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PAPER P4 ADVANCED FINANCIAL MANAGEMENT BPP Learning Media is the sole ACCA Platinum Approved Learning

PAPER P4

ADVANCED FINANCIAL MANAGEMENT

BPP Learning Media is the sole ACCA Platinum Approved Learning Partner – content for the ACCA qualification. In this, the only Paper P4 Practice and Revision Kit to be reviewed by the examiner:

We discuss the best strategies for revising and taking your ACCA exams

We show you how to be well prepared for your exam

We give you lots of great guidance on tackling questions

We show you how you can build your own exams

We provide you with three mock exams including the new Pilot paper

Our Passcard and i-Pass products also support this paper.

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FOR EXAMS UP TO JUNE 2014

and i-Pass products also support this paper. P R A C T I C E &

First edition 2007 Seventh edition January 2013

ISBN 9781 4453 6654 8 (previous ISBN 9781 4453 8003 2)

e-ISBN 9781 4453 6957 0

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available from the British Library

All our rights reserved. No part of this publication may be

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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, except where otherwise stated.

©

BPP Learning Media Ltd

2013

answer bank have been prepared by BPP Learning Media Ltd, except where otherwise stated. © BPP

Contents

 

Page

Finding questions

Using your BPP Learning Media products

iv

Question index

v

Topic index

viii

Helping you with your revision – the ONLY P4 Practice and Revision Kit to be reviewed by the examiner!

ix

 

Revising P4

Topics to revise

x

Question practice

x

Passing the P4 exam

xi

Exam formulae

xv

Exam information

xvii

Useful websites

xix

Planning your question practice

BPP Learning Media’s question plan

xx

Build your own exams

xxiv

Questions and answers

Questions

3

Answers

91

Exam practice

 

Mock exam 1

Questions

357

Plan of attack

367

 

Answers

369

Mock exam 2

Questions

389

Plan of attack

399

 

Answers

401

Mock exam 3 (Pilot Paper)

 

Questions

417

Plan of attack

427

 

Answers

429

ACCA examiner's answers

Pilot paper

445

Mathematical tables and formulae Review Form

459

ACCA examiner's answers  Pilot paper 445 Mathematical tables and formulae Review Form 459 iii

iii

A note about copyright

Dear Customer

What does the little © mean and why does it matter?

Your market-leading BPP books, course materials and e-learning materials do not write and update themselves. People write them: on their own behalf or as employees of an organisation that invests in this activity. Copyright law protects their livelihoods. It does so by creating rights over the use of the content.

Breach of copyright is a form of theft – as well as being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics.

With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media:

Photocopying our materials is a breach of copyright

Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright

You can, of course, sell your books, in the form in which you have bought them – once you have finished with them. (Is this fair to your fellow students? We update for a reason.) Please note the e-products are sold on a single user licence basis: we do not supply ‘unlock’ codes to people who have bought them second-hand.

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 listed on our website. A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that do. If they act illegally and unethically in one area, can you really trust them?

Using your BPP Learning Media products

This Kit gives you the question practice and guidance you need in the exam. Our other products can also help you pass:

Learning to Learn Accountancy gives further valuable advice on revision

Passcards provide you with clear topic summaries and exam tips

Success CDs help you revise on the move

i-Pass CDs offer tests of knowledge against the clock

Underlying knowledge CD offers guidance on assumed knowledge for Options papers P4, P5, P6, P7

You can purchase these products by visiting http://www.bpp.com/acca

iv Finding questions

Options papers P4, P5, P6, P7 You can purchase these products by visiting http://www.bpp.com/acca iv Finding

Question index

The headings in this checklist/index indicate the main topics of questions, but questions are expected to cover several different topics. Questions have been amended to reflect the new format of the exam from June 2013.

Questions set under the old syllabus Paper 3.7 – Strategic Financial Management (SFM) and Paper 14 – Financial Strategy (FS) are included as their style and/or content are similar to the questions that appear in Paper P4 – Advanced Financial Management.

Part A: Role and responsibility towards stakeholders

 

Time

Page number

 

allocation

   

Marks

Mins

Question

Answer

Part A: Role and responsibility towards stakeholders

 

1 Preparation question – Shareholders and bondholders

15

27

3

91

2 Preparation question – Capital structure (12/04)

15

27

3

92

3 Multimedia company

25

45

3

94

4 Agenda for change (12/07, amended)

25

45

4

97

5 Solar Supermarkets (12/08, amended)

25

45

5

100

6 Preparation question – International corporate governance (SFM, 12/02)

15

27

5

102

7 Mezza Co (6/11, amended)

25

45

6

104

8 Kengai Co (12/11, amended)

25

45

7

107

Part B: Economic environment for multinationals

 

9 International trade

25

45

8

109

10 Global financial markets

25

45

8

111

11 Boxless (SFM, 12/04, amended)

25

45

9

113

12 World Trade Organisation (SFM, 12/05, amended)

25

45

9

116

13 Pharmaceutical Co (6/09, amended)

25

45

10

119

14 PMU (12/10, amended)

25

45

10

120

Part C: Advanced investment appraisal

 

