ACCA f9 BPP study text 2016 financial management

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S
T
U
D
Y

PAPER F9
FINANCIAL MANAGEMENT

BPP Learning Media is the sole ACCA Platinum Approved Learning Partner – content
for the ACCA qualification. In this, the only Paper P1 study text to be reviewed by the
examiner:


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

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

We emphasise key points in regular fast forward summaries



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support this paper.

FOR EXAMS UP TO JUNE 2014

T
E
X
T


First edition 2007
Sixth edition September 2012
ISBN 9781 4453 9652 1
(Previous ISBN 9781 4453 7766 7)
e-ISBN 9781 4453 9212 7
British Library Cataloguing-in-Publication Data
A catalogue record for this book
is available from the British Library

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ii


Contents
Page

Introduction
Helping you to pass – the ONLY F9 Study Text reviewed by the examiner!
Studying F9
The exam paper and exam formulae

v
vii
x

Part A Financial management function
1

Financial management and financial objectives

3

Part B Financial management environment
2
3

The economic environment for business
Financial markets and institutions

35
55

Part C Working capital management
4
5
6

Working capital
Managing working capital
Working capital finance

75
89
115

Part D Investment appraisal
7
8
9
10
11

Investment decisions
Investment appraisal using DCF methods
Allowing for inflation and taxation
Project appraisal and risk
Specific investment decisions

139
155
173
187
201

Part E Business finance
12
13
14

Sources of finance
Dividend policy
Gearing and capital structure

221

253
263

Part F Cost of capital
15
16

The cost of capital
Capital structure

285
309

Part G Business valuations
17
18

Business valuations
Market efficiency

329
351

Part H Risk management
19
20

Foreign currency risk
Interest rate risk

363
387

Mathematical tables

401

Exam question bank
Exam answer bank
Index

405
427
485

Review form ..................................................................................................

Contents

iii


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iv


Helping you to pass – the ONLY F9 Study Text 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 study materials for the 2013 exams. By incorporating the
examiner’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 do 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.

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 the examiner expects
you 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 page xi of this Study Text.

Testing what you can do
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 Exam 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 the 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.

Exam 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 able to explain and
discuss financial management techniques and issues.

The F9 examiner
The examiner is Tony Head. He 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 June 2013 sitting onwards. The syllabus changes are
summarised below.

Summary of changes to F9
ACCA periodically reviews its qualification syllabuses so that they fully meet the needs of stakeholders
such as employers, students, regulatory and advisory bodies and learning providers.
The changes to the F9 syllabus are summarised below. The additions to the syllabus consist of two topics
previously examined in the higher-level P4 paper which are now included at the F9 level. There are also
two topics which have been deleted, as they will be assumed knowledge from F2 and FMA.

Table 1 – Additions to F9
Section and subject area

Syllabus content

B3 – The treasury function

(a) Describe the role of money markets in:
(i) Providing short-term liquidity to
industry and the public sector
(ii) Providing short-term trade finance
(iii) Allowing an organisation to
manage its exposure to foreign
currency risk and interest rate risk
(b) Explain the role of banks and other
financial institutions in the operation of
the money markets.
(c) Explain the characteristics and role of
the principal money market
instruments:
(i) Interest-bearing instruments
(ii) Discount instruments
(iii) Derivative products.

F2 – Estimating the cost of equity

(b) Explain and discuss systematic and
unsystematic risk, and the relationship
between portfolio theory and the capital
asset pricing model (CAPM)

Introduction

vii


Table 2 – Deletion from F9

Section and subject area

Syllabus content

D1 – The nature of investment decisions and
the appraisal process

(a) Distinguish between capital and revenue
expenditure, and between non-current
assets and working capital investment.
(b) Explain the role of investment appraisal
in the capital budgeting process.
(c) Discuss the stages of the capital
budgeting process in relation to
corporate strategy.

D3 – Discounted cash flow (DCF) techniques

(a) Explain and apply concepts relating to
interest and discounting, including:
(i) The relationship between interest
rates and inflation, and between
real and nominal interest rates
(ii) The calculation of future values and
the application of the annuity
formula
(iii) The calculation of present values,
including the present value of an
annuity and perpetuity, and the use
of discount and annuity tables

(iv) The time value of money and the
role of cost of capital in appraising
investments

viii

Introduction


1 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.

