ACCA p4 EW 2010 advanced financial manageement

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P4 Study Text
Advanced Financial
Management

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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

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Used around the world by Emile Woolf Colleges including
China, Russia and the UK

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ii

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Paper P4
Advanced Financial Management

c
Contents
Page
Syllabus and study guide

1

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

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443

iii


iv

Answers

475

Index

521

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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

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1


Paper P4: Advanced Financial Management

Syllabus
A

Role and responsibility towards stakeholders
1
2
3
4
5

B

Advanced investment appraisal
1
2

3
4
5

C

Management of international trade and finance
Strategic business and financial planning for multinationals

Emerging issues in finance and financial management
1
2
3

2

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
1
2

G

Predicting corporate failure
Financial reconstruction

Business re-organisation

Treasury and advanced risk management techniques
1
2
3
4
5

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
1
2
3

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

1
2
3
4

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

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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.
6

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3


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
1.

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.

2.

The role and responsibility of senior financial executive/advisor
a)

b)
c)
d)

e)
f)

4

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.

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Syllabus and study guide

3. Impact of environmental issues on corporate objectives and on
governance

a)

4.

Financial strategy formulation
a)
b)
c)
d)

5.

Recommend the optimum capital mix and structure within a
specified business context and capital asset structure.
Recommend appropriate distribution and retention policy.
Establish capital investment monitoring and risk management
systems.
Develop a framework for risk management comparing and
contrasting risk mitigation, hedging and diversification strategies.

Ethical issues in financial management
a)
b)
c)

B

Assess the issues which may impact upon corporate objectives and
governance from:
i)

Sustainability and environmental risk
ii)
The carbon-trading economy and emissions
iii) The role of the environment agency
iv) Environmental audits and the triple bottom line approach

Assess the ethical dimension within business issues and decisions
and advise on best practice in the financial management of the
firm.
Demonstrate an understanding of the interconnectedness of the
ethics of good business practice between all of the functional areas
of the firm.
Recommend an ethical framework for the development of a firm’s
financial policies and a system for the assessment of their ethical
impact upon the financial management of the firm.

ADVANCED INVESTMENT APPRAISAL
1.

Discounted cash flow techniques and the use of free cash flows
a)

b)
c)
d)
e)

Evaluate the potential value added to a firm arising from a
specified capital investment project or portfolio using the net
present value model. Project modelling should include explicit

treatment of:
i)
Inflation and specific price variation
ii)
Taxation and the assessment of fiscal risk
iii) Multi-period capital rationing to include the formulation of
programming methods and the interpretation of their
output.
Establish the potential economic return (using internal rate of
return and modified internal rate of return) and advise on a
project’s return margin and its vulnerability to competitive action.
Forecast a firm’s free cash flow and its free cash flow to equity (pre
and post capital reinvestment).
Advise, in the context of a specified capital investment
programme, on a firm’s current and projected dividend capacity.
Advise on the value of a firm using its free cash flow and free cash
flow to equity under alternative horizon and growth assumptions.

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5


Paper P4: Advanced Financial Management

2.

Impact of financing on investment decisions and adjusted present
values
a)

b)

c)

3.

Application of option pricing theory in investment decisions
a)

b)
c)

4.

Demonstrate an understanding of option pricing theory:
i)
Determine, using published data, the five principal drivers
of option value (value of the underlying, exercise price, time
to expiry, volatility and the risk-free rate).
ii)
Discuss the underlying assumptions, structure, application
and limitations of the Black-Scholes model
Evaluate embedded real options within a project, classifying them
into one of the real option archetypes.
Assess and advise on the value of options to delay, expand,
redeploy and withdraw using the Black Scholes model.

