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ACCA Platinum Text IFC & IBC 2011 (for DIGITAL prints)_Layout 1 13/10/2011 12:28 Page 1



S
T
U
D
Y

T
E
X
T


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:
 We discuss the best strategies for studying for ACCA exams
 We highlight the most important elements in the syllabus and the key skills you will need
 We signpost how each chapter links to the syllabus and the study guide
 We provide lots of exam focus points demonstrating what the examiner will want you to do
 We emphasise key points in regular fast forward summaries
 We test your knowledge of what you've studied in quick quizzes

 We examine your understanding in our exam question bank
 We reference all the important topics in our full index

BPP's Practice & Revision Kit, i-Pass and Interactive Passcard products also
support this paper.
FOR EXAMS UP TO JUNE 2014



ii





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
Published by
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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Your learning materials, published by BPP Learning
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All our rights reserved. No part of this publication may be
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any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior
written permission of BPP Learning Media Ltd.

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

©
BPP Learning Media Ltd
2012




Contents

iii

Contents
Page
Introduction
Helping you to pass – the ONLY F9 Study Text reviewed by the examiner! v
Studying F9 vii
The exam paper and exam formulae x
Part A Financial management function
1 Financial management and financial objectives 3
Part B Financial management environment
2 The economic environment for business 35
3 Financial markets and institutions 55
Part C Working capital management
4 Working capital 75
5 Managing working capital 89
6 Working capital finance 115
Part D Investment appraisal
7 Investment decisions 139
8 Investment appraisal using DCF methods 155
9 Allowing for inflation and taxation 173
10 Project appraisal and risk 187
11 Specific investment decisions 201
Part E Business finance
12 Sources of finance 221
13 Dividend policy 253
14 Gearing and capital structure 263
Part F Cost of capital
15 The cost of capital 285
16 Capital structure 309

Part G Business valuations
17 Business valuations 329
18 Market efficiency 351
Part H Risk management
19 Foreign currency risk 363
20 Interest rate risk 387
Mathematical tables
401

Exam question bank
405

Exam answer bank
427

Index
485

Review form



iv

A note about copyright
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really trust them?



Introduction
v

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.


vi
Introduction
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.

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).

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.
FA
S
T F
O
RWAR
D




Introduction
vii

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)




viii
Introduction
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





Introduction
ix

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.


x
Introduction
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.



Introduction
xi


Syllabus and Study Guide
The F9 syllabus and study guide can be found below.



xii
Introduction





Introduction
xiii




xiv
Introduction



Introduction
xv





xvi
Introduction




Introduction
xvii




xviii
Introduction




Introduction
xix






xx
Introduction
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

Dec
2008

Pilot
Paper

FINANCIAL MANAGEMENT FUNCTION

1 Nature & purpose

4c


1 Objectives 3a 4c,d 3a 3a,b 4a
1 Stakeholders 4a 1e

FINANCIAL MANAGEMENT ENVIRONMENT


2 Economic environment
3 Financial markets and institutions 4a

WORKING CAPITAL MANAGEMENT

4, 5 Management 2a,c 2a-d
3a,b,
c,d
1a,b,c 4b,d 3c 2b,c 3a,b,c
6 Funding strategies 2b 4b 4c 3a,b 3d

INVESTMENT APPRAISAL

7 Non-discounted cash flow techniques 1b 1b 2a,b 4b

8, 9 Discounted cash flow techniques 1a 1a,b 1a,b 1a 3a,b 1a,b 2b,c 3b 4a,c
10 Risk and uncertainty 1c 1c

11 Specific investment decisions 1c 1d 3c 1c,d


BUSINESS FINANCE


12 Sources of short-term finance 4a

12 Sources of long term-finance 3b,c 4a,b 3b 2a,b 2d 4b,c 1a, 4a

13 Dividend policy 3c 4d 4c 2d

14 Finance for SMEs

COST OF CAPITAL

15 Calculation 4c,d 3c 2a
1c,
4b,c
2a 2a,b,c 1a 3a 1a
16 Gearing (capital structure) 3d 2c 2b,c 1c 3c 1b,c

BUSINESS VALUATIONS


17 Valuation of shares 4a,b 3a,b 4a 4b 1b 1b,c,d
17 Valuation of debt 2b 4b

18
Efficient market hypothesis / practical
considerations
2c

RISK MANAGEMENT


19
Causes of interest rate / exchange rate
fluctuations
4a 3c 2b
19 Hedging foreign currency risk 3d,e 3d 4c,d 2a,c,d
20 Hedging interest rate risk 2a





Introduction
xxi

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
Economic Order Quantity 5
=
0

2C D
Ch

Miller-Orr Model

6

Return point = Lower limit + (
1
3


spread)

Spread = 3






1
3
3
transaction cos t variance of cash flows
4
int erest rate

The Capital Asset Pricing Model


15
E(r
i
) = R
f
+ ß
i
(E (r
m
) – R
f
)
The Asset Beta Formula

16
ß
a
=






V
e
e
(V V (1 T))
e
d

+
 


 

 
 
V(1 T)
d
d
(V V (1 T))
e
d

The Growth Model

15
P
0
=


D(1 g)
0
(K g)
e
or P
0
=



D(1 g)
0
(r g)
e

Gordon’s Growth Approximation

15
g = br
e

The weighted average cost of capital

15
WACC =
 
 

 
 
V
e
VV
e
d
k
e
+






V
d
VV
e
d
k
d
(1–T)
The Fisher formula

9
(1 + i) = (1 + r)(1 + h)
Purchasing Power Parity and Interest Rate Parity

19
S
1
= S
0



(1 h )
c
(1 h )

b
F
0
= S
0



(1 i )
c
(1 i )
b






xxii
Introduction