15 Jonas Chemical Systems

25

45

12

123

16 CD

25

45

13

127

17 Slow Fashions Co (6/09, amended)

25

45

14

130

18 Your business (6/09, amended)

25

45

15

133

19 Kodiak Company (12/09, amended)

25

45

15

136

20 Tisa Co (6/12, amended)

25

45

17

139

21 GDW Co

25

45

17

141

22 Preparation question – Cathlynn

15

27

18

143

23 MMC (6/11, amended)

25

45

19

144

24 Marengo Co (12/10, amended)

25

45

19

146

25 Digunder (12/07, amended)

25

45

20

148

26 AVT (SFM, 12/01, amended)

25

45

21

151

27 Alaska Salvage Co (12/09, amended)

25

45

21

153

28 Strayer (SFM, 6/02, amended)

25

45

22

155

29 Neptune (6/08, amended)

25

45

22

157

(SFM, 6/02, amended) 25 45 22 155 29 Neptune (6/08, amended) 25 45 22 157 Finding

Finding questions

v

Part A: Role and responsibility towards stakeholders

 

Time

Page number

 

allocation

   

Marks

Mins

Question

Answer

30 Airline Business (12/07, amended)

25

45

23

161

31 Fubuki (12/10)

25

45

24

164

32 Levante Co (12/11, amended)

25

45

25

167

33 Do-it-Yourself

25

45

26

170

34 AWP Co

25

45

27

174

35 Preparation question – Somax (FS, 6/96, amended)

12

22

28

176

36 Pondhills (FS, 6/01, amended)

25

45

29

178

37 Ennea (6/12)

25

45

30

179

Part D: Acquisitions and mergers

 

38 Mercury Training (6/08, amended)

25

45

31

182

39 Saturn Systems (6/08, amended)

25

45

31

185

40 Minprice

25

45

32

187

41 Fly 4000

25

45

34

191

42 Burcolene (12/07, amended)

25

45

35

195

Part E: Corporate reconstruction and reorganisation

 

43 AIR

25

45

37

199

44 MandM Co (6/10, amended)

25

45

38

202

45 Proteus Co (12/11, amended)

25

45

38

204

46 BBS Stores (6/09, amended)

25

45

39

207

Part F: Treasury and advanced risk management techniques

 

47 Troder (SFM, 6/03, amended)

25

45

42

211

48 MJY (SFM, 12/05, amended)

25

45

42

213

49 KYT (FS, 6/99, amended)

25

45

43

215

50 Asteroid Systems (6/08, amended)

25

45

44

217

51 Multidrop (6/10, amended)

25

45

44

220

52 NTC (SFM, 6/02, amended)

25

45

45

223

53 Casasophia Co (6/11, amended)

25

45

46

226

54 HYK (FS, 12/99, amended)

25

45

47

230

55 Phobos Co (12/08, amended)

25

45

48

232

56 Katmai Co (12/09, amended)

25

45

49

235

57 Sembilan Co (6/12, amended)

25

45

50

237

58 Lamri Co (12/10, amended)

25

45

50

240

Part G: Emerging issues

 

59 Moose Co (12/09, amended)

25

45

52

243

60 GoSlo Motor Corp (6/10, amended)

25

45

52

245

61 Kilenc Co (6/12, amended)

25

45

53

247

62 NRD Co

25

45

54

250

vi Finding questions

245 61 Kilenc Co (6/12, amended) 25 45 53 247 62 NRD Co 25 45 54

Part A: Role and responsibility towards stakeholders

 

Time

Page number

 

allocation

   

Marks

Mins

Question

Answer

Part H: 50 mark questions

 

63 Vadener (SFM, 6/06, amended)

50

90

55

252

64 International Enterprises (12/07, amended)

50

90

56

256

65 McTee (SFM, 6/05, amended)

50

90

58

259

66 Wurrall (SFM, 6/04, amended)

50

90

59

265

67 Blipton International (12/08, amended)

50

90

61

270

68 Jupiter Co (12/08, amended)

50

90

62

275

69 Trosoft (SFM, 12/04, amended)

50

90

63

279

70 Your company (FS, 6/99, amended)

50

90

65

283

71 Omnikit (FS, 6/97, amended)

50

90

67

287

72 Intergrand (SFM, 12/02, amended)

50

90

68

293

73 Pursuit Co (6/11, amended)

50

90

70

298

74 Laceto (FS, 6/01, amended)

50

90

72

304

75 Anchorage Retail Co (12/09, amended)

50

90

73

309

76 Romage (FS, 6/00, amended)

50

90

75

314

77 Galeplus (SFM, 12/04, amended)

50

90

77

318

78 Polytot (SFM, 6/04, amended)

50

90

78

322

79 FNDC (SFM, 12/06, amended)

50

90

79

328

80 Nente Co (6/12, amended)

50

90

80

332

81 Seal Island (6/10, amended)

50

90

82

336

82 Sleepon (SFM, 12/05, amended)

50

90

84

341

83 Fuelit (FS, 12/00, amended)

50

90

 

85 345

84 Aggrochem Co (6/10, amended)

50

90

 

86 350

Mock exam 1

Questions 85 to 88

Mock exam 2

Questions 89 to 92

Mock exam 3 (Pilot paper)

Questions 93 to 96

Planning your question practice

Our guidance from page xx shows you how to organise your question practice, either by attempting questions from each syllabus area or by building your own exams – tackling questions as a series of practice exams.

June and December 2013 exams

BPP’s answers for these exams along with additional questions will be available for free after the exams on http://www.bpp.com/acca

with additional quest ions will be available for free after the exams on http://www.bpp.com/acca Finding questions

Finding questions

vii

Topic index

Listed below are the key Paper P4 syllabus topics and the numbers of the questions in this Kit covering those topics.

