2015 ACCA p4 AFM study text BPP

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ACCA Approved
Study Text

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Paper P4
Advanced Financial Management
Study Text for exams
up to June 2015

Free access
to our Exam
Success site
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For exams up to June 2015

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Paper P4
Advanced Financial Management
This ACCA Study Text for Paper P4 Advanced
Financial Management has been comprehensively
reviewed by the ACCA examining team. This review
guarantees appropriate depth and breadth of content
and comprehensive syllabus coverage.

Advanced Financial Management

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ADVANCED FINANCIAL

MANAGEMENT

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PAPER P4

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BPP Learning Media is an ACCA Approved Learning Partner – content. This means we
work closely with ACCA to ensure this Study Text contains the information you need to
pass your exam.
In this Study Text, which has been reviewed by the ACCA examination team, we:
Highlight the most important elements in the syllabus and the key skills you need



Signpost how each chapter links to the syllabus and the study guide



Provide lots of exam focus points demonstrating what is expected of you in the exam



Emphasise key points in regular fast forward summaries



Test your knowledge in quick quizzes



Examine your understanding in our practice question bank



Reference all the important topics in our full index

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BPP's Practice & Revision Kit, i-Pass and Interactive Passcard products also
support this paper.

FOR EXAMS IN DECEMBER 2014 AND JUNE 2015

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First edition 2007
Seventh edition May 2014

All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system or transmitted, in
any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior
written permission of BPP Learning Media Ltd.

ISBN 9781 4727 1088 8
(Previous ISBN 9781 4453 9656 9)
e-ISBN 9781 4453 6743 9

We are grateful to the Association of Chartered Certified
Accountants for permission to reproduce past
examination questions. The suggested solutions in the
practice answer bank have been prepared by BPP
Learning Media Ltd, unless otherwise stated.

British Library Cataloguing-in-Publication Data

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A catalogue record for this book
is available from the British Library

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Published by

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BPP Learning Media Ltd
BPP House, Aldine Place
London W12 8AA
www.bpp.com/learningmedia
Printed in the United Kingdom by

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©
BPP Learning Media Ltd
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Your learning materials, published by BPP Learning
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Contents

Page

Introduction

v
vii
xi

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Helping you to pass
Studying P4
The exam paper and exam formulae

Part A Role and responsibility towards stakeholders
1
2
3a
3b
3c

The role and responsibility of senior financial executive/advisor
Financial strategy formulation
Conflicting stakeholder interests
Ethical issues in financial management
Impact of environmental issues on corporate objectives and governance

Part B Economic environment for multinationals

Trading and planning in a multinational environment

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4

Part C Advanced investment appraisal

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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

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5
6
7a
7b
8

3
29
69
95
103

121

159
187
205
259
277

Part D Acquisitions and mergers

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

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9
10
11
12

305
319
353
365

Part E Corporate reconstruction and reorganisation
Financial reconstruction
Business reorganisation

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13
14

379
393

Part F Treasury and advanced risk management techniques

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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
Dividend policy in multinationals and transfer pricing

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15
16
17
18

409
427
477
513

Part G Emerging issues
Recent developments in world financial markets and international trade

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

529
553
559
587
655

Contents

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A note about copyright
Dear Customer
What does the little © mean and why does it matter?

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Your market-leading BPP books, course materials and elearning materials do not write and update
themselves. People write them: on their own behalf or as employees of an organisation that invests in this
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Breach of copyright is a form of theft – as well being a criminal offence in some jurisdictions, it is
potentially a serious breach of professional ethics.

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BPP Learning Media:
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And what about outside the UK? BPP Learning Media strives to make our materials available at prices
students can afford by local printing arrangements, pricing policies and partnerships which are clearly
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our material or supporting organisations that do. If they act illegally and unethically in one area, can you
really trust them?

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Introduction

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Helping you to pass
BPP Learning Media – Approved Learning Partner - content

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As ACCA’s Approved Learning Partner – content, 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 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.

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Your achievement of the PER should now be recorded in your on-line My Experience record.

Tackling studying

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Developing exam awareness

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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.

Our Texts are completely focused on helping you pass your exam.

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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.

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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

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You can find the syllabus and Study Guide on pages xiii – xxii of this Study Text

Testing what you can do

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Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can
recall what you have learnt.

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

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

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Topic list

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.
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.

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Knowledge brought forward from earlier studies

Demonstrate how to apply key knowledge and
techniques.

Key terms

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

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Examples

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

Exam focus points

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Formulae that are not given in the exam but which have to
be learnt.

Gives you essential practice of techniques covered in the

chapter.

Case Study

Real world examples of theories and techniques.

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

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Chapter Roundup
Quick Quiz

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Gives you a useful indication of syllabus areas that
closely relate to performance objectives in your Practical
Experience Requirement (PER).

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Question

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Formula to learn

A quick test of your knowledge of the main topics in the
chapter.
Found at the back of the Study Text with more
comprehensive chapter questions. Cross referenced for
easy navigation.

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Practice Question Bank

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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.

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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 advisor, in taking or recommending
financial management decisions that are likely to have an impact on the entire organisation.

The syllabus is divided into seven main sections:
(a)

The role and responsibility towards stakeholders

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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, amongst other things, in both a
domestic and international context.

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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.

