BPP ACCA p4 advance financial management 2017

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Advanced Financial Management
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S
T
U
D
Y

PAPER P4
ADVANCED FINANCIAL
MANAGEMENT

BPP Learning Media is an ACCA Approved Content Provider. This means we work
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your exam.
In this Study Text, which has been reviewed by the ACCA examination team, we:


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FOR EXAMS IN SEPTEMBER 2016, DECEMBER 2016,
MARCH 2017 AND JUNE 2017

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First edition 2007
Ninth edition January 2016

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Contents
Page

Introduction
Helping you to pass
Studying P4
The exam paper and exam formulae
Syllabus and study guide

v
vii
xiv
xvi

Part A Role of the senior financial advisor in the
multinational organisation
1
2
3
4a
4b

The role and responsibility of the senior financial advisor
Financial strategy formulation
Ethical and governance issues
Trading in a multinational environment
Planning in a multinational environment

3
29
69
87
123

Part B Advanced investment appraisal
5
6
7a
7b
8

Discounted cash flow techniques
Application of option pricing theory in investment decisions

Impact of financing on investment decisions and adjusted present values
Valuation and the use of free cash flows
International investment and financing decisions

153
179
199
255
271

Part C Acquisitions and mergers
9
10
11
12

Acquisitions and mergers versus other growth strategies
Valuation of acquisitions and mergers
Regulatory framework and processes
Financing mergers and acquisitions

297
313
343
355

Part D Corporate reconstruction and reorganisation
13
14

Financial reconstruction
Business reorganisation

369
383

Part E Treasury and advanced risk management techniques
15
16
17

The role of the treasury function in multinationals
The use of financial derivatives to hedge against foreign exchange risk
The use of financial derivatives to hedge against interest rate risk

Appendix: Mathematical tables
Practice question bank
Practice answer bank
Index
Review form

399
417
467
505
511
537
601

Contents

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iv

Introduction

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Helping you to pass
BPP Learning Media – Approved Content Provider
As ACCA's Approved Content Provider, BPP Learning Media gives you the opportunity to use study
materials reviewed by the ACCA examination team. By incorporating the examination team's comments
and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study
Text provides excellent, ACCA-approved support for your studies.

The PER alert
Before you can qualify as an ACCA member, you have to not only pass all your exams but also fulfil a three
year practical experience requirement (PER). To help you to recognise areas of the syllabus that you
might be able to apply in the workplace to achieve different performance objectives, we have introduced
the 'PER alert' feature. You will find this feature throughout the Study Text to remind you that what you
are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement.
Your achievement of the PER should now be recorded in your online My Experience record.

Tackling studying
Studying can be a daunting prospect, particularly when you have lots of other commitments. The different
features of the Study 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 P4 outlines the content of the paper, the necessary skills you are expected to be
able to demonstrate and any brought forward knowledge you are expected to have.
Exam focus points are included within the chapters to highlight when and how specific topics were
examined, or how they might be examined in the future.

Using the Syllabus and Study Guide
You can find the syllabus and Study Guide on pages xvi–xxvi 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 Practice Question Bank, as well as
Quick Quizzes at the end of each chapter to test your knowledge of the chapter content.

Introduction

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v


Chapter features
Each chapter contains a number of helpful features to guide you through each topic.
Topic list
Topic list

Syllabus reference

What you will be studying in this chapter and the relevant
section numbers, together with ACCA syllabus references.

Introduction

Puts the chapter content in the context of the syllabus as
a whole.

Study Guide

Links the chapter content with ACCA guidance.

Exam Guide

Highlights how examinable the chapter content is likely to
be and the ways in which it could be examined.

Knowledge brought forward from earlier studies

What you are assumed to know from previous
studies/exams.

FAST FORWARD

Summarises the content of main chapter headings,
allowing you to preview and review each section easily.

Examples

Demonstrate how to apply key knowledge and

techniques.

Key terms

Definitions of important concepts that can often earn you
easy marks in exams.

Exam focus points

When and how specific topics were examined, or how
they may be examined in the future.