If you need to concentrate your practice and revision on certain topics or if you want to attempt all available questions that refer to a particular subject, you will find this index useful.

Syllabus topic

Question numbers

Acquisitions - regulatory framework and processes

7, 39, 40, 63, 74, 80

Acquisitions and mergers versus other growth strategies

39, 42, 64, 67, 71, 72, 75, 82

Application of option pricing theory in investment decisions 17, 22, 23, 24, 25, 26, 27, 83, 84

Business re-organisation

Conflicting stakeholder interests

Dividend policy in multinationals and transfer pricing

Environmental issues

Ethical issues

Financial planning for multinational organisations

Financial reconstruction

Financial strategy formulation

38, 43, 44, 45, 46, 76, Mock 1 Q4, Mock 3 Q3

1, 5, 6, 8, 11, Mock 1 Q1

11, 12, 14, 58, 63, 64, 71, 78, Mock 2 Q4

4, 7, 8, 73, 83, Mock 3 Q1

3, 4, 5, 7, 13, 76

10, 11, 14, 65, 67, 72, Mock 2 Q1

43, 76, Mock 3 Q3

1, 3, 4, 5, 7, 37, 63, 64, 66, 68, 75, 80, Mock 2 Q4, Mock 3 Q1

40, 72, 74, 75

48, 49, 50, 51, 52, 53, 65, 68, 77, 78, 84, Mock 1 Q2, Mock 2 Q2

10, 27, 28, 29, 30, 31, 32, 33, 34, 35, 37, 38, 57, 65, 66, 68, 69, 70, 81, Mock 3 Q4

27, 47, 49, 54, 55, 56, 57, 75, 77, 79, Mock 2 Q2, Mock 3 Q2

16, 33, 71, 72, Mock 2 Q1, Mock 3 Q1

60, 61, 70

15, 16, 17, 18, 20, 21, 29, 56, 67, 68, 69, 81, 82, 83, Mock 1 Q1, Mock 1 Q3, Mock 2 Q3

59, 62, 70

9, 11, 12, 13, 37, 63, 78

2, 3, 10, 13, 64, 66, Mock 1 Q1

Financing acquisitions and mergers

Foreign exchange risk hedging

Impact of financing on investment decisions and adjusted present values

Interest rate risk hedging

International investment and financing decisions

International trade and finance

Investment appraisal - discounted cash flow techniques

Islamic financing

Management of international trade and finance

The role and responsibility of senior financial executive/advisor

Treasury function

Valuation and the use of free cash flows

Valuation for acquisitions and mergers

World financial markets

48, 50, 78, 79

19, 41, 42, 66, 73, 80, 84, Mock 1 Q3

40, 41, 42, 71, 72, 73, 74, 80, 84

59, 60, 61, 73

viii Finding questions

50, 78, 79 19, 41, 42, 66, 73, 80, 84, Mock 1 Q3 40, 41, 42,

Helping you with your revision – the ONLY P4 Practice and Revision Kit to be 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 revision materials for the 2013 and June 2014 exams. By incorporating the examiner’s comments and suggestions regarding syllabus coverage, the BPP Learning Media Practice and Revision Kit provides excellent, ACCA-approved support for your revision.

Tackling revision and the exam

Using feedback obtained from ACCA examiners as part of their review:

We look at the dos and don’ts of revising for, and taking, ACCA exams

We focus on Paper P4; we discuss revising the syllabus, what to do (and what not to do) in the exam, how to approach different types of question and ways of obtaining easy marks

Selecting questions

We provide signposts to help you plan your revision.

A full question index

A topic index listing all the questions that cover key topics, so that you can locate the questions that provide practice on these topics, and see the different ways in which they might be examined

BPP's question plan highlighting the most important questions and explaining why you should attempt them

Build your own exams, showing how you can practise questions in a series of exams

Making the most of question practice

At BPP Learning Media we realise that you need more than just questions and model answers to get the most from your question practice.

Our Top tips included for certain questions provide essential advice on tackling questions, presenting answers and the key points that answers need to include

We show you how you can pick up Easy marks on some questions, as we know that picking up all readily available marks often can make the difference between passing and failing

We include marking guides to show you what the examiner rewards

We include examiners’ comments to show you where students struggled or performed well in the actual exam

We refer to the 2012 BPP Study Text (for exams up to June 2014) for detailed coverage of the topics covered in questions

(for exams up to June 2014) for detailed coverage of the topics covered in questions Helping

Helping you with your revision

ix

Attempting mock exams

There are three mock exams that provide practice at coping with the pressures of the exam day. We strongly recommend that you attempt them under exam conditions. Mock exams 1 and 2 reflect the question styles and syllabus coverage of the exam; Mock exam 3 is the pilot paper.

Revising P4

Topics to revise

Any part of the syllabus could be tested in the compulsory Section A question, therefore it is essential that you learn the entire syllabus to maximise your chances of passing. There are no short cuts – trying to spot topics is dangerous and will significantly reduce the likelihood of success.

As this is an advanced level paper, it assumes knowledge of the topics covered in Paper F9 – Financial Management, including the Capital Asset Pricing Model (CAPM), investment appraisal techniques (such as NPV and IRR), cost of capital and risk management. You should revise these topics if necessary as they have a significant impact on your understanding of the more advanced techniques.

It's also useful to keep reading the business pages during your revision period and not just narrowly focus on the syllabus. Remember that the examiner has stressed that this paper is about how organisations respond to real- world issues, so the more you read, the more practical examples you will have of how organisations have tackled real-life situations.

