Management Accounting Financial Strategy

NB: This paper was part of the 2005 syllabus and is no longer being examined. This page is for information only.

First examined in May 2005

Syllabus outline

The syllabus comprises:

Learning aims

Students should be able to:

• understand and apply contemporary thinking on strategic financial management;
• understand and utilise appropriate tools for strategic financial management;
• evaluate strategic financial management options in light of the needs of management and the policy of the enterprise;
• characterise and describe the enterprise's financial strategy and use that characterisation to develop optimal financial strategy for all stages of the life-cycle;
• assess and evaluate proposed strategies.

Assessment strategy

There will be a written examination paper of three hours, with the following sections.

• Section A - 50 marks
  A maximum of four compulsory questions, totalling 50 marks, all relating to a single scenario.
• Section B ' 50 marks
  Two question, from a choice of four, each worth 25 marks. Short scenarios will be given, to which some or all questions relate.

Learning Outcomes and Syllabus Content

A - Formulation of Financial Strategy - 20%

Learning outcomes

On completion of their studies students should be able to:

• identify an organisation's objectives in financial terms and evaluate their attainment;
• discuss the interrelationships between decisions concerning investment, financing and dividends;
• identify and analyse the impact of internal and external constraints on financial strategy (e.g. funding, regulatory bodies, investor relations, strategy, and economic factors);
• evaluate current performance, taking account of potential variations in economic and business factors;
• recommend alternative financial strategies for an organisation.

Syllabus content

• The financial and non-financial objectives of different organisations (e.g. value for money, maximising shareholder wealth, providing a surplus).
• The three key decisions of financial management (by which we mean investment, financing, dividend) and their links.
• Benefits of matching characteristics of investment and financing, (e.g. in cross-border investment.)
• Identifying the financial objectives of an organisation and the economic forces affecting its financial plans, e.g. interest, inflation and exchange rates.
• Assessing attainment of financial objectives.
• Developing financial strategy in the context of regulatory requirements (e.g. price and service controls exercised by industry regulators) and international operations.
• Modelling and forecasting cash flows and financial statements based on expected values for economic variables (e.g interest rates) and business variables (e.g. volume and margins) over a number of years.
• Analysis of sensitivity to changes in expected values in the above models and forecasts.
• Identifying financing requirements (both in respect of domestic and international operations) and the impacts of different types of finance on the above models and forecasts.
• Assessing the implications for shareholder value of alternative financial strategies, including dividend policy. (Note: Modigliani and Miller's theory of dividend irrelevancy will be tested in broad terms. The mathematical proof of the model will not be required, but some understanding of the graphical method is expected.)
• Current and emerging issues in financial reporting (e.g. proposals to amend or introduce new accounting standards) and in other forms of external reporting (e.g. environmental accounting).

B - Financial Management - 30%

Learning outcomes

On completion of their studies students should be able to:

• identify and describe optimal strategies for the management of working capital and satisfaction of longer term financing requirements;
• identify and evaluate key success factors in the management of the finance function and its relationship with other parts of the organisation and, where necessary, with external parties;
• discuss the role and management of the treasury function;

Syllabus content

• Working capital management strategies. (Note: No detailed testing of cash and stock management models will be set since these are covered at the Managerial level.)
• Types and features of domestic and international long-term finance: share capital (ordinary and preference shares, warrants), long-term debt (bank borrowing and forms of securitised debt, e.g. convertibles) and finance leases, and methods of issuing securities.
• The lender's assessment of creditworthiness.
• The lease or buy decision (with both operating and finance leases).
• The operation of stock exchanges (e.g. how share prices are determined, what causes share prices to rise or fall, and the efficient market hypothesis). (Note: No detailed knowledge of any specific country's stock exchange will be tested.)
• The capital asset pricing model (CAPM): calculation of the cost of equity using the dividend growth model (knowledge of methods of calculating and estimating dividend growth will be expected), the ability to gear and ungear betas and comparison to the arbitrage pricing model.
• The ideas of diversifiable risk (unsystematic risk) and systematic risk. (Note: use of the two-asset portfolio formula will not be tested.)
• The cost of redeemable and irredeemable debt, including the tax shield on debt (numerical questions on the cost of convertible debt will not be tested).
• The weighted average cost of capital (WACC): calculation, interpretation and uses.
• Criteria for selecting sources of finance, including finance for international investments.
• The effect of financing decisions on balance sheet structure and on ratios of interest to investors and other financiers (gearing, earnings per share, price-earnings ratio, dividend yield, dividend cover gearing, interest cover).
• Management of the finance function and relationships with professional advisors (accounting, tax and legal), auditors and financial stakeholders (investors and financiers).
• The role of the treasury function in terms of setting corporate objectives, liquidity management, funding management, currency management.
• The advantages and disadvantages of establishing treasury departments as profit centres or cost centres, and their control.