Formula to learn

Formulae that are not given in the exam but which have to
be learnt.
Gives you a useful indication of syllabus areas that
closely relate to performance objectives in your Practical
Experience Requirement (PER).

vi

Question

Gives you essential practice of techniques covered in the
chapter.

Case Study

Real world examples of theories and techniques.

Chapter Roundup

A full list of the Fast Forwards included in the chapter,
providing an easy source of review.

Quick Quiz

A quick test of your knowledge of the main topics in the
chapter.

Practice Question Bank

Found at the back of the Study Text with more
comprehensive chapter questions. Cross referenced for
easy navigation.

Introduction

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Studying P4
As the name suggests, this paper examines advanced financial management topics and is particularly
suited to those who are thinking about a career in treasury or are likely to be involved in strategic financial
management decisions.

1 What P4 is about
The aim of the syllabus is to develop students' ability to apply relevant knowledge and skills, and
exercise the professional judgement expected of a senior financial adviser, in taking or recommending
financial management decisions that are likely to have an impact on the entire organisation.

This is an advanced level optional paper which builds on the topics covered in Paper F9 Financial
Management. As an advanced paper, it tests much more than just your ability to perform calculations. You
must be able to evaluate data, assess the potential financial and strategic consequences of taking
investment decisions and advise on alternative courses of action, among other things, in both a domestic
and international context.
The syllabus is divided into five main sections.
(a)

The role of the senior financial adviser in the multinational organisation
More than ever, company management's responsibility towards all stakeholders is under scrutiny.
They must be aware of different stakeholder groups' conflicting needs and be able to develop
suitable financial strategies that fulfil each group's interests as much as possible. The impact of
environmental factors should also be uppermost in their minds given the increasing importance
placed on such factors in the modern business world.
Ethical issues cannot be ignored – ethics are expected to be a consistent theme in the
examination, and students will be expected to be able to take a practical approach to identifying
such issues in given scenarios.
Multinational companies have their own unique set of challenges, including having operations in
international locations. You will be expected to have detailed knowledge and understanding of how
to manage international finances and strategic business and financial planning for companies with
international operations.

(b)

Advanced investment appraisal
This section revisits investment and financing decisions with the emphasis moving from
straightforward technical knowledge towards the strategic issues associated with making
investment decisions, both domestic and international.

(c)

Acquisitions and mergers
You will be expected to discuss the logic of a growth strategy based on acquisitions, to choose and
apply an appropriate method of valuation and make strategic decisions regarding how the merger
or acquisition should be financed. You will be required to act in an advisory as well as technical
capacity.

(d)

Corporate reconstruction and reorganisation
This section looks at how to put together a restructuring package and ways in which an
organisation might be reorganised (for example, management buyouts and sell-offs). As above,
you will be expected to act in both a technical and advisory capacity in questions on this section.

Introduction

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vii


(e)

Treasury and advanced risk management techniques
This section covers distinct areas of risk and how to measure and manage them. Interest rate and
currency risks and the derivatives used to hedge against them are considered in detail. You will be
required not only to know how the derivatives work but also to advise on the best methods of
hedging in particular scenarios.

2 Skills you have to demonstrate
2.1 Knowledge and application

Even with exams you've previously taken, you'll remember that passing didn't only mean reproducing
knowledge. You also had to apply what you knew. At Professional level, the balance is tilted much more
towards application. You will need a sound basis of technical knowledge. The exams will detect whether
you have the necessary knowledge. However, you won't pass if you just spend your time acquiring
knowledge. Developing application skills is vital.

2.2 Application skills
What application skills do you need? Many P4 questions will include detail in a scenario about a specific
organisation. The following skills are particularly important when you're dealing with question scenarios.
(a)

Identifying the most important features of the organisation and the organisation's environment.
Clues to these will be scattered throughout the scenario. The technical knowledge that you have
should help you do this, but you will also need business awareness and imagination. There will be
a main theme running through most scenarios that you'll need to identify.

(b)

Using analysis techniques that will give you more insight into the data that you're given.

(c)

Making informed judgements that follow from your analysis about what the organisation is doing
and should be doing.

(d)

Communicating clearly and concisely your analysis and recommendations.