Question practice

You should use the Passcards and any brief notes you have to revise the syllabus, but you mustn't spend all your revision time passively reading. Question practice is vital; doing as many questions as you can in full will help develop your ability to analyse scenarios and produce relevant discussion and recommendations. The question plan on page xxi tells you what questions cover so that you can choose questions covering a variety of syllabus areas.

Make sure you leave enough time in your revision schedule to practise the longer Section A questions, as such questions are compulsory in the exam. The scenarios and requirements of Section A questions are more complex and will integrate several parts of the syllabus, therefore practice is essential. Also ensure that you attempt all three mock exams under exam conditions.

x Revising P4

therefore practice is essential. Also ensure that you attempt all three mock exams under exam conditions.

Passing the P4 exam

Displaying the right qualities

The examiner will expect you to display the following qualities.

Qualities required

 

Fulfilling the higher level question requirements

This means that when you are asked to show higher level skills such as assessment or evaluation, you will only score well if you demonstrate them. Merely describing something when you are asked to evaluate it will not earn you the marks you need.

Identifying the most important features of the organisation and its environment

You must use your technical knowledge and business awareness to identify the key features of the scenario.

Sorting the information in the scenario

You will get a lot of information, particularly in the Section A scenario, and will be expected to evaluate how useful it is and use it to support answers such as comparisons and discussions.

Selecting relevant real-life examples

You will gain credit for using good examples.

Arguing well

You may be expected to discuss both sides of a case, or present an argument in favour or against something. You will gain marks for the quality and logical flow of your arguments.

Making reasonable

The measures you recommend must be appropriate for the organisation; you may need to discuss their strengths and weaknesses, as there may be costs of adopting them. The recommendations should clearly state what has to be done.

recommendations

Avoiding weaknesses

Our experience of, and examiner feedback from, other higher level exams enables us to predict a number of weaknesses that are likely to occur in many students’ answers. You will enhance your chances significantly if you ensure you avoid these mistakes:

Failing to provide what the question verbs require (discussion, evaluation, recommendation) or to write about the topics specified in the question requirements

Repeating the same material in different parts of answers

Stating theories and concepts rather than applying them

Quoting chunks of detail from the question that don't add any value

Forcing irrelevancies into answers, for example irrelevant definitions or theories, or examples that don't relate to the scenario

Giving long lists or writing down all that's known about a broad subject area, and not caring whether it's relevant or not

Focusing too narrowly on one area – for example only covering financial risks when other risks are also important

Letting your personal views prevent you from answering the question – the question may require you to construct an argument with which you personally don’t agree

Unrealistic or impractical recommendations

Vague recommendations - instead of just saying improve risk management procedures, you should discuss precisely how you would improve them

Failing to answer sufficient questions, or all parts of a question, because of poor time management

 Failing to answer sufficient questions , or all parts of a question, because of poor

Revising P4

xi

Using the reading time

We recommend that you spend the first part of the 15 minutes reading time choosing the Section B questions you will do, on the basis of your knowledge of the syllabus areas being tested and whether you can fulfil all the question requirements. Remember that Section B questions can cover different parts of the syllabus, and you should be happy with all the areas that the questions you choose cover. We suggest that you should note on the paper any ideas that come to you about these questions.

However don't spend all the reading time going through and analysing the Section B question requirements in detail; leave that until the three hours’ writing time. Instead you should be looking to spend as much of the reading time as possible looking at the Section A scenario, as this will be longer and more complex than the Section B scenarios and cover more of the syllabus. You should highlight and annotate the key points of the scenario on the question paper.

Choosing which questions to answer first

Spending most of your reading time on the compulsory Section A question will mean that you can get underway with planning and writing your answer to the Section A question as soon as the three hours start. It will give you more actual writing time during the one and a half hours you should allocate to it and it's writing time that you'll need. Comments from examiners of other syllabuses that have similar exam formats suggest that students appear less time-pressured if they do the big compulsory questions first.

During the second half of the exam, you can put Section A aside and concentrate on the two Section B questions you’ve chosen.

However our recommendations are not inflexible. If you really think the Section A question looks a lot harder than the Section B questions you’ve chosen, then do those first, but DON'T run over time on them. You must leave yourself at least one hour and 30 minutes to tackle the Section A question. When you come back to it, having had initial thoughts during the reading time, you should be able to generate more ideas and find the question is not as bad as it looks.

Tackling questions

Scenario questions

You'll improve your chances by following a step-by-step approach to Section A scenarios along the following lines.

Step 1

Read the background

Usually the first couple of paragraphs will give some background on the company and what it is aiming to achieve. By reading this carefully you will be better equipped to relate your answers to the company as much as possible.

Step 2

Read the requirements

There is no point reading the detailed information in the question until you know what it is going to be used for. Don’t panic if some of the requirements look challenging – identify the elements you are able to do and look for links between requirements, as well as possible indications of the syllabus areas the question is covering.

xii Revising P4

between requirements, as well as possible indications of the syllabus areas the question is covering. xii

Step 3

Highlight the action verbs that are used in each requirement

These convey the level of skill you need to exhibit and also the structure your answer should have. A lower level verb such as define will require a more descriptive answer; a higher level verb such as evaluate will require a more applied, critical answer. Approximately 75% of the syllabus will be tested at intellectual level 3 (synthesis), 20% at intellectual level 2 (application) and 5% at level one (knowledge). Action 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

State the meaning of

Perform a specific mathematical technique

1 Identify/describe

Calculate

2 Discuss

Analyse

Evaluate

Examine in detail by argument

Examine in detail the structure of…

Use your judgement to assess the value of…

Estimate

Use judgement to recommend a course of action

Present/justify valid recommendations

Make an approximate judgement or calculation

3 Advise

Report

Step 4

Check the mark allocation to each part

This shows you the depth anticipated and helps allocate time.