International investment and financing decisions
a)

b)
c)
d)
e)

6

Assess the impact of financing upon investment decisions of:
i)
Pecking order theory
ii)
Static trade-off theory
iii) Agency effects and capital structure
Apply the adjusted present value technique to the appraisal of
investment decisions that entail significant alterations in the
financial structure of the firm, including their fiscal and
transactions cost implications.
Outline the application of Monte Carlo simulation to investment
appraisal.
Candidates will not be expected to undertake
simulations in an examination context but will be expected to
demonstrate an understanding of:
i)
Simple model design
ii)
The different types of distribution controlling the key
variables within the simulation.
iii) The significance of the simulation output and the assessment
of the likelihood of project success.
iv) The measurement and interpretation of project value at risk.

Assess the impact upon the value of a project of alternative
exchange rate assumptions .
Forecast project or firm free cash flows in any specified currency
and determine the project’s net present value or firm value under
differing exchange rate, fiscal and transaction cost assumptions:
Evaluate the significance of exchange controls for a given
investment decision and strategies for dealing with restricted
remittance.
Assess the impact of a project upon a firm’s exposure to
translation, transaction and economic risk.
Assess and advise upon the costs and benefits of alternative
sources of finance available within the international financial
markets.

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Syllabus and study guide

5.

Impact of capital investment on financial reporting
a)

C

Assess the impact of a significant capital investment project upon

the reported financial position and performance of the firm taking
into account:
i)
Alternative financing strategies
ii)
Foreign exchange translation
iii) Taxation and double taxation
iv) Capital allowances and the problem of tax exhaustion.

ACQUISITIONS AND MERGERS
1.

Acquisitions and mergers versus other growth strategies
a)
b)
c)
d)
e)

2.

Discuss the arguments for and against the use of acquisitions and
mergers as a method of corporate expansion.
Evaluate the corporate and competitive nature of a given
acquisition proposal.
Advise upon the criteria for choosing an appropriate target for
acquisition.
Compare the various explanations for the high failure rate of
acquisitions in enhancing shareholder value.
Evaluate, from a given context, the potential for synergy

separately classified as:
i)
Revenue synergy
ii)
Cost synergy
iii) Financial synergy

Valuation for acquisitions and mergers
a)
b)
c)

d)

e)
f)
g)

Outline the argument and the problem of overvaluation.
Estimate the potential near-term and continuing growth levels of a
firm’s earnings using both internal and external measures.
Assess the impact of an acquisition or merger upon the risk profile
of the acquirer distinguishing:
i)
Type 1 acquisitions that do not disturb the acquirer’s
exposure to financial or business risk
ii)
Type 2 acquisitions that impact upon the acquirer’s exposure
to financial risk
iii) Type 3 acquisitions that impact upon the acquirer’s exposure

to both financial and business risk.
Advise on the valuation of a type 1 acquisition of both quoted and
unquoted entities using:
i)
‘Book value-plus’ models
ii)
Market relative models
iii) Cash flow models, including EVATM, MVA
Advise on the valuation of type 2 acquisitions using the adjusted
net present value model.
Advise on the valuation of type 3 acquisitions using iterative
revaluation procedures.
Demonstrate an understanding of the procedure for valuing high
growth start-ups.

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Paper P4: Advanced Financial Management

3.

Regulatory framework and processes
a)

b)

4.

Financing acquisitions and mergers
a)
b)
c)

D

Compare the various sources of financing available for a proposed
cash-based acquisition
Evaluate the advantages and disadvantages of a financial offer for
a given acquisition proposal using pure or mixed mode financing
and recommend the most appropriate offer to be made.
Assess the impact of a given financial offer on the reported
financial position and performance of the acquirer.

CORPORATE RECONSTRUCTION AND RE-ORGANISATION
1.

Predicting corporate failure
a)

b)

2.

b)
c)

3.

Assess the risk of corporate failure within the short to medium
term using a range of appropriate financial evaluation methods
(this will require an ability to use multivariate techniques such as
the Z and Zeta score models).
Advise on the application of financial distress models to firms in
emerging markets given local regulatory and financial market
conditions.

Financial reconstruction
a)

Assess a company situation and determine whether a financial
reconstruction is the most appropriate strategy for dealing with
the problem as presented.
Assess the likely response of the capital market and/or individual
suppliers of capital to any reconstruction scheme and the impact
their response is likely to have upon the value of the firm.
Recommend a reconstruction scheme from a given business
situation, justifying the proposal in terms of its impact upon the
reported performance and financial position of the firm.

