FINANCIAL MANAGEMENT : Examiner Reports:Topic wise Past papers 2007-2013

General Comments:
important to read the question requirement carefully. Some candidates did not do this and as a
result included irrelevant material in their answers which did not score marks.
It is also important to manage your time carefully in the examination.
Illegible handwriting and poor formatting of answers.
Making mistakes identified in previous F9 examiner reports and hence not learning to avoid
mistakes already discussed.

INVESTMENT APPRAISAL
INFLATION:

Fixed Cost :
What Was Done Wrong What was Done Correct
some candidates dealt with annual fixed cost as though
it were fixed cost per
unit.







What Was Done Wrong What was Done Correct
Sales Income & Variable Cost Inflated Wrongly. E.g.
Each years Cashflow inflated by only one Years inflation
rate. Year Two Cash flows need inflating for two years
year three cash flows need inflating for three years, and
so on, Inflation hasa a Compounding effect
operating cash flows (sales income, variable cost
and fixed cost) at the start of their
calculation. and dealt at a later stage with other
cash flows (tax and capital items). This approach
helps to avoid errors in the tax treatment of cash
flows
Some candidates incorrectly multiplied each years
figures by 1.047,rather than by 1.047 (year 1), 1.047 2
(year 2)

Some candidates did not know that nominal cash
flows included the effects of inflation and used the
uninflated cash flows provided in the question as
nominal cash flows.





FINANCIAL MANAGEMENT : Examiner Reports:Topic wise Past papers 2007-2013
Scrap Value:
What Was Done Wrong What was Done Correct
Some candidates wrongly classified scrap value as
income subject to corporation tax, leading to an error in
their
tax calculations.








Corporation tax Liability;
Calculating the tax liability using the alternative approach of subtracting tax-allowable
depreciation from net cash flow to give taxable profit, then adding back the tax-allowable
depreciation as a non-cash item, received full credit.
What Was Done Wrong What was Done Correct
Most candidates calculated corporation tax liabilities
separately from the tax benefits given by tax-allowable
depreciation
Most candidates correctly used the nominal
after-tax cost of capital provided as the discount
rate in their NPV
using 30% corporation tax, when the question specified
28% corporation tax;

failing to put tax liabilities and tax benefits one year in
arrears

failing to allow for scrap value when calculating tax-
allowable depreciation for the final year.





Capital Rationing :
capital rationing means that shareholder wealth is not being maximised, at least theoretically.
If the projects were all divisible, ranking by profitability index
some uncertainty about the profitability index, which was occasionally referred to as return on capital
employed, the probability index and the profit index. The correct approach was to divide the sum of the
present values of future cash flows by the initial investment, or to divide the NPV by the initial
investment. Both methods were acceptable.
FINANCIAL MANAGEMENT : Examiner Reports:Topic wise Past papers 2007-2013
What Was Done Wrong What was Done Correct
A number of answers discussed at length how to
calculate the maximum NPV, when the question
requirement was not to discuss it, but to calculate it
Better answers therefore considered why the
Board of the company;
had decided against seeking additional finance,
whether by equity or debt;
had decided not to follow a strategy of rapid
expansion by accepting all investments with a
positive NPV;
capital funds.







Working Capital :
What Was Done Wrong What was Done Correct
some candidates wrongly classified incremental working
capital as a tax-allowable deduction, resulting in tax
calculation errors.

errors in calculating working capital investment were the
most common error found in candidates
answers. These errors included omitting the first years
investment: calculating working capital investment on
aeal terms basis while evaluating nominal terms cash
flows; using total rather than incremental working
capital
investment; failing to reduce working capital investment
when sales fell, but rather including the reduction in
working capital (cash inflow) as an investment (cash
outflow); failing to recover working capital at the end of
the
investment project, which was said to have an expected
life of four years; putting total working capital as an
initial investment, and incremental working capital
investment as cash income in each year.
significant number of candidates were able to
calculate correctly both initial and incremental
working capital investment, which was based on
sales income,






FINANCIAL MANAGEMENT : Examiner Reports:Topic wise Past papers 2007-2013
Comments:
What Was Done Wrong What was Done Correct
correctly cited this as financial grounds for
rejection. Better answers noted that the board of
directors
required this project to be undertaken regardless
of its financial acceptability.
candidates lost marks by not referring to NPV or
by not making any comment at all on financial
acceptability.
most candidates correctly referred to positive NPV
as the reason for approval, sometimes relating this
to increasing shareholder wealth.