3 How to pass

3.1 Study the whole syllabus
You need to be comfortable with all areas of the syllabus. Compulsory Question 1 will always span a
number of syllabus areas and other questions may do so as well. In particular you must have a very good
knowledge and awareness of the themes in the ethical section of the syllabus, as compulsory Question 1
will always include an element on ethics.
The examination team has also stressed that study and revision should cover the entire syllabus in detail.
Students should not question spot or prioritise one area of the syllabus over another. The examination
team has identified in its examination team's reports those topics which students who question spotted
clearly believed would not be examined, but unfortunately were.

3.2 Focus on themes, not lists
There are quite a number of lists in the Texts. This is inevitable because corporate governance guidance
quoted as best practice is often in list form. Lists are also sometimes the clearest way of presenting
information. However, the examination team has stressed that passing the exam is not a matter of learning
and reproducing lists. Good answers will have to focus on the details in the scenario and bring out the
underlying themes that relate to the scenario. The points in them will have more depth than a series of
single-line bullet points.

viii

Introduction

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3.3 Read around
Wider reading will help you understand the main issues businesses face.
Most importantly you should read the technical articles on the ACCA website that are relevant to P4.
Websites such as Reuters.com are also a useful source of information on current trends in the financial
environment.

3.4 Lots of question practice
You can develop application skills by attempting questions in the Practice Question Bank and later on in
the BPP Learning Media Practice & Revision Kit.

4 Answering questions
4.1 Analysing question requirements
It's particularly important to consider the question requirements carefully to make sure you understand
exactly what the question is asking, and whether each question part has to be answered in the context of
the scenario or is more general. You also need to be sure that you understand all the tasks that the
question is asking you to perform.
If for example you are asked to:
'Discuss the benefits and disadvantages of a company entering into an overseas joint venture instead of
setting up overseas independently’, then you would explain:




The merits of joint venture as a method of entering an overseas market.
The merits of setting up independently in an overseas market..
In both cases you would support your argument using the clues in the scenario.

You would not discuss whether a company should enter this overseas market (this is an extract from a
past exam question, and many candidates made this mistake).

4.2 Understanding the question verbs
Important!

In the report for the first P4 exam, the examination team highlighted lack of understanding of the
requirements of question verbs as the most serious weakness in many candidates' scripts. The
examination team will use question verbs very deliberately to signal what is required.

Introduction

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ix


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

Calculate

Perform a specific mathematical technique

1

Describe

Give the key features

1

Identify

Recognise or select

2

Apply

Apply relevant concepts to solve problems

2

Distinguish

Define two different terms, viewpoints or concepts on the
basis of the differences between them

2

Compare and
contrast

Explain the similarities and differences between two different
terms, viewpoints or concepts

2

Analyse

Give reasons for the current situation or what has happened

3

Examine

Critically review in detail

3

Discuss

Examine by using arguments for and against

3

Explore

Examine or discuss in a wide-ranging manner

3

Estimate

Make an appropriate judgement or calculation

3

Evaluate/critically
evaluate

Determine the value of in the light of the arguments for and
against (critically evaluate means weighting the answer
towards criticisms/arguments against)

3

Assess

Determine the strengths / weaknesses / importance
/significance/ ability to contribute

3

Advise /
Recommend

Use judgement to recommend a course of action(s) in terms
the recipient will understand

At this level of your studies you will normally expect to see Intellectual level 3 verbs in exam questions.
Intellectual level 3 verbs (advise, report) test your ability to take a complex situation and to use your
judgement and technical knowledge (from a number of different syllabus areas) to construct
appropriate decisions and recommendations.
In the exam you should actively be looking to synthesise knowledge from different syllabus areas as
you construct your answer.

4.3 Content of answers
Well-judged, clear recommendations grounded in the scenario will always score well, as markers for this
paper have a wide remit to reward good answers. You need to be selective. As we've said, lists of points
memorised from Texts and reproduced without any thought won't score well.

Important!

x

The examination team identified lack of application skills as a serious weakness in many student answers.

What constitutes good application will vary question by question but is likely to include:


Only including technical knowledge that is relevant to the scenario.



