S 37 L 0

Paper 3.
7 Strategic Financial Management

June 2003 Introductory Seminar
INTRODUCTORY SEMINAR
As you are all doubtless aware from December 2001 the examinations have been set on the
new syllabus. To date there have been three SFM examinations. While there are many
similarities between the new syllabus, Paper 3.7 Strategic Financial Management, and the
old there are also some significant changes. Most of the changes involve additions to the
syllabus. Almost nothing was taken out of the old syllabus but several new things were
introduced.
One thing is worth noting and that is that the examiner has not changed. Scott Goddard will
be setting the examination for Paper 3.7. The structure of the new examination is also very
similar to that for the old Paper 14. With one or two exceptions, which will be considered in
detail later in this introductory seminar, the first examinations for the new syllabus have been
very similar in style and level of difficulty to those set for Paper 14. We can expect this to
continue in the future.
This series of eight FTMS Online seminars in designed to help you pass the Paper 3.7
(Strategic Financial Management) examination of the ACCA in June 2003. Obviously it is not
possible to cover the entire syllabus in the depth required for a Part 3 core paper examination
in approximately four hours. However it should be possible to give you sufficient
understanding of the key areas of the syllabus to ensure that you are able to score between
two thirds and three quarters of the available marks next June. It is important for you to
realise that it is not enough to simply listen to the lectures and read the accompanying notes.
You must work the questions included in the package and you should supplement these by
working other recent ACCA examination questions.
In this introductory session we will:

1) Introduce you to the examiner.
2) Consider the structure of the examination and discuss its importance for your study
plan over the period leading up to the examination.
3) Review the syllabus and highlight the key topic areas that will be critical in
determining your success next June.
4) Show you how the FTMS Online programme can help you pass this very demanding
examination next June.
5) Discuss the last two examination papers and consider their implications for the June
2003 examination.
6) Outline the topics to be considered in the next six lectures of this programme.
© 2003 FTMS Online PTE Ltd

1
Paper 3.7 Strategic Financial Management
1.0 Meet the examiner
As I have already told you the examiner for Paper 3.7 will be Mr. C. S. (Scott) Goddard. He
was previously the examiner for the old Paper 14. Scott has been the ACCA’s examiner for
corporate finance in its various forms for many years. I sometimes think he has been
examining corporate finance for the ACCA for as long as I have been teaching it but that
cannot be true because he is not that old! If you look at a past examination question and
published model answer you can be fairly certain that it was written by the current examiner.
BG (before Goddard) questions have moved out of circulation. Scott Goddard is an academic
and is a university lecturer in the UK. He sets a fairly standard “academic” paper on corporate
finance. He has a special interest in international aspects of finance and has published a
book on the subject (it is on the reading list!).
Mr. Goddard is a good examiner. His papers invariably have a broad syllabus coverage and
he does not repeat himself. You cannot memorise your way through one of his examinations,
you must understand. In my opinion he has one major weakness as an examiner and that is
he has an unrealistic expectation of what ordinary people can do in three hours. It is very
difficult to complete his papers in the time allowed. However as I will show you during the
course of the FTMS Online programme it is perfectly possible to score very high marks
provided you approach the examination in the right way.
2.0 The examination
There are a number of aspects of the examination paper that you should be aware of from
the outset of your studies.
1) The structure of the paper. The paper is divided into two sections. Section A carries
70 marks. There are two questions, both are compulsory. This structure was the
same for the old Paper 14 examination. Before June 2002 in every examination one
of the questions in Section A was worth 40 marks, the other 30 marks. In June 2002
both Section A questions were worth 35 marks. In the last exam the paper reverted to
the old 40:30 structure. In Section B there are four questions. They are all worth 15
marks and you are required to attempt two of them. As you can see is this
examination is virtually entirely compulsory. The significance of this structure is that it
is not possible to avoid any major area of the syllabus. Where an examination has an
element of choice and there is a topic in the syllabus that you simply cannot
2
understand it is possible to ignore it in your study and hope it does not come up in
the examination. After all even if it does come up you can always do one of the other
questions. With Strategic Financial Management (SFM) this is not the case. The topic
you ignore may be the basis of a 40 mark compulsory question in which case your
chances of passing the examination are virtually nil!
2) Calculations and discussion. Based on previous examinations and the pilot paper we
can expect that approximately 40 to 45 marks will be for doing calculations and about
of 55 to 60 marks will be for discussing the significance of the calculations you have
done. Depending upon your choice of questions in Section B the mark split could be
as few as 30 marks for calculations and as many as 70 marks for discussion. This is
a highly discursive examination. The split of marks between computation and
discussion is all the more important because most of the relatively easy marks are in
the discursive part of the paper. If you are going to pass this examination, and we all
hope that you will, you must realise that you will write your way to success, you will
not calculate your way to success.
3) A “broad brush approach”. It is clear that The SFM examiner wants to examine your
understanding of the broader strategic issues and is less concerned with the minutiae
of the syllabus and the detail of the calculations. When answering a question in the
SFM examination that entails some calculations the important thing is to get a
number and then discuss the significance of the number that you have for the
financial management of the business. Most of the marks are for discussing the
meaning and significance of the number you have. Typically, relatively few marks are
for the calculations required getting the number. If you make a few errors in your
calculations but make some sensible remarks about the (wrong) number you have
you will pass the examination. If you take an eternity to (correctly) calculate the
number but fail to discuss its significance in terms of formulating financial policy you
will fail. Unfortunately far too many students devote far too much time in the
examination hall to arithmetic calculations, which carry very few marks, and far too
little time to a discussion of the results of the calculations, which is where all of the
marks are to be found.
4) The examiner attaches considerable importance to general, background, financial