Business re-organisation
a)
b)
c)

8

Demonstrate an understanding of the principal factors influencing

the development of the regulatory framework for mergers and
acquisitions globally and, in particular, be able to compare and
contrast the shareholder versus the stakeholder models of
regulation.
Identify the main regulatory issues which are likely to arise in the
context of a given offer and
i)
assess whether the offer is likely to be in the shareholders’
best interests
ii)
advise the directors of a target company on the most
appropriate defence if a specific offer is to be treated as
hostile.

Recommend, with reasons, strategies for unbundling parts of a
quoted company.
Evaluate the likely financial and other benefits of unbundling.
Advise on the financial issues relating to a management buy-out
and buy-in.

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Syllabus and study guide

E

TREASURY AND ADVANCED RISK MANAGEMENT TECHNIQUES

1.

The role of the treasury function in multinationals
a)

b)
c)

d)

2.

Describe the role of the money markets in:
i)
Providing short-term liquidity to industry and the public
sector
ii)
Providing short-term trade finance
iii) Allowing a multinational firm to manage its exposure to
FOREX and interest rate risk.
Explain the role of the banks and other financial institutions in the
operation of the money markets.
Describe the characteristics and role of the principal money market
instruments:
i)
Coupon bearing:
ii)
Discount instruments
iii) Derivatives
Outline the role of the treasury management function within:

i)
The short term management of the firm’s financial resources
ii)
The longer term maximisation of shareholder value
iii) The management of risk exposure

The use of financial derivatives to hedge against forex risk
a)

b)

c)

Demonstrate an understanding of the operations of the derivatives
market, including:
i)
The relative advantages and disadvantages of exchange
traded versus OTC agreements.
ii)
Key features, such as standard contracts, tick sizes, margin
requirements and margin trading.
iii) The source of basis risk and how it can be minimised.
Evaluate, for a given hedging requirement, which of the following
is the most appropriate strategy, given the nature of the
underlying position and the risk exposure:
i)
The use of the forward exchange market and the creation of
a money market hedge
ii)
Synthetic foreign exchange agreements (SAFE’s)

iii) Exchange-traded currency futures contracts
iv) Currency swaps
v)
FOREX swaps
vi) Currency options
Advise on the use of bilateral and multilateral netting and
matching as tools for minimising FOREX transactions costs and
the management of market barriers to the free movement of
capital and other remittances.

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Paper P4: Advanced Financial Management

3.

The use of financial derivatives to hedge against interest rate risk
a)

4.

Other forms of risk
a)
b)

c)

5.

b)

Determine a firm’s dividend capacity and its policy given:
i)
The firm’s short- and long-term reinvestment strategy
ii)
The impact of any other capital reconstruction programmes
on free cash flow to equity such as share repurchase
agreements and new capital issues
iii) The availability and timing of central remittances
iv) The corporate tax regime within the host jurisdiction
Develop company policy on the transfer pricing of goods and
services across international borders and be able to determine the
most appropriate transfer pricing strategy in a given situation
reflecting local regulations and tax regimes.

ECONOMIC ENVIRONMENT FOR MULTINATIONALS
1.

Management of international trade and finance
a)
b)

c)
d)

10

Assess the firm’s exposure to political, economic, regulatory and
fiscal risk and the strategies available for the mitigation of such
risk.
Assess the firm’s exposure to credit risk, including:
i)
Explain the role of, and the risk assessment models used by,
the principal rating agencies.
ii)
Estimate the likely credit spread over risk free.
iii) Estimate the firm’s current cost of debt capital using the
appropriate term structure of interest rates and the credit
spread.
Explain the role of option pricing models in the assessment of
default risk, the value of debt and its potential recoverability

Dividend policy in multinationals and transfer pricing
a)

F

Evaluate for a given hedging requirement which of the following
is the most appropriate given the nature of the underlying position
and the risk exposure:
i)
Forward Rate Agreements
ii)
Interest Rate Futures
iii) Interest rate swaps
iv) Options on FRA’s (caps and collars), Interest rate futures and
interest rate swaps.