Including scenario details that support the points you are making.



Tackling the problems highlighted in the scenario and the question requirements



Explaining why the factors you're discussing are significant

Introduction

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5 Gaining professional marks
As P4 is a Professional level paper, four Professional level marks will be awarded in the compulsory
question. The examination team has stated that some marks may be available for presenting your answer
in the form of a letter, presentation, memo, report, briefing notes, management reporting, narrative or
press statement. You may also be able to obtain marks for the layout, logical flow and presentation of your
answer. You should also make sure that you provide the points required by the question.

Important!

Whatever the form of communication requested, you will not gain professional marks if you fail to follow
the basics of good communication. Keep an eye on your spelling and grammar. Also think carefully, am I
saying things that are appropriate in a business communication?

Introduction

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xi


6 Brought forward knowledge
As mentioned previously, this paper builds on knowledge brought forward from Paper F9 Financial
Management. If you have not studied F9, you should be aware that the following topics are assumed
knowledge and should be considered examinable.












xii

Management of working capital
Business finance (including sources of finance and dividend policy)

The capital structure decision
Investment decisions
Interest and discounting
Investment appraisal
Capital rationing
Cost of capital (including CAPM and WACC)
Business valuations
Market efficiency
Foreign currency and interest rate risk management

Introduction

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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

J15

D14

O

O

J14

D13 J 13 D 12 J 12 D 11 J 11 D 10 J 10 D 09

ROLE OF SENIOR FINANCIAL ADVISER
1, 2

Role of senior financial adviser/ financial
strategy formulation

C

O

C

C

2

Ethical/environmental issues

4a

Trading in a multinational environment

4b

Planning in a multinational environment

C

O
O

C, O

O

O

O

O

O

O

ADVANCED INVESTMENT APPRAISAL
5
6
7a, 7b
8

C

Discounted cash flow techniques
O

Application of option pricing theory to
investment decisions
Impact of financing, adjusted present values /
Valuation & free cash flows
International investment / financing

O

C

C, O

O

O

O

C

C
C

C

C

C, O C, O
O

C

C

C, O

O

O

C

C, O

O

C

C

ACQUISITIONS AND MERGERS
9,11,12
10

Strategic/financial/regulatory issues

C

O

Valuation techniques

C

O

O

O

O

C, O

O

C
C

C

C

C

CORPORATE RECONSTRUCTION AND
REORGANISATION
13

Financial reconstruction

O

14

Business reorganisation

O

C
O

C
C

O

C

O

TREASURY AND ADVANCED RISK MANAGEMENT
TECHNIQUES
O

15

Role of the treasury function

16

Hedging foreign currency risk

17

Hedging interest rate risk

C
O

O

C

O
O

O

C

C
O

O

C

O

Note – this analysis ends in June 2015 because for sittings after this date the ACCA are not releasing exam
papers in full.

Introduction

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xiii


7 The exam paper and exam formulae
Format of the paper
Section A contains one compulsory question worth 50 marks.
This question covers topics from across the syllabus but tends 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 contains a choice of 2 from 3 questions worth 25 marks each.
Professional marks are available. The examination team 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 – 3 hours and 15 minutes

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
7a

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

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

7a

The growth model
P0 

D0 (1  g)

12

(re  g)

Gordon's growth approximation
5

g = bre
The weighted average cost of capital

WACC =

 Vd 
 Ve 
 k d (1 – T)

 ke  
V
V
V
V


 e d
 e d

7a

The Fisher formula
5

(1  i) = (1  r) (1  h)
Purchasing power parity and interest rate parity

S1 = S0

×

1 + h 
1 + h 
c

8

b

xiv

Introduction

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Chapter in Study Text

F0 = S0

×

1 + i 
1 + i 
c

8

b

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
Where

d1 =





2

In Pa / Pe  (r + 0.5s )t
s t

6
6

d2 = d1 – s t
The put call parity relationship

6

p = c – Pa  Pee–rt

Introduction

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xv


Syllabus and Study Guide
The P4 syllabus and Study Guide can be found below. Please note the changes to the syllabus – these are
summarised at the end of this section.

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xx

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