2 What skills are required?


You are expected to have a core of financial management knowledge



You will be required to carry out calculations, with clear workings and a logical structure



You will be required to explain financial management techniques and discuss whether they are
appropriate for a particular organisation



You must be able to apply your skills in a practical context

3 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



Practising questions under timed conditions is essential. BPP’s Practice and Revision Kit
contains 25 mark questions on all areas of the syllabus



Questions will be based on simple scenarios and answers must be focused and specific to the
organisation



Answer all parts of the question. Even if you cannot do all of the calculation elements, you will still
be able to gain marks in the discussion parts



Make sure you write full answers to discussion sections, not one or two word lists, the examiner is
looking for understanding to be demonstrated



Plan your written answers and write legibly



Include all your workings and label them clearly



Read Student Accountant (the ACCA’s student magazine) regularly – it often contains technical
articles written either by or on the recommendation of the examiner which can be invaluable for
future exams.

4 Brought forward knowledge
You will need to have a good working knowledge of certain management accounting techniques from F2.
In particular, short-term decision making techniques such as cost-volume-profit analysis and the
calculation of relevant costs. Due to the latest syllabus change, you will also 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. Revision sections
around the capital budgeting process and interest and discounting are included in this Study Text. 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.

Introduction

ix


The exam paper
Format of the paper
The exam consists of four compulsory 25 mark questions.
Time allowed is 3 hours with 15 minutes’ reading time.

x

Introduction


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


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. Further details can be found in the Exam
Focus Points in the relevant chapters.
Covered
in Text
chapter

June
2012

Dec
2011

June
2011

Dec
2010

June
2010

Dec
2009

June

2009

3a,b

4a

Dec
2008

Pilot
Paper

FINANCIAL MANAGEMENT FUNCTION
1

Nature & purpose

1

Objectives

1

Stakeholders

4c
3a

4c,d

3a
4a

1e

FINANCIAL MANAGEMENT ENVIRONMENT
2

Economic environment

3

Financial markets and institutions

4a

WORKING CAPITAL MANAGEMENT
4, 5
6

Management
Funding strategies

2a,c

2a-d

2b

3a,b,

c,d

1a,b,c

4b

4b,d

3c

2b,c

3a,b,c

4c

3a,b

3d

2a,b

4b

INVESTMENT APPRAISAL
7

Non-discounted cash flow techniques

1b

8, 9

Discounted cash flow techniques

1a

10

Risk and uncertainty

11

Specific investment decisions

1c

1b
1a,b

1a,b

1c

1c

1a

1d

3a,b

1a,b

2b,c

3b

3c

1c,d

4a,c

4b,c

1a, 4a

1a

3a

1a

2b,c

1c

3c

1b,c

4b

1b

1b,c,d

BUSINESS FINANCE
12

Sources of short-term finance

12

Sources of long term-finance

13

Dividend policy

14

Finance for SMEs

4a
3b,c

4a,b

3b

2a,b

2d

3c

4d

4c

2d

3c

2a

1c,
4b,c

2a

2a,b,c

3d

2c

COST OF CAPITAL

15

Calculation

16

Gearing (capital structure)

4c,d

BUSINESS VALUATIONS
17

Valuation of shares

17

Valuation of debt

18

Efficient market hypothesis / practical
considerations

4a,b

3a,b

4a
2b

4b
2c

RISK MANAGEMENT

xx

19

Causes of interest rate / exchange rate
fluctuations

19

Hedging foreign currency risk

20

Hedging interest rate risk

Introduction

4a
3d,e

3c
3d

2b

4c,d
2a

2a,c,d


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
5

Economic Order Quantity
=

2C0D
Ch
6

Miller-Orr Model

Return point = Lower limit + (

1
 spread)
3

1
3

3
  transaction cos t  variance of cash flows 
Spread = 3  4

int erest rate




15

The Capital Asset Pricing Model

E(ri) = Rf + ßi(E (rm) – Rf)
16

The Asset Beta Formula


  Vd (1 T)

Ve
ßa = 
d 
e  + 
 (Ve  Vd (1 T))   (Ve  Vd (1 T)) 
15

The Growth Model

P0 =

D0 (1 g)
D (1 g)
or P0 = 0
(Ke  g)
(re  g)

15

Gordon’s Growth Approximation

g = bre
15

The weighted average cost of capital

 Ve 
WACC = 
 ke +
 Ve  Vd 

 Vd 

 kd (1–T)
 Ve  Vd 
9

The Fisher formula

(1 + i) = (1 + r)(1 + h)
Purchasing Power Parity and Interest Rate Parity

S1 = S0 

(1 hc )

(1 hb )

F0 = S0 

19

(1 ic )

(1 ib )

Introduction

xxi


xxii

Introduction


P
A
R

T
A

Financial management function

1