(b)

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Ethical issues cannot be ignored – ethics are expected to be a consistent theme in the
examination, with the examiner expecting students to be able to take a practical approach to
identifying such issues in given scenarios.
Economic environment for multinationals

(c)

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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.
Advanced investment appraisal

Acquisitions and mergers

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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.

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You will be expected to distinguish between different types of acquisitions, choose and apply the
most 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.
Corporate reconstruction and re-organisation

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(e)

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This section looks at how to put together a restructuring package and ways in which an
organisation might be re-organised (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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(f)

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 not
only be required to know how the derivatives work but also to advise on the best methods of
hedging in particular scenarios. This section also covers other risks such as credit risk and
additional treasury functions such as dividend policy.
Emerging issues in finance and financial management

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(g)

Financial management is a continually developing area and finance executives have to keep up to
date with the new tools and techniques that are emerging, as well as developments in the
international financial markets.

2 Skills you have to demonstrate

Be able to integrate knowledge and understanding from across the syllabus



Think in a strategic way – you are assumed to be a senior financial adviser for the purposes of this
paper



Be able to criticise financial techniques as well as apply them, and be able to make reasoned
judgements and give objective advice based on calculated results



Be able to think internationally as well as from the viewpoint of the domestic market



If you read the main capabilities listed by ACCA that students are expected to have on completion
of P4, you will find continued reference to the verbs ‘evaluate’, ‘assess’, ‘advise’ and ‘explain’ –
make sure you can do all of these in relation to the different aspects of the syllabus

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3 How to pass

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The examiner’s reports for both exams in 2013 highlighted factors on which students should focus.
Study the entire syllabus. Students who are well-prepared are much more likely to be successful
than students who study at the last minute and rely on question spotting and hints.



Apply knowledge and understanding to the scenario. Weak answers tend to be more general.



Provide a balanced answer to all parts of the question, whether discussion or calculation parts.
Scripts that answer all parts of all questions are more likely to pass than scripts that leave question
parts or whole questions unanswered. Students should make sure that they choose optional
questions where they can answer all parts.



Good time management is vitally important. Students should avoid spending too long on
individual questions.



Answer the question set, all of the question set and no more. Question requirements and
narrative should be read carefully. Irrelevant answers will not score well.



Legible, well-presented and well-structured answers often score well. The presentation of

answers achieving high marks is normally good, with clear labelling and structure and workings.
Adopting these practices will also help students obtain the professional marks.

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Remember what the examiners’ reports say and emulate the approaches, techniques and good
practice that they suggest.

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Do a quick check. Do the numerical answers make sense?



Apply knowledge and understand

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Introduction

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4 Brought forward knowledge

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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.

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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

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



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
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

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.

D13

J 13 D 12 J 12 D 11 J 11 D 10 J 10 D 09 J 09 D 08 J 08 D 07

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

C

C

C

O

O

ADVANCED INVESTMENT APPRAISAL
C

Application of option pricing theory to
investment decisions

C

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

O

7a, 7b
8

International investment and financing
decisions
ACQUISITIONS AND MERGERS

10

Valuation techniques

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9, 11, 12 Strategic/financial/regulatory issues

O

O

C

C

C

C

O

O

C, O

O

O

O

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Discounted cash flow techniques

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5

C, O

O

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Trading and planning in a multinational
environment

O

O

ECONOMIC ENVIRONMENT FOR
MULTINATIONALS
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Covered
in Text
chapter

C, O C, O
O

C

C

O

O

O

O

C

O

C, O

O

C

C

C, O C, O

O

O

C

C, O

O

C

O
C

O
O

O

0

O

C

C

C

C

C
C

C

C

C

CORPORATE RECONSTRUCTION &
REORGANISATION
Financial reconstruction

14

Business reorganisation

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C

O

C
C

O

C

O

C

TREASURY & ADVANCED RISK
MANAGEMENT TECHNIQUES
Role of the treasury function

16

Hedging foreign currency risk

17

Hedging interest rate risk

18

Dividend policy & transfer pricing in
multinationals

O
O
O

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C

O

C
O

O

O

C

O
O

O

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EMERGING ISSUES
Recent developments and trends in world
financial markets and international trade

O

O

O

O

O

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O

O
O


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The exam paper and exam formulae
Format of the paper
Section A contains one compulsory question worth 50 marks.

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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 two from three 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 with 15 minutes’ reading time.

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Exam formulae

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Modigliani and Miller Proposition 2 (with tax)
Vd

k e  k ie  (1  T)(k ie  k d )

Ve

The asset beta formula

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The capital asset pricing model
E(ri) = Rf + i(E(rm) – Rf)

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



P0 

D0 (1  g)
(re  g)



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The growth model

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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

7a

Assumed knowledge

Assumed knowledge

12

g = bre

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Gordon's growth approximation

5

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The weighted average cost of capital

 Ve 
 Vd 

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

WACC = 

7a

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The Fisher formula

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

5

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Purchasing power parity and interest rate parity

S1 = S0 ×

1+ hc 
1+ hb 

8

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/>1+ ic 
1+ ib 

F0 = S0 ×

8

Modified internal rate of return

MIRR = 


 PVI 

1+ re  - 1

5

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1

n
 PVR 

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

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The put call parity relationship

16

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p = c – Pa + Pee–rt

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Chapter in Study Text

Introduction

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Syllabus and Study Guide

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The P4 syllabus and study guide can be found below.

Introduction

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Introduction

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P

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Role and responsibility towards
stakeholders

1

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