Step 5

Read the question slowly, focusing on the initial requirements

Once you know what you are expected to do in the first requirement, read the question in detail, trying to focus on the information that will be needed for your first task.

Step 6

Read the scenario carefully

Put points under headings related to requirements (eg by noting in the margin to what part of the question the scenario detail relates).

Step 7

Consider the consequences of the points you’ve identified

You will often have to provide recommendations based on the information you've been given. Be

prepared to criticize the code, framework or model that you’ve been told to use if required.

have also to bring in wider issues or viewpoints, for example the views of different stakeholders.

You may

Step

8

Write a brief plan

 

You may be able to do this on the question paper as often there will be at least one blank page in the question booklet. However any plan you make should be reproduced in the answer booklet when writing time begins. Make sure you identify all the requirements of the question in your plan – each requirement may have sub-requirements that must also be addressed. If there are professional marks available, highlight in your plan where these may be gained (such as preparing a report).

Step

9

Write the answer

Make every effort to present your answer clearly. The pilot paper and exam papers so far indicate that the examiner will be looking for you to make a number of clear points. The best way to demonstrate what you’re doing is to put points into separate paragraphs with clear headers.

way to demonstrate what you’re doing is to put points into separate paragraphs with clear headers.

Revising P4

xiii

Discussion questions

Do not be tempted to write all you know about a particular topic in a discussion question. Markers can easily spot when a student is ‘waffling’ and you will receive little or no credit for this approach. Keep referring back to the question requirement to ensure you are not straying from the point.

To make it easier for the marker to determine the relevance of the points you are making, you could explain what you mean in one sentence and then why this point is relevant in another.

Remember that depth of discussion will be important. Always bear in mind how many marks are available for the discussion as this will give you an indication of the depth that is required. Ask yourself the following questions as you are tackling a discussion question:

Have I made a point in a coherent sentence?

Have I explained the point (to answer the ‘so what’ or ‘why’ queries)?

Have I related the point to the company in the scenario?

Gaining the easy marks

Knowledge of the core topics that we list under topics to revise should present you with some easy marks. The pilot paper suggests that there will be some marks available on certain part questions for definitions, explanations or descriptions that don’t have to be related to the scenario. However don’t assume that you can ignore all the scenarios and still pass!

As P4 is a Professional level paper, 4 professional level marks will be awarded. Some of these should be easy to obtain. The examiner has stated that some marks may be available for presenting your answer in the form of a letter, presentation, memo, report or briefing notes. You may also be able to obtain marks for the style and layout of your answer.

Reports should always have an appropriate title. They should be formally written, with an introductory paragraph setting out the aims of the report. You should use short paragraphs and appropriate headings, with a summary of findings as a conclusion.

Memorandums should have the following information at the beginning:

Subject; name of recipient; name of author; date

The language can be less formal than a report but the content should still have an introduction and conclusion, and be divided into small paragraphs with appropriate headings.

Letters should be addressed appropriately to the correct person and be dated. They should have a short introductory paragraph, and conclusion and be formally written. Letters beginning with ‘Dear Sir/Madam’ should end with ‘Yours faithfully’.

xiv Revising P4

be formally written. Letters beginning with ‘Dear Sir/Madam’ should end with ‘Yours faithfully’. xiv Revising P4

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.

Modigliani and Miller Proposition 2 (with tax)

k

e

k

i

e

(1T)(k

i

e

k

d

)

V

d

V

e

The capital asset pricing model

E(r i ) = R f + i (E(r m ) – R f )

The asset beta formula

 

a

V

e

V (1

d

T)

V

e

e

The growth model

P

0

D (1

0

g)

(r

e

g)

 

V

e

V (1

d

V (1 T)

d

T)

d

Gordon's growth approximation

g = br e

The weighted average cost of capital

WACC =

 

V

e

+V

V

ed

 

k

e

+

V

d

+V

V

ed

 

k

d

(1- T)

The Fisher formula

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

Purchasing power parity and interest rate parity

S =S

1

0

F =S

0

0

×

×

1+h

c

1+h

1+i

c

b

1+i

b

×  1+h c   1+h  1+i c b    1+i b

Chapter in Study Text

7a

2

2

12

5

7a

5

8

8

Revising P4

xv

Modified internal rate of return

MIRR =

 

PV

R

PV

I

 

1

n

1+r

e

-1

The Black-Scholes option pricing model

c = P a N(d 1 ) – P e N(d 2 )e rt

Where

d 1 =

In  P /P  + (r + 0.5s 2 )t a e s t
In
P /P
+ (r + 0.5s
2 )t
a
e
s
t

d 2 = d 1 – s

t
t

The put call parity relationship

p = c – P a + P e e rt

Chapter in Study Text

5

6

6

6

6

Formulae to learn

These are the main formulae that are not given in the exam formula sheet. Make sure you learn these as you may be required to use them in the exam. They are used throughout the Study Text and this Practice and Revision Kit.

