriate headings.

Letters should be addressed appropriately to the correct person and be dated. They should have a short
introductory paragraph, and conclusion and be formally written. Letters beginning with ‘Dear Sir/Madam’ should
end with ‘Yours faithfully’.

xiv

Revising P4


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
Modigliani and Miller Proposition 2 (with tax)
k e  k ie  (1  T)(k ie  k d )

Vd

7a

Ve

The capital asset pricing model
2

E(ri) = Rf + i(E(rm) – Rf)
The asset beta formula




  Vd (1  T)
Ve
d 
a  
e   
 Ve  Vd (1  T)   Ve  Vd (1  T) 









2

The growth model
P0 

D0 (1  g)
(re  g)

12

Gordon's growth approximation
5

g = bre
The weighted average cost of capital

 Ve 
 Vd 
ke + 

 k d (1- T)
 Ve + Vd 
 Ve + Vd 

WACC = 

7a

The Fisher formula

(1 + i) = (1 + r) (1 + h)

5

Purchasing power parity and interest rate parity

S1 = S0 ×

1+ hc 
1+ hb 

8

F0 = S0 ×

1+ ic 
1+ ib 

8

Revising P4

xv


Chapter in Study Text
Modified internal rate of return

1

 PV  n
MIRR =  R  1+ re  - 1
 PVI 

5

The Black-Scholes option pricing model
6

c = PaN(d1) – PeN(d2)e–rt
In Pa /Pe  + (r + 0.5s )t
2

Where d1 =

6

s t

6

d2 = d 1 – s t
The put call parity relationship

6

p = c – Pa + Pee–rt

Formulae to learn
These are the main formulae that are not given in the exam formula sheet. Make sure you learn these as you may
be required to use them in the exam. They are used throughout the Study Text and this Practice and Revision Kit.

D
1 g
P
0

Ke =

Kd =

i(1t)

Kpref =

xvi

P
0
Preference dividend
Market value (ex div)

=

d
P0

Gearing

=

Book value of debt
Book value of equity

Interest cover

=

Profit from operations
Interest

Current ratio

=

Revising P4

Current
assets

:

Current
liabilities


Exam information
The exam paper
Format of the paper
The format of the exam changes from June 2013 onwards.
Section A comprises one compulsory question. The total for this section will be 50 marks.

Longer questions will cover topics from across the syllabus but will tend to be based on one major area – for
example a cross-border merger question (major topic) might bring in ethical issues (smaller topic).
Section B will be 50 marks in total (25 marks per question). There is a choice of two from three questions.
Four professional marks are available. The examiner has emphasised that in order to gain all the marks available,
students must write in the specified format (such as a report or memo). Reports must have terms of reference,
conclusion, appendices and appropriate headings. Make sure you are familiar with how different types of
documents are constructed to improve your chances of gaining maximum professional marks.
Time allowed is 3 hours with 15 minutes’ reading time and the pass mark remains at 50%.

Exams prior to 2013
Questions and answers for exams prior to 2013 are available on:
/>
Revising P4

xvii


Analysis of past papers
The table below provides details of when each element of the syllabus has been examined and the question number
and section in which each element appeared.
Covered
in Text
chapter

D
12

J
12

D
11

J
11

D
10

J
10

D

09

J
09

D
08

J
08

D
07

C

C

O

O

O

O

C

O

C, O

ROLE AND RESPONSIBILITY TOWARDS
STAKEHOLDERS
1, 2

Role of senior financial executive/financial
strategy formulation

3a

Conflicting stakeholder interests

3b, 3c

C

Ethical/environmental issues

O

O

C, O

O

O

ECONOMIC ENVIRONMENT FOR

MULTINATIONALS
4

Trading and planning in a multinational
environment

O

O

O

ADVANCED INVESTMENT APPRAISAL
5

Discounted cash flow techniques

6

Application of option pricing theory to investment
decisions

7a, 7b
8

Impact of financing, adjusted present values /
Valuation and use of free cash flows