knowledge. The paper is set in the belief that all Part Three students are regular
readers of a quality business newspaper. If you are not already I strongly advise you
to become one in the very near future.

3
3.0 The syllabus
The SFM syllabus is a fairly conventional programme on corporate finance. However there
are two points that are worth noting:
1) Corporate Finance is examined by the ACCA in Papers 2.4 and 3.7. Some of the
topics examined at Paper 2.4 are a foundation for topics in Paper 3.7; others
effectively terminate at Paper 2.4. All aspects of working capital management, i.e. the
management of stocks, debtors and cash, are covered at Paper 2.4. With one or two
minor exceptions these topics are unlikely to feature in the examination for Paper 3.7.
The exceptions are that you might get a 15 mark question in section B on the
international dimensions of these issues. It is also possible that questions on short-
term cash management could be set within the context of a question on treasury
management. However such questions will arise relatively rarely and as these topics
will not feature significantly in the critical section A of the paper we will not be
concerning ourselves with working capital management on taught component of this
programme of study.
2) All of the basics of investment appraisal are introduced at Paper 2.4. This is essential
prior knowledge for the SFM examination. Investment appraisal in its various forms
was the basis of more section A questions than any other topic area in the old Paper
14 examinations. It is in the Pilot Paper and the first two “real” examinations although
the question in June 2002 was quite unusual. There is little doubt that investment
appraisal will continue to be a major source of Section A questions in the future. As
you start your study for SFM it is assumed that you can do all of the following:
♦ Calculate a payback period, an accounting rate of return (ARR), a net
present value (NPV) and an internal rate of return (IRR).
♦ Explain the meanings of all of the measures listed above.
♦ Outline the circumstances in which the NPV rule and the IRR rule may
conflict and explain the superiority of the NPV rule.
♦ Deal with the problems of taxation and inflation within the context of an
investment appraisal.
All of these issues will be reviewed later in the programme. At Paper 2.4 the three special
cases of the investment decision i.e. lease or buy, capital rationing and replacement policy
are also examinable. While these are likely to be less important for the SFM paper it is still
presumed knowledge at the outset of your Paper 3.7 study. These topics will also be briefly
reviewed later in the course.

4
4.0 The core areas of the syllabus
The syllabus identifies five core areas. These are:
1) Investment decisions
2) Risk analysis
3) Global financial management
4) Financial forecasting.
5) Treasury management
Following the December 2001 examination it seems that we must add one more core area
and this is option pricing. It is almost certain that the compulsory questions will come from
these key areas and these are the topics that you should be concentrating on over the next
five months.
To these six core areas we must add portfolio theory and the Capital Asset Pricing Model
(CAPM). Both of these topics can produce fifteen mark questions in Section B of the paper.
Much more important however is the fact that virtually all questions coming from topics 1 to 4
above can and do involve aspects of the CAPM. The CAPM is undoubtedly the single most
important theoretical model in the SFM syllabus.
There are relatively few topics that have the weight to produce a 30 or 40 mark question.
The core areas of the syllabus translate into seven potential topics for questions. It is likely
that the compulsory questions in Section A will come from one of these seven topic areas.
The key topic areas are:
1) Investment appraisal.
2) Financing decisions.
3) Aspects of valuation.
4) Financial planning and performance evaluation.
5) Option pricing
6) Treasury management.
7) Global financial management.