Ke =

K d =

D

1

P

0

g

i(1t)

P

0

K pref =

Preference dividend =

d

Market value

(ex div)

P

0

Gearing

Interest

cover

Current ratio

Book value of debt

=

Book value of equity

Profit from operations

=

=

Current

assets

Interest

:

Current

liabilities

xvi Revising P4

of debt = Book value of equity Profit from operations = = Current assets Interest :

Exam information

The exam paper

Format of the paper

The format of the exam changes from June 2013 onwards.

Section A comprises one compulsory question. The total for this section will be 50 marks.

Longer questions will cover topics from across the syllabus but will tend 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 will be 50 marks in total (25 marks per question). There is a choice of two from three questions.

Four professional marks are available. The examiner 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 is 3 hours with 15 minutes’ reading time and the pass mark remains at 50%.

Exams prior to 2013

Questions and answers for exams prior to 2013 are available on:

http://www.accaglobal.com/en/student/qualification-resources/acca-qualification/acca-exams/p4-exams/students-

acca-exams-p4-past_papers.html

-resources/acca-qualification/acca-exams/p4-exams/students- acca-exams-p4-past_papers.html Revising P4 xvii

Revising P4

xvii

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.

Covered

                       

in Text

D

J

D

J

D

J

D

J

D

J

D

chapter

12

12

11

11

10

10

09

09

08

08

07

 

ROLE AND RESPONSIBILITY TOWARDS STAKEHOLDERS

                     

1, 2

Role of senior financial executive/financial strategy formulation

 

C

 

O

   

C, O

 

C

C

O

3a

Conflicting stakeholder interests

                     

3b, 3c

Ethical/environmental issues

   

O

O

     

O

O

O

O

 

ECONOMIC ENVIRONMENT FOR MULTINATIONALS

                     

4

Trading and planning in a multinational environment

O

     

O

   

O

     
 

ADVANCED INVESTMENT APPRAISAL

                     

5

Discounted cash flow techniques

O

O

C

 

C

C

C, O

C, O

C

O

C, O

6

Application of option pricing theory to investment decisions

 

C

 

O

O

C

C, O

O

   

O

7a, 7b

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

C

C, O

C, O

O

C

   

C

O

O

0

8

International investment and financing decisions

 

O

C

               
 

ACQUISITIONS AND MERGERS

                     

9, 11, 12

Strategic/financial/regulatory issues

O

   

C

   

C

   

O

C

10

Valuation techniques

O

C

 

C

 

C

     

C

C

 

CORPORATE RECONSTRUCTION & REORGANISATION

                     

13

Financial reconstruction

       

C

           

14

Business reorganisation

C

 

O

 

C

O

 

C

     
 

TREASURY & ADVANCED RISK MANAGEMENT TECHNIQUES

                     

15

Role of the treasury function

             

O

     

16

Hedging foreign currency risk

C

   

C

 

O

 

O

 

O

 

17

Hedging interest rate risk

 

O

C

     

O

 

O

   

18

Dividend policy & transfer pricing in multinationals

       

O

           
 

EMERGING ISSUES

                     

19

Recent developments and trends in world financial markets and international trade

O

O

   

O

O

O

       

IMPORTANT!

The table above gives a broad idea of how frequently major topics in the syllabus are examined. It should not be used to question spot and predict for example that Topic X will not be examined because it came up two sittings ago. The examiner’s reports indicate that the examiner is well aware some students try to question spot. You can assume that he will therefore take care to ensure that the exams avoid falling into a predictable pattern, and may examine the same topic two sittings in a row for example.

xviii Revising P4

falling into a predictable pattern, and may examine the same topic two sittings in a row

Useful websites

The websites below provide additional sources of information of relevance to your studies for Advanced Financial Management.

www.accaglobal.com

ACCA's website. The students’ section of the website is invaluable for detailed information about the qualification, past issues of Student Accountant (including technical articles) and interviews with examiners.

www.bpp.com

Our website provides information about BPP products and services, with a link to the ACCA website.

www.ft.com

This website provides information about current international business. You can search for information and articles on specific industry groups as well as individual companies.

www.economist.com

Here you can search for business information on a week-by-week basis, search articles by business subject and use the resources of the Economist Intelligence Unit to research sectors, companies or countries.

www.invweek.co.uk

This site carries business news and articles on markets from Investment Week and International Investment.

www.pwcglobal.com/uk

The PricewaterhouseCoopers website includes UK Economic Outlook.

www.cfo.com

Good website for financial officers.

www.bankofengland.co.uk

This website is useful for sourcing Bank of England publications.

www.yieldcurve.com

A useful website for research and articles on such areas as interest rate derivatives and securitisation.

A useful website for research and articles on such areas as interest rate derivatives and securitisation.

Revising P4

xix

Planning your question practice

We have already stressed that question practice should be right at the centre of your revision. Whilst you will spend some time looking at your notes and Paper P4 Passcards, you should spend the majority of your revision time practising questions.

We recommend two ways in which you can practise questions.

Use BPP Learning Media's question plan to work systematically through the syllabus and attempt key and other questions on a section-by-section basis

Build your own exams – attempt questions as a series of practice exams

These ways are suggestions and simply following them is no guarantee of success. You or your college may prefer an alternative but equally valid approach.

BPP Learning Media's question plan

The BPP Learning Media plan below requires you to devote a minimum of 45 hours to revision of Paper P4. Any time you can spend over and above this should only increase your chances of success.