Advise on the theory and practice of free trade and the
management of barriers to trade.
Demonstrate an up to date understanding of the major trade
agreements and common markets and, on the basis of
contemporary circumstances, advise on their policy and strategic
implications for a given business.
Discuss the objectives of the World Trade Organisation.
Discuss the role of international financial institutions within the
context of a globalised economy, with particular attention to the
International Monetary Fund, the Bank of International

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Syllabus and study guide

e)

2.

Strategic business and financial planning for multinationals
a)

G

Settlements, The World Bank and the principal Central Banks (the
Fed, Bank of England, European Central Bank and the Bank of

Japan).
Assess the role of the international financial markets with respect
to the management of global debt, the financial development of
the emerging economies and the maintenance of global financial
stability.

Advise on the development of a financial planning framework for
a multinational taking into account:
i)
Compliance with national governance requirements (for
example the LSE requirements for admission for trading)
ii)
The mobility of capital across borders and national
limitations on remittances and transfer pricing.
iii) The pattern of economic and other risk exposures in the
different national markets
iv) Agency issues in the central coordination of overseas
operations and the balancing of local financial autonomy
with effective central control.

EMERGING ISSUES
1.

Developments in world financial markets
Demonstrate awareness, and discuss the significance to the firm, of
latest developments in the world financial markets with particular
reference to the removal of barriers to the free movement of capital and
the international regulations on money laundering

2.

Financial engineering and emerging derivative products
Demonstrate awareness, and discuss the significance to the firm, of
latest derivative products with particular emphasis on the risks in
derivative trading and the application of the following in their
management:
i)
Value at Risk
ii)
Scenario analysis
iii) Stress testing

3.

Developments in international trade and finance
Demonstrate an awareness of new developments in the macroeconomic
environment, establishing their impact upon the firm, and advising on
the appropriate response to those developments both internally and
externally.

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Paper P4: Advanced Financial Management

13

12

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Paper P4
Advanced Financial Management

ƒ
 
 
 

Formulae and tables
Formula Sheet
Modigliani and Miller Proposition 2 (with tax)

K e = K ie + (1 − T )(K ie − K d )

Vd
Ve

Two asset portfolio

Sp = w 2a s 2a + w b2 sb2 + 2w a w brab s a sb

The Capital Asset Pricing Model
E(ri ) = R f + βi (E(rm ) − R f )

The asset beta formula
⎡
⎤ ⎡ Vd (1 − T )
⎤
Ve
βa = ⎢
βe ⎥ + ⎢
βd ⎥
⎣ (Ve + Vd (1 − T )) ⎦ ⎣ (Ve + Vd (1 − T )) ⎦

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Paper P4: Advanced Financial Management

The Growth Model

Po =

D o (1 + g )
(re − g )

Gordon’s growth approximation

g = bre

The weighted average cost of capital
⎡ Vd ⎤

⎡ Ve ⎤
WACC = ⎢
⎥ K d (1 − T )
⎥K e + ⎢
⎣ Ve + Vd ⎦
⎣ Ve + Vd ⎦

The Fisher formula

(1+ i) = (1+ r )(1+ h)
Purchasing power parity and interest rate parity
S1 = S o ×

(1+ hc )
(1+ hb )

fo = S o ×

(1+ ic )
(1+ ib )

The Black Scholes Option Pricing Model
c = PaN(d1) − PeN(d2 )e −rt

Where:
d1 =

(

)

In(Pa / Pe ) + r + 0.5s 2 t
s t

d2 = d1 − s t

The FOREX modified Black and Scholes option pricing model
c = e −rt FoN(d1) − XN(d2 )

14

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Formulae and tables

Or

( )