O

O

C

C
C

International investment and financing decisions

C, O

C, O

O

C

C

C

C, O

C, O

O

O

C

C, O

O

O

C

C

O
O

O

0

O

C

C

C

ACQUISITIONS AND MERGERS
9, 11, 12 Strategic/financial/regulatory issues
10

Valuation techniques

O
O

C
C

C

C

C

CORPORATE RECONSTRUCTION &
REORGANISATION
13

Financial reconstruction

14

Business reorganisation

C
C

O

C

O

C

TREASURY & ADVANCED RISK MANAGEMENT
TECHNIQUES
15

Role of the treasury function

16

Hedging foreign currency risk

17

Hedging interest rate risk

18

Dividend policy & transfer pricing in
multinationals

O
C

C
O

O

C

O
O

O
O

O

EMERGING ISSUES
19

Recent developments and trends in world financial
markets and international trade

O

O

O

O

O

IMPORTANT!

The table above gives a broad idea of how frequently major topics in the syllabus are examined. It should not be
used to question spot and predict for example that Topic X will not be examined because it came up two sittings
ago. The examiner’s reports indicate that the examiner is well aware some students try to question spot. You can
assume that he will therefore take care to ensure that the exams avoid falling into a predictable pattern, and may
examine the same topic two sittings in a row for example.

xviii

Revising P4


Useful websites
The websites below provide additional sources of information of relevance to your studies for Advanced Financial
Management.


www.accaglobal.com
ACCA's website. The students’ section of the website is invaluable for detailed information about the
qualification, past issues of Student Accountant (including technical articles) and interviews with examiners.



www.bpp.com
Our website provides information about BPP products and services, with a link to the ACCA website.



www.ft.com
This website provides information about current international business. You can search for information and
articles on specific industry groups as well as individual companies.



www.economist.com
Here you can search for business information on a week-by-week basis, search articles by business subject
and use the resources of the Economist Intelligence Unit to research sectors, companies or countries.



www.invweek.co.uk
This site carries business news and articles on markets from Investment Week and International Investment.



www.pwcglobal.com/uk
The PricewaterhouseCoopers website includes UK Economic Outlook.



www.cfo.com
Good website for financial officers.



www.bankofengland.co.uk
This website is useful for sourcing Bank of England publications.



www.yieldcurve.com

A useful website for research and articles on such areas as interest rate derivatives and securitisation.

Revising P4

xix


Planning your question practice
We have already stressed that question practice should be right at the centre of your revision. Whilst you will spend
some time looking at your notes and Paper P4 Passcards, you should spend the majority of your revision time
practising questions.
We recommend two ways in which you can practise questions.


Use BPP Learning Media's question plan to work systematically through the syllabus and attempt key and
other questions on a section-by-section basis



Build your own exams – attempt questions as a series of practice exams

These ways are suggestions and simply following them is no guarantee of success. You or your college may prefer
an alternative but equally valid approach.

BPP Learning Media's question plan
The BPP Learning Media plan below requires you to devote a minimum of 45 hours to revision of Paper P4. Any
time you can spend over and above this should only increase your chances of success.

Step 1

Review your notes and the chapter summaries in the Paper P4 Passcards for each section of the
syllabus.

Step 2

Answer the key questions for that section. These questions have boxes round the question number
in the table below and you should answer them in full. Even if you are short of time you must attempt
these questions if you want to pass the exam. You should complete your answers without referring to
our solutions.

Step 3

Attempt the other questions in that section. For some questions we have suggested that you prepare
answer plans or do the calculations rather than full solutions. Planning an answer means that you
should spend about 40% of the time allowance for the questions brainstorming the question and
drawing up a list of points to be included in the answer.

Step 4

xx

Attempt Mock exams 1, 2 and 3 under strict exam conditions.

Planning your question practice


Syllabus section
Role and
responsibility
towards

shareholders

2012
Passcards
chapters

Questions
in this Kit

1-3C

2

Write an answer plan.
This is a good way to test your understanding of capital
structure issues.

3

Answer in full.
This question, adapted from the December 2007 exam,
tests your knowledge of strategic financial issues
Answer in full.
This question, adapted from the December 2008 exam,
covers ethical issues.
Write an answer plan.
This question examines corporate governance issues
and is a good test of your knowledge of different
corporate governance systems.
Answer in full.

This question, adapted from the June 2011 exam, looks
at key financial strategy decisions regarding the
commercialisation of a new product.
Answer in full.
This question, adapted from the December 2011 exam,
looks at triple bottom line reporting and also stakeholder
conflict.