Step 1

Review your notes and the chapter summaries in the Paper P4 Passcards for each section of the

syllabus.

Step 2

Answer the key questions for that section. These questions have boxes round the question number

in the table below and you should answer them in full. Even if you are short of time you must attempt these questions if you want to pass the exam. You should complete your answers without referring to our solutions.

Step 3

Attempt the other questions in that section. For some questions we have suggested that you prepare

answer plans or do the calculations rather than full solutions. Planning an answer means that you should spend about 40% of the time allowance for the questions brainstorming the question and drawing up a list of points to be included in the answer.

Step 4

Attempt Mock exams 1, 2 and 3 under strict exam conditions.

xx Planning your question practice

answer. Step 4 Attempt Mock exams 1, 2 and 3 under strict exam conditions. xx Planning
 

2012

     

Passcards

Questions in this Kit

Done

Syllabus section

chapters

Comments

 

Role and

1-3C

 

2

Write an answer plan. This is a good way to test your understanding of capital structure issues.

 
1-3C   2 Write an answer plan. This is a good way to test your understanding

responsibility

   

towards

shareholders

 
 
3
3

Answer in full.

 
  3 Answer in full.  
 

This question, adapted from the December 2007 exam, tests your knowledge of strategic financial issues

 
 
4
4

Answer in full. This question, adapted from the December 2008 exam, covers ethical issues.

 
  4 Answer in full. This question, adapted from the December 2008 exam, covers ethical issues.

6

Write an answer plan. This question examines corporate governance issues and is a good test of your knowledge of different corporate governance systems.

examines corporate governance issues and is a good test of your knowledge of different corporate governance
7
7

Answer in full. This question, adapted from the June 2011 exam, looks at key financial strategy decisions regarding the commercialisation of a new product.

from the June 2011 exam, looks at key financial strategy decisions regarding the commercialisation of a
8
8

Answer in full. This question, adapted from the December 2011 exam, looks at triple bottom line reporting and also stakeholder conflict.

This question, adapted from the December 2011 exam, looks at triple bottom line reporting and also

Economic

4

 

11

 

Answer in full.

     

environment for

 

This question focuses on overseas tax issues.

 

multinationals

 
13
13

Answer in full.

 
  13 Answer in full.  
 

This question, adapted from the June 2009 exam, focuses on various ethical and strategic issues facing a multinational company.

 
 

65

Write an answer plan. This is a good question on financing issues facing a multinational company.

 
  65 Write an answer plan. This is a good question on financing issues facing a
14
14

Answer in full. This question, adapted from the December 2010 exam, covers advantages and disadvantages of a joint venture with a foreign entity.

adapted from the December 2010 exam, covers advantages and disadvantages of a joint venture with a

Advanced

5 - 8

 

16

Do the calculations in part (a) to ensure you are comfortable with the investment appraisal methods.

     

investment

   

appraisal

 
 
18
18

Answer in full.

 
  18 Answer in full.  
 

This is adapted from the June 2009 paper and examines investment appraisal techniques and duration.

 
 
81
81

Answer in full. This question, adpated from the June 2010 paper examines NPV, sensitivity analysis and simulations.

 
in full. This question, adpated from the June 2010 paper examines NPV, sensitivity analysis and simulations.
the June 2010 paper examines NPV, sensitivity analysis and simulations.   Planning your question practice xxi

Planning your question practice

xxi

 

2012

     

Passcards

Questions in this Kit

Done

Syllabus section

chapters

Comments

     

19

 

Answer in full. This adapted June 2012 question tests your ability to use the free cash flow model to value a company.

Answer in full. This adapted June 2012 question tests your ability to use the free cash
 
 

22

Do the calculations in part (a). This gives you a good opportunity to ensure you are comfortable with Black- Scholes calculations.

in part (a). This gives you a good opportunity to ensure you are comfortable with Black-
23
23

Answer in full. This adapted June 2011 question tests your ability to use the Black-Scholes model to value an option to delay.

in full. This adapted June 2011 question tests your ability to use the Black-Scholes model to
24
24

Answer in full. This adapted December 2010 question covers options contracts, delta hedging and risk management. Answer part (a) This question, adapted from the June 2010 exam, looks at capital structure and regulation of takeovers.

Answer part (a) This question, adapted from the June 2010 exam, looks at capital structure and
84
84
84
29
29

Answer in full. This adapted June 2008 question gives you the chance to practise APV and MIRR calculations. Answer in full.

in full. This adapted June 2008 question gives you the chance to practise APV and MIRR
32
32
32
 

This adapted December 2011 question gives you the chance to practise bond valuations and credit ratings.

Acquisitions and

9 - 12

 

39

Write an answer plan. This is a good discursive question on issues relating to a takeover. Answer in full.

12   39 Write an answer plan. This is a good discursive question on issues relating

mergers

 
 
38
38
  38
 

This question requires you to determine an issue price and calculate cost of equity capital and WACC.

 
73
73

Answer in full. This adapted June 2011 question covers various acquisition issues, including effects on capital structure, business valuation techniques and finance requirements.

acquisition issues, including effects on capital structure, business valuation techniques and finance requirements.
75
75

Answer in full. An adapted December 2009 question which covers risks associated with an acquisition, performance measures and also interest rate risk.

2009 question which covers risks associated with an acquisition, performance measures and also interest rate risk.

Corporate

13 - 14

 

43

Write an answer plan. This question makes you think about advantages and disadvantages of an MBO.