( )

p = e −rf XN - d2 − F0N − d1

Where:
d1 =

1n(Fo / X ) + s 2 T / 2

s T

and

d2 = d1 − − s T

The Put Call Parity relationship

p = c − Pa + Pee −rt

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15


Paper P4: Advanced Financial Management

Present value table
Present value of 1 i.e. (1 + r )− n
where
r
= discount rate
n
= number of periods until payment
Periods

16

Discount rate (r)

(n)

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1
2
3
4
5

0.990
0.980

0.971
0.961
0.951

0.980
0.961
0.942
0.924
0.906

0.971
0.943
0.915
0.888
0.863

0.962
0.925
0.889
0.855
0.822

0.952
0.907
0.864
0.823
0.784

0.943
0.890

0.840
0.792
0.747

0.935
0.873
0.816
0.763
0.713

0.926
0.857
0.794
0.735
0.681

0.917
0.842
0.772
0.708
0.650

0.909
0.826
0.751
0.683
0.621

1
2

3
4
5

6
7
8
9
10

0.942
0.933
0.923
0.914
0.905

0.888
0.871
0.853
0.837
0.820

0.837
0.813
0.789
0.766
0.744

0.790
0.760

0.731
0.703
0.676

0.746
0.711
0.677
0.645
0.614

0.705
0.665
0.627
0.592
0.558

0.666
0.623
0.582
0.544
0.508

0.630
0.583
0.540
0.500
0.463

0.596
0.547

0.502
0.460
0.422

0.564
0.513
0.467
0.424
0.386

6
7
8
9
10

11
12
13
14
15

0.896
0.887
0.879
0.870
0.861

0.804
0.788

0.773
0.758
0.743

0.722
0.701
0.681
0.661
0.642

0.650
0.625
0.601
0.577
0.555

0.585
0.557
0.530
0.505
0.481

0.527
0.497
0.469
0.442
0.417

0.475
0.444

0.415
0.388
0.362

0.429
0.397
0.368
0.340
0.315

0.388
0.356
0.326
0.299
0.275

0.350
0.319
0.290
0.263
0.239

11
12
13
14
15

(n)

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

1
2
3
4
5

0.901
0.812
0.731
0.659

0.593

0.893
0.797
0.712
0.636
0.567

0.885
0.783
0.693
0.613
0.543

0.877
0.769
0.675
0.592
0.519

0.870
0.756
0.658
0.572
0.497

0.862
0.743
0.641
0.552

0.476

0.855
0.731
0.624
0.534
0.456

0.847
0.718
0.609
0.516
0.437

0.840
0.706
0.593
0.499
0.419

0.833
0.694
0.579
0.482
0.402

1
2
3
4

5

6
7
8
9
10

0.535
0.482
0.434
0.391
0.352

0.507
0.452
0.404
0.361
0.322

0.480
0.425
0.376
0.333
0.295

0.456
0.400
0.351
0.308

0.270

0.432
0.376
0.327
0.284
0.247

0.410
0.354
0.305
0.263
0.227

0.390
0.333
0.285
0.243
0.208

0.370
0.314
0.266
0.225
0.191

0.352
0.296
0.249
0.209

0.176

0.335
0.279
0.233
0.194
0.162

6
7
8
9
10

11
12
13
14
15

0.317
0.286
0.258
0.232
0.209

0.287
0.257
0.229
0.205

0.183

0.261
0.231
0.204
0.181
0.160

0.237
0.208
0.182
0.160
0.140

0.215
0.187
0.163
0.141
0.123

0.195
0.168
0.145
0.125
0.108

0.178
0.152
0.130
0.111

0.095

0.162
0.137
0.116
0.099
0.084

0.148
0.124
0.104
0.088
0.074

0.135
0.112
0.093
0.078
0.065

11
12
13
14
15

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Formulae and tables

Annuity table
Present value of an annuity of 1 i.e.
where

r
n

1 − (1 + r )− n
r

= discount rate
= number of periods

Periods

Discount rate (r)
5%
6%
7%

(n)