5
5.0 A Study guide
As this is still a relatively new syllabus I have produced a detailed study guide, which is
designed to show you exactly what you need to know and what you need to be able to do to
pass this June.
Study Guide
Syllabi very rarely tell you everything you need to know about studying for an external
examination. The following study guide attempts to identify the specific knowledge and skills
that you will need to acquire in order to pass Paper 3.7. The study guide splits the syllabus
into 6 study units corresponding to the six taught seminars on the FTMS Online Programme.
Each unit requires approximately the same amount of study time to complete. The study
planner provides you with a knowledge checklist so you can monitor your own progress
through the course. You should note that completion of a unit requires listening to the
relevant seminar, doing the appropriate reading and working the relevant questions. Simply
listening to the aural presentation will not ensure that you acquire the skills identified in the
checklist.
Unit 1
Content
Organisational objectives. Corporate governance. Strategy formulation. Performance analysis

including SWOT analysis and GAP analysis. Alternative approaches to performance
evaluation, SVA, EVA and MVA. Free cash flows. Financial planning. Use of budgets in
planning. The nature of financial control. Basic investment appraisal. The treatment of
taxation and inflation. Traditional approaches to the treatment of risk and uncertainty.
Knowledge checklist
By the end of this unit you should be able to:

1) explain and justify the assumptions about organisational objectives that underlie most
of the conventional wisdom in corporate finance;
2) discuss the different objectives that are likely to be pursued by different types of
organisation e.g. quoted companies, not for profit organisations such as charities and
state owned enterprises;
6
3) identify the key stakeholders in organisations;

4) explain the environmental issues that affect corporate objectives and governance;
5) identify directors powers and behaviour;
6) discuss the significance of creative accounting and off balance sheet finance;
7) understand the principles of agency theory and the potential for conflict between the
objectives of various stakeholders;
8) discuss goal congruence and its achievement through remuneration schemes;
9) discuss issues of corporate governance and be familiar with the recommendations of
the Cadbury Committee, Greenbury Committee, Hampel Committee and the
Combined code on Corporate Governance;
10) identify the roles of auditors, audit committees, remuneration committees and non-
executive directors;
11) discuss the effects of corporate governance on corporate financial strategy;
12) analyse performance using ratios;
13) describe alternative approaches to performance evaluation e.g. shareholder value
added (SVA), economic value added (EVA) and market value added (MVA);
14) discuss the advantages and limitations of these approaches;
15) understand the meaning of free cash flow and estimate free cash flows in a company;
16) explain the significance of free cash flows in financial planning and company
valuation.
17) understand how business plans are formulated
18) describe the relationship between long term and short term planning;
19) explain the potential conflict between long run and short run plans;
20) explain top down and bottom up planning;
21) review the nature of financial control explaining the significance of the three levels of
control, i.e. strategic, tactical and operational.
22) calculate a NPV and an IRR;
23) explain the meaning of the two measures;
24) describe the circumstances in which the two measures may give conflicting
recommendation;
25) explain the theoretical superiority of the NPV rule;
26) understand the treatment of inflation and taxation in investment appraisal;

7
Unit 2
Content
Portfolio theory. The capital security market line. The risk reducing effects of diversification.
The limitations of portfolio theory. The CAPM. The components of the CAPM. The nature and
meaning of beta values. Estimating betas. Alpha values, their meaning and significance. The
security market line. Asset betas, equity betas and debt betas. Ungearing and regearing beta
values. The limitations of the CAPM. Option valuation models. The significance of options
embedded in investments.
Knowledge checklist
At the end of this unit you should be able to:

1) calculate the expected return and the variance of a probability distribution and the
covariance between two probability distributions;
2) calculate the risk and return of a two asset portfolio where the data input into the
formulae is provided and where it is not;
3) describe the capital market line and discuss its significance;
4) explain the concept of risk reduction through diversification and discuss its
significance;
5) do simple calculations of the risk and return of multi asset portfolios but only where
they comprise independent investments;
6) understand the practical problems in the use of portfolio theory for evaluating
investment opportunities.
7) understand the components of the basic CAPM formula and be able to explain how
they can be found in practice;
8) appreciate the significance of the CAPM in terms of the practical limitations of
portfolio theory;
9) explain what a beta value measures which means you must understand the
difference between systematic and unsystematic risk;
10) describe and explain alpha values and discuss their significance;
11) understand the nature of the security market line;
12) do the calculations to ungear and regear a beta. These calculations are extremely
important. They come up in almost every examination;

8
13) describe equity betas, asset betas, debt betas, geared betas and ungeared betas.
This means you need to know what they measure, how they are calculated and when
they are used;
14) explain and discuss potential conflicts between PT and CAPM in the evaluation of
investment opportunities;
15) understand the limitations of the CAPM by explaining the assumptions on which it is
based;
16) explain the limitations of investment decisions based on the NPV rule;
17) understand the role of option pricing models and the arbitrage pricing model in
investment appraisal;
18) comment on the significance of options embedded in investments.
Unit 3
Content
The cost of capital. The rationale for the use of the WACC in project appraisal. The cost of
equity. Simple cost of debt calculations. More complex cost of debt calculations. Cost of
convertibles. The weighted average cost of capital. Financing decisions. The Modigliani and
Miller hypotheses. Practical aspects of the financing decision. Valuation of securities.
Dividend models, earnings models and asset based models. Other factors affecting share
prices. Valuation of debt and convertibles.
Knowledge checklist

1) explain the rationale for the use of the WACC in project appraisal;
2) calculate the cost of equity using both the dividend valuation model and the CAPM;
3) explain the reasons for different estimates of the cost of equity using the two models;
4) calculate the cost of both dated and undated loan stock which means you must be
able to do IRR calculations;
5) calculate the cost of loan stocks with variable redemption dates and those with
interest which is not payable annually;
6) understand the nature of convertible loan stocks and the problems of estimating the
cost of a convertible;
7) calculate a WACC.

9
8) explain the fundamental issues with respect to financing decisions i.e. is it possible to
increase the value of the business through it’s financing decisions;
9) understand the MM capital structure hypotheses both with and without tax;
10) demonstrate an awareness of the extensions to the basic MM analysis provided by
Miller (personal taxes) and Brealey and Myers (the costs of financial distress and
agency costs);
11) to use the MM formulae to calculate the value of a geared company together with the
cost of equity and the WACC;
12) understand the practical aspects of the financing decision and be able to calculate
the impact of financing decisions on both gearing (and its significance) and EPS;
13) place a value on a share using the DVM and approximate to this by using a suitable
dividend yield;
14) value a business by discounting future cash flows to a present value;
15) explain the use of a PE ratio in share valuation and use a PE ratio to estimate a
share price;
16) calculate asset based values of a share;
17) explain and discuss the advantages and limitations of these approaches to valuation;
18) explain the relevance of accounting information to share valuation;
Unit 4
Content
The limitations to the use of the WACC in project appraisal. Project specific WACCs.
Adjusted present values. Mergers and acquisitions. The motives for making takeover bids.
Expansion and market maintenance strategies. Concepts of market efficiency. Forms of
consideration. The rules relating to takeovers. The City Code. Defences against unwelcome
takeover bids. Reorganisations and schemes of reconstruction. De-mergers and
management buy-outs. Financing management buyouts. Going private. Share repurchases.
Knowledge checklist

1) understand the theoretical limitations to the use of the WACC in project evaluation;
2) calculate a project specific WACC;
3) understand the relationship between financing and investment decisions;

10
4) calculate an adjusted present value (APV).