C - Business Valuations and Acquisitions - 25%

Learning outcomes

On completion of their studies students should be able to:

• calculate values of organisations of different types, e.g. service, capital intensive;
• identify and calculate the value of intangible assets (including intellectual property);
• identify and evaluate the financial and strategic implications of proposals for mergers, acquisitions, demergers and divestments;
• compare and recommend alternative forms of consideration for, and terms of, acquisitions;
• calculate post-merger or post-acquisition value of companies;
• identify and evaluate post-merger or post-acquisition value enhancement strategies;
• discuss and illustrate the impact of regulation on business combinations;
• evaluate exit strategies.

Syllabus content

• Valuation bases for assets (e.g. historic cost, replacement cost and realisable value), earnings (e.g. price/earnings multiples and earnings yield) and cash flows (e.g. discounted cash flow, dividend yield and the dividend growth model).
• The strengths and weaknesses of each valuation method and when each is most suitable.
• Recognition of the interests of different stakeholder groups in mergers, acquisitions and company valuations.
• Application of the efficient market hypothesis to business valuations.
• Selection of an appropriate cost of capital for use in valuation.
• The impact of changing capital structure on the market value of a company. (Note: An understanding of Modigliani and Miller's theory of gearing, with and without taxes, will be expected, but proof of their theory will not be examined.)
• Forms of intellectual property and methods of valuation.
• The reasons for merger or acquisitions (e.g. synergistic benefits).
• Forms of consideration and terms for acquisitions (e.g. cash, shares, convertibles and earn-out arrangements), and their financial effects.
• The post-merger or post-acquisition integration process (e.g. management transfer and merger of systems).
• The implications of regulation for business combinations. (Note: Detailed knowledge of the City Code and EU competition rules will not be tested.)
• The function/role of management buy-outs, venture capitalists.
• Types of exit strategy and their implications.

D - Investment Decisions and Project Control - 25%

Learning outcomes

On completion of their studies students should be able to:

• analyse relevant costs, benefits and risks of an investment project;
• evaluate investment projects (domestic and international) taking account of potential variations in business and economic factors;
• recommend methods of funding investments, taking account of basic tax considerations;
• evaluate procedures for the implementation and control of investment projects;
• recommend investment decisions when capital is rationed.

Syllabus content

• Identification of a project's relevant costs (e.g. infrastructure, marketing and human resource development needs), benefits (including incremental effects on other activities as well as direct cash flows) and risks (i.e. financial and non-financial).
• Linking investments with customer requirements and product/service design.
• Linking investment in IS/IT with strategic, operational and control needs (particularly where risks and benefits are difficult to quantify).
• Calculation of a project's net present value and internal rate of return, including techniques for dealing with cash flows denominated in a foreign currency and use of the weighted average cost of capital.
• The modified internal rate of return based on a project's 'terminal value' (reflecting an assumed reinvestment rate).
• The effects of taxation (including foreign direct and withholding taxes), potential changes in economic factors (inflation, interest and exchange rates) and potential restrictions on remittances on these calculations.
• Recognising risk using the certainty equivalent method (when given a risk free rate and certainty equivalent values).
• Adjusted present value. (Note: The two step method may be tested for debt introduced permanently and debt in place for the duration of the project.)
• Capital investment real options (i.e. to make follow-on investment, abandon or wait).
• Project implementation and control in the conceptual stage, the development stage, the construction stage and initial manufacturing/operating stage.
• Post completion audit of investment projects.
• Single period for capital rationing for divisible and non-divisible projects. (Note: Multi-period rationing will not be tested.)