1%

2%

3%

4%

8%

9%

10%

1
2
3
4
5

0.990
1.970
2.941
3.902
4.853

0.980
1.942
2.884
3.808
4.713

0.971
1.913
20829

3.717
4.580

0.962
1.886
2.775
3.630
4.452

0.952
1.859
2.723
3.546
4.329

0.943
1.833
2.673
3.465
4.212

0.935
1.808
2.624
3.387
4.100

0.926
1.783
2.577

3.312
3.993

0.917
1.759
2.531
3.240
3.890

0.909
1.736
2.487
3.170
3.791

1
2
3
4
5

6
7
8
9
10

5.795
6.728
7.652

8.566
9.471

5.601
6.472
7.325
8.162
8.983

5.417
6.230
7.020
7.786
8.530

5.242
6.002
6.733
7.435
8.111

5.076
5.786
6.463
7.108
7.722

4.917
5.582
6.210

6.802
7.360

4.767
5.389
5.971
6.515
7.024

4.623
5.206
5.747
6.247
6.710

4.486
5.033
5.535
5.995
6.418

4.355
4.868
5.335
5.759
6.145

6
7
8

9
10

11
12
13
14
15

10.37
11.26
12.13
13.00
13.87

9.787
10.58
11.35
12.11
12.85

9.253
9.954
10.63
11.30
11.94

8.760
9.385
9.986

10.56
11.12

8.306
8.863
9.394
9.899
10.38

7.887
8.384
8.853
9.295
9.712

7.499
7.943
8.358
8.745
9.108

7.139
7.536
7.904
8.244
8.559

6.805
7.161
7.487

7.786
8.061

6.495
6.814
7.103
7.367
7.606

11
12
13
14
15

(n)