4

6

7

8

Economic
environment for
multinationals

4

Answer in full.
This question focuses on overseas tax issues.

13

Answer in full.
This question, adapted from the June 2009 exam,
focuses on various ethical and strategic issues facing a

multinational company.
Write an answer plan.
This is a good question on financing issues facing a
multinational company.
Answer in full.
This question, adapted from the December 2010 exam,
covers advantages and disadvantages of a joint venture
with a foreign entity.

14

5-8



Comments

11

65

Advanced
investment
appraisal

Done

16

Do the calculations in part (a) to ensure you are

comfortable with the investment appraisal methods.

18

Answer in full.
This is adapted from the June 2009 paper and examines
investment appraisal techniques and duration.
Answer in full.
This question, adpated from the June 2010 paper
examines NPV, sensitivity analysis and simulations.

81

Planning your question practice

xxi


Syllabus section

2012
Passcards
chapters

Questions
in this Kit
19

22

23

24

84

29

32

Acquisitions and
mergers

9 - 12

39

38

73

75

Corporate
reconstruction and
reorganisation

13 - 14

Planning your question practice

Comments
Answer in full.
This adapted June 2012 question tests your ability to
use the free cash flow model to value a company.
Do the calculations in part (a). This gives you a good
opportunity to ensure you are comfortable with BlackScholes calculations.
Answer in full.
This adapted June 2011 question tests your ability to
use the Black-Scholes model to value an option to delay.
Answer in full.
This adapted December 2010 question covers options
contracts, delta hedging and risk management.
Answer part (a)
This question, adapted from the June 2010 exam, looks
at capital structure and regulation of takeovers.
Answer in full.
This adapted June 2008 question gives you the chance
to practise APV and MIRR calculations.
Answer in full.
This adapted December 2011 question gives you the
chance to practise bond valuations and credit ratings.
Write an answer plan.
This is a good discursive question on issues relating to a
takeover.
Answer in full.
This question requires you to determine an issue price
and calculate cost of equity capital and WACC.
Answer in full.
This adapted June 2011 question covers various

acquisition issues, including effects on capital structure,
business valuation techniques and finance requirements.
Answer in full.
An adapted December 2009 question which covers risks
associated with an acquisition, performance measures
and also interest rate risk.

43

Write an answer plan.
This question makes you think about advantages and
disadvantages of an MBO.

44

Answer in full.
An adapted June 2010 question that focuses on issues
to be considered when disposing of a division.
Answer in full.
This question, adapted from the December 2011 exam,
tests your skills in analysing a proposed MBO.

45

xxii

Done



Syllabus section
Treasury and
advanced risk
management
techniques

2012
Passcards
chapters

Questions
in this Kit

15 - 18

47

Write an answer plan.
This tests your understanding of the use of options for
foreign currency hedging.

48

Answer in full.
This is a good question for practising different hedging
strategies.
Answer in full.
This question, adapted from the June 2010 paper,
examines calculations and discussion relating to

multilateral netting.
Answer parts (a) and (b).
A question that covers alternative forms of currency
hedging.
Answer in full.
This question, adapted from the une 2012 exam, covers
interest rate swaps.
Answer in full.
A question adapted from June 2011 on interest rate
hedging, including swaps.
Answer in full.
This question, adapted from the December 2010 exam,
covers dividend capacity issues.

51

78

57

53

58

Emerging issues

19

59

60

61

Done



Comments

Answer in full.
A good question, adapted from the December 2009
paper, on lending issues set against the background of
the global debt crisis.
Answer in full.
This question, adapted from the June 2010 exam, deals
with tranching, credit enhancement and securitisation.
Answer in full.
This question, adapted from the June 2012 exam, deals
with overseas subsidiaries, dark pool trading and money
laundering.

Planning your question practice

xxiii


Build your own exams
Having revised your notes and the BPP Learning Media Passcards, you can attempt the questions in the Kit as a
series of practice exams using the suggestions we have listed below.

Section A
1
Section B
2
3
4

xxiv

Planning your question practice

1

2

3

4

5

66

82

78

64

65

11
62
49

55
43
10

44
4
12

28
54
36

16
47
38