5) explain and discuss the motives for takeovers and mergers;
6) describe alternative strategies for growth i.e. organic growth and growth by
acquisition and discuss the advantages and disadvantages of the strategies
7) describe the three forms of the efficient market hypothesis;
8) discuss their significance for financial management;
9) show how potential acquisition targets may be identified;
10) do a valuation for a takeover;
11) write about the procedures for a takeover including an outline knowledge of the City
Code and the role of the Takeover Panel;
12) discuss the possible defences against an unwelcome bid;
13) comment on the advantages and disadvantages of different forms of consideration
for a bid;
14) identify the key factors that are likely to determine the success of a takeover bid;
15) understand the importance of post acquisition audits;
16) discuss the strategic issues relating to corporate restructuring;
17) explain the advantages and disadvantages of divestments and de-mergers;
18) identify situations in which a management buyout is likely to be the best strategy;
19) discuss the issues relating to the financing of management buyouts;
20) evaluate financial restructuring proposals including reconstructions and schemes of
arrangement;
Unit 5
Content
The nature and determinants of exchange rates. PPPT and IRPT. Types of foreign exchange
risk. Hedging transactions exposure. Internal hedges. Forward market and money market
hedges. Derivative hedges. Currency futures and options. Management of interest rate risk
FRAs. Interest futures and options. Swaps and financial engineering. Option pricing. The
Black Scholes Models. The “Greeks”, delta, gamma, vega, theta and rho. Delta hedges.
Knowledge checklist

1) understand foreign exchange markets and exchange rate systems;

11
2) understand the nature of exchange rates which means you need to know about bid
and offer rates, direct and indirect quotations, cross rates, spot rates and forward
rates;
3) explain the determinants of both spot and forward rates, which means you need to
understand interest rate parity theory;
4) predict movements in the spot rate using purchasing power parity theory;
5) understand the various types of foreign exchange risk;
6) understand the nature of the hedging decision (an insurance decision);
7) explain the main internal hedging strategies. These are domestic currency invoicing,
leading and lagging and netting;
8) do simple calculations to illustrate the advantages of multi-lateral netting;
9) do computations showing how forward contracts and money market hedges can be
used to hedge transactions exposure;
10) understand the nature of futures contracts and currency options;
11) know the trading rules for dealing in these derivative products;
12) do calculations showing how currency futures and options can be used to hedge
forex risk;
13) discuss the advantages and disadvantages of the various hedging strategies.
14) explain the nature and significance of interest rate risk;
15) show how FRAs can be used to manage risk;
16) explain and comment on the use of interest rate futures to hedge risk;
17) describe options hedges using both OTC and traded options;
18) construct and evaluate an options hedge;
19) describe and comment on the uses of caps and floors,
20) show how to construct a collar uses both OTC and traded products;
21) explain the advantages of options hedges compared with other hedging strategies;
22) describe the uses of swaps;
23) evaluate a swap described in a question;
24) design your own swap;
25) explain the uses of “swaptions” and other forms of “financial engineering”;
26) discuss the determinant of options prices;
27) explain the Black Scholes model and discuss its limitations;
28) use Black Scholes to price call options;
29) use put call parity theory to value put options;
30) explain the nature of the “Greeks” i.e. delta, gamma, vega, theta and rho;
31) construct a basic delta hedge.

12
Unit 6
Content
Dividend policy. Forms of entity for foreign operations. Evaluating FDIs. A cost of capital for a
FDI. APVs within an international context. The significance of taxation and the use of tax
havens. Remittance of funds. Financing FDIs. The international capital structure decision.
Political risk.
Knowledge checklist

1) explain the dividend irrelevancy hypothesis;
2) do simple calculations to demonstrate dividend irrelevancy;
3) discuss practical considerations in the formulation of corporate dividend policy;
4) explain and comment on the nature of free trade and protectionism;
5) describe and comment on different forms of entity for foreign operations;
6) evaluate a foreign direct investment;
7) calculate a cost of capital for a FDI;
8) use the APV rule to evaluate a FDI;
9) discuss the significance of taxation and the use of tax havens.
10) discuss the significance of blocked funds and explain alternative methods used by
MNCs to repatriate funds;
11) discuss the factors that influence the types of finance used for FDIs;
12) describe the strategic implications of international financing;
13) describe what is meant by political risk and explain how it can be measured;
14) explain and comment various methods that MNCs use to manage political risk;
15) describe the nature and developments of the main international markets;
16) explain the various types of finance that are available to the treasurers of MNCs;