13 - 14   43 Write an answer plan. This question makes you think about advantages

reconstruction and

 

reorganisation

 
44
44

Answer in full.

  44 Answer in full.
 

An adapted June 2010 question that focuses on issues to be considered when disposing of a division.

 
45
45

Answer in full. This question, adapted from the December 2011 exam, tests your skills in analysing a proposed MBO.

45 Answer in full. This question, adapted from the December 2011 exam, tests your skills in

xxii Planning your question practice

adapted from the December 2011 exam, tests your skills in analysing a proposed MBO. xxii Planning
 

2012

     

Passcards

Questions in this Kit

Done

Syllabus section

chapters

Comments

Treasury and

15 - 18

 

47

Write an answer plan. This tests your understanding of the use of options for foreign currency hedging.

- 18   47 Write an answer plan. This tests your understanding of the use of

advanced risk

 

management

techniques

 
 
48
48

Answer in full.

  48 Answer in full.
 

This is a good question for practising different hedging strategies.

 
51
51

Answer in full. This question, adapted from the June 2010 paper, examines calculations and discussion relating to multilateral netting.

This question, adapted from the June 2010 paper, examines calculations and discussion relating to multilateral netting.
78
78

Answer parts (a) and (b).

78 Answer parts (a) and (b).
 

question that covers alternative forms of currency hedging.

A

 
57
57

Answer in full. This question, adapted from the une 2012 exam, covers interest rate swaps.

  57 Answer in full. This question, adapted from the une 2012 exam, covers interest rate
53
53

Answer in full.

53 Answer in full.
 

question adapted from June 2011 on interest rate hedging, including swaps.

A

 
58
58

Answer in full.

  58 Answer in full.
 

This question, adapted from the December 2010 exam, covers dividend capacity issues.

Emerging issues

19

 

59

 

Answer in full.

Emerging issues 19   59   Answer in full.
 

A

good question, adapted from the December 2009

paper, on lending issues set against the background of

 
60
60

the global debt crisis. Answer in full.

  60 the global debt crisis. Answer in full.
 

This question, adapted from the June 2010 exam, deals with tranching, credit enhancement and securitisation.

 
61
61

Answer in full. This question, adapted from the June 2012 exam, deals with overseas subsidiaries, dark pool trading and money laundering.

This question, adapted from the June 2012 exam, deals with overseas subsidiaries, dark pool trading and
exam, deals with overseas subsidiaries, dark pool trading and money laundering. Planning your question practice xxiii

Planning your question practice

xxiii

Build your own exams

Having revised your notes and the BPP Learning Media Passcards, you can attempt the questions in the Kit as a series of practice exams using the suggestions we have listed below.

 

1

2

3

4

5

Section A

         

1

66

82

78

64

65

Section B

         

2 11

 

55

44

28

16

3 62

 

43

4

54

47

4 49

 

10

12

36

38

xxiv Planning your question practice

16 3 62   43 4 54 47 4 49   10 12 36 38 xxiv

Questions

Questions 1

1

2

2

ROLE AND RESPONSIBILITY TOWARDS STAKEHOLDERS

Questions 1 to 8 cover the role and responsibility towards stakeholders, the subject of Part A of the BPP Study Text for Paper P4.

1 Preparation question - Shareholders and bondholders (6/03)

27 mins

(a)

Discuss why conflicts of interest might exist between shareholders and bondholders.

(8 marks)

(b)

Provide examples of covenants that might be attached to bonds, and briefly discuss the advantages and

disadvantages to companies of covenants.

(7 marks)

 

(Total = 15 marks)

2 Preparation question - Capital structure (12/04)

27 mins

Prepare a briefing document for a board of directors discussing issues that might influence a company's capital

structure strategy.

3 Multimedia company

(15 marks)

45 mins

You have been appointed as the chief financial officer of a multimedia company which is financed by private equity. There is considerable public interest in the company and it continues a very rapid rate of growth under the leadership of its dynamic founder and chief executive officer, Martin Pickle. Martin Pickle owns over 30 per cent of the company’s equity and has also loaned the business substantial sums to sustain its overseas development. The balance of the other investors consist of some small shareholdings held by current and past employees and the remainder is in the hands of a private equity company which is represented by two directors on the board.

Recent financial information

Year ending

Profit for the year

Investment in projects

Dividend paid

31 December

after interest and tax

or capital expenditure

$ million

$ million

$ million

20X5

18

-

9

20X6

21

30

6

20X7

30

-

15

20X8

33

45

6

20X9

48

-

24

You enjoy a substantial salary and package of other benefits. Your role description gives you overall responsibility to the board for the financial direction of the company, the management of its financial resources, direction and oversight of its internal control systems and responsibility for its risk management. After two months in the job you are called to a meeting with Martin Pickle and the company’s non-executive chairman. In that time you have made significant progress in improving the financial controls of the business and the current year end, which is three weeks away, looks very promising. The company’s underlying earnings growth promises to be in excess of 20 per cent and its cash generation is strong. The CEO tells you that he would like you to put together a plan to take the company to full listing as a first step to him undertaking a substantial reduction in his financial stake in the business. He tells you that this discussion must be confidential, as he expects that the market would react adversely to the news. However, he would like to see what could be done to make sure that the year end figures are as strong as possible. Given your performance, he also tells you that they would like to offer you a substantial incentive in the form of share options.

he also tells you that they would like to offer you a substantial incentive in the

Questions

3

Required

(a)