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

1
2
3
4
5

0.901
1.713
2.444
3.102
3.696

0.893
1.690
2.402
3.037
3.605

0.885
1.668
2.361
2.974
3.517

0.877
1.647
2.322
2.914
3.433

0.870
1.626
2.283
2.855
3.352

0.862
1.605
2.246
2.798
3.274

0.855
1.585
2.210
2.743
3.199

0.847
1.566
2.174
2.690
3.127

0.840
1.547
2.140
2.639
3.058

0.833
1.528
2.106
2.589
2.991

1
2
3
4
5

6
7
8
9
10

4.231
4.712
5.146
5.537
5.889

4.111
4.564
4.968
5.328
5.650

3.998
4.423
4.799
5.132
5.426

3.889
4.288
4.639
4.946
5.216

3.784
4.160
4.487
4.772
5.019

3.685
4.039
4.344
4.607
4.833

3.589
3.922
4.207
4.451
4.659

3.498
3.812
4.078
4.303
4.494

3.410
3.706
3.954
4.163
4.339

3.326
3.605
3.837
4.031
4.192

6
7
8
9
10

11
12
13
14
15

6.207
6.492
6.750
6.982
7.191

5.938
6.194
6.424
6.628
6.811

5.687
5.918
6.122
6.302
6.462

5.453
5.660
5.842
6.002
6.142

5.234
5.421
5.583
5.724
5.847

5.029
5.197
5.342
5.468
5.575

4.836
4.988
5.118
5.229
5.324

4.656
4.793
4.910
5.008
5.092

4.486
4.611
4.715
4.802
4.876

4.327
4.439
4.533
4.611
4.675

11
12
13
14
15

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17


Paper P4: Advanced Financial Management

Standard normal distribution table

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.0
0.1
0.2
0.3
0.4

0.0000
0.0398
0.0793
0.1179
0·1554

0.0040
0.0438
0.0832
0.1217
0.1591

0.0080
0.0478
0.0871
0.1255
0.1628

0.0120
0.0517
0.0910
0.1293
0.1664

0.0160
0.0557
0.0948
0.1331
0.1700

0.0199
0.0596
0.0987
0.1368
0.1736

0.0239
0.0636
0.1026
0.1406
0.1772

0.0279
0.0675
0.1064
0.1443
0.1808

0.0319
0.0714
0.1103
0.1480
0.1844

0.0359
0.0753
0.1141
0.1517
0.1879

0.5
0.6
0.7
0.8
0.9

0.1915
0.2257
0.2580
0.2881
0.3159

0.1950
0.2291
0.2611
0.2910
0.3186

0.1985
0.2324
0.2642
0.2939
0.3212

0·2019
0.2357
0.2673
0.2967
0.3238

0·2054
0.2389
0.2703
0.2995
0.3264

0.2088
0.2422
0.2734
0.3023
0.3289

0.2123
0.2454
0.2764
0.3051
0.3315

0·2157
0.2486
0.2794
0.3078
0.3340

0·2190
0.2517
0.2823
0.3106
0.3365

0·2224
0.2549
0.2852
0.3133
0.3389

1.0
1.1
1.2
1.3
1.4

0.3413
0.3643
0.3849
0.4032
0.4192

0.3438
0.3665
0.3869
0.4049
0.4207

0.3461
0.3686
0.3888
0.4066
0.4222

0.3485
0.3708
0.3907
0.4082
0.4236

0.3508
0.3729
0.3925
0.4099
0.4251

0.3531
0.3749
0.3944
0.4115
0.4265

0.3554
0.3770
0.3962
0.4131
0.4279

0.3577
0.3790
0.3980
0.4147
0.4292

0.3599
0.3810
0.3997
0.4162
0.4306

0.3621
0.3830
0.4015
0.4177
0.4319

1.5
1.6
1.7
1.8
1.9

0.4332
0.4452
0.4554
0.4641
0.4713

0.4345
0.4463
0.4564
0.4649
0.4719

0.4357
0.4474
0.4573
0.4656
0.4726

0.4370
0.4484
0.4582
0.4664
0.4732

0.4382
0.4495
0.4591
0.4671
0.4738

0.4394
0.4505
0.4599
0.4678
0.4744

0.4406
0.4515
0.4608
0.4686
0.4750

0.4418
0.4525
0.4616
0.4693
0.4756

0.4429
0.4535
0.4625
0.4699
0.4761

0.4441
0.4545
0.4633
0.4706
0.4767

2.0
2.1
2.2
2.3
2.4

0.4772
0.4821
0.4861
0.4893
0.4918

0.4778
0.4826
0.4864
0.4896
0.4920

0.4783
0.4830
0.4868
0.4898
0.4922

0.4788
0.4834
0.4871
0.4901
0.4925

0.4793
0.4838
0.4875
0.4904
0.4927

0.4798
0.4842
0.4878
0.4906
0.4929

0.4803
0.4846
0.4881
0.4909
0.4931

0.4808
0.4850
0.4884
0.4911
0.4932

0.4812
0.4854
0.4887
0.4913
0.4934

0.4817
0.4857
0.4890
0.4916
0.4936

2.5
2.6
2.7
2.8
2.9

0.4938
0.4953
0.4965
0.4974
0.4981

0.4940
0.4955
0·4966
0.4975
0.4982

0.4941
0.4956
0.4967
0.4976
0.4982

0.4943
0.4957
0.4968
0.4977
0.4983

0.4945
0.4959
0.4969
0.4977
0.4984

0.4946
0.4960
0.4970
0.4978
0.4984

0.4948
0.4961
0.4971
0.4979
0.4985

0.4949
0.4962
0.4972
0.4979
0.4985

0.4951
0.4963
0.4973
0.4980
0.4986

0.4952
0.4964
0.4974
0.4981
0.4986

3.0

0.4987

0.4987

0.4987

0.4988

0.4988

0.4989

0.4989

0.4989

0.4990

0.4990

This table can be used to calculate N(di), the cumulative normal distribution
functions needed for the Black-Scholes model of option pricing. If di > 0, add 0·5 to
the relevant number above. If di < 0, subtract the relevant number above from 0·5.

18

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CHAPTER

Paper P4
Advanced Financial Management

1

The role and responsibilities
of financial managers

Contents
1

Conflicting stakeholder interests

2

Improving corporate governance

3

Role and responsibility of the senior financial
management executive

4

Dividend and retentions policy

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19