13
6.0 Past Examinations
As this is only the fourth “real” examination of the new syllabus we only have three past
papers to guide us in selecting topics for the June examination. We also have the Pilot Paper.
December 2002
1) Intergrand plc. Part (a) is an 8 mark essay on growth by acquisition and organic
growth. Part (b) is a 32 mark section on the valuation of a proposed acquisition of a
company in a foreign country. The valuation is based on the APV rule and requires
calculations to discount free cash flows. In order to arrive at a valuation it is
necessary to calculate appropriate interest rates for discounting various components
of the cash flows to a present value. The question also requires a discussion of other
“commercial and business factors” that should be considered. In part (b) of the
question 22 marks are for calculations and 10 are for discussion.
2) Autocrat plc. This is a question on treasury management. Part (a) is written and
requires a discussion of the relative merits of futures and options to manage interest
rate risk. Part (b) (11 marks) is a standard calculation on the use of interest rate
futures and options to manage interest rate risk with some discussion of the
uncertainty involved in the hedges. Part (c) requires calculations to should the effects
of hedging foreign exchange risk in the forward market and with currency options in
two different exchange rate scenarios. It is worth 8 marks). Finally part (d) requires a
discussion and illustration of the use of a currency “straddle option”. It is worth 5
marks.
3) TYR plc. This is a question on dividend policy and the dividend valuation model. Part
(a) (6 marks) requires the identification and evaluation of the company’s dividend
policy. Part (b) (4 marks) is the usual written section on “other factors / information
that need to be considered. Part c, which is worth 5 marks requires a valuation of the
company’s shares using the dividend valuation model.
4) Shegdor plc. This is an interesting question on transfer pricing. Part (a), which is only
worth 4 marks, is a straightforward discussion of the objectives of transfer pricing in a
multi-national corporation. Parts (b) and (c), which carry 8 marks and 3 marks
respectively, examine the effects of different transfer pricing policies but have a
“political risk” dimension. Part (b) requires a calculation of the tax implications of two
14
different transfer pricing policies and a decision on where to carry out assembly of the
company’s products. Part (c) requires a discussion of the reaction of the various
governments involved to the decisions taken in part (b).
5) This is a very standard question on predicting exchange rate movements using PPPT
and the International Fisher Effect and the difficulties encountered in making such
predictions. There is only one part of the question worth 15 marks.
6) Question 6 is on Corporate Governance. Part (a) which carries 9 marks requires a

discussion as to whether certain actions taken by a British plc are consistent with the
requirements of the Combined Code on Corporate Governance. Part (b) is a 6 mark
discussion of the differences between the corporate governance systems in the U.K.,
Germany, the U.S.A. and Japan.
The important points to note about the examination are as follows:
1) Four of the questions came from the key areas of the syllabus identified earlier. Two
of the questions in Section B where from peripheral areas of the syllabus. These
were question 4 on transfer pricing and question 6 on corporate governance.
2) At the time of writing I do not have the marking scheme for the December
examination but I would estimate that, depending upon the choice of optional
questions in Section B of the paper, between 55 and 61 of the marks are for
discussion and 39 to 45 for doing calculations. The compulsory Section A had 37
marks for discussion and 33 for calculations. In Section B a maximum of 24 marks
could have been earned without using a calculator. A maximum of 12 marks were
available for calculations.
3) Perhaps the most striking feature of the examination was the syllabus coverage that
the examiner was able to achieve in just one examination. He did this by combining
topics within questions in the compulsory Section A of the paper. For example,
question 1 was the long awaited question on a valuation. However it was a valuation
for a takeover of a foreign company and included the use of APVs for evaluating
foreign direct investments and calculations of the cost of capital. All in one question!
Question 2 was a treasury management question but for the first time it included both
interest rate risk and foreign exchange risk.

15
4) The examiner did introduce some more complex hedging strategies by asking a
question on the use of straddle options. However it was only worth 5 marks.
5) This was the first “real examination” under the new syllabus that did not have a
question on option pricing and the Black Scholes Model.
6) This was the first paper that did not include a specific question on a project appraisal
although the valuation question 1 did require a valuation based on discounting future
free cash flows.
7) All of the topics that appeared in the Pilot Paper have now come up in the real thing.
8) All of the new topics in the syllabus have now made their debut in the examination.
9) There are no “hot tips” for June!
June 2002
The following questions came up in June 2002:
1) NTC plc. This is a question on the management of foreign exchange risk. It begins with
an 8 mark written section on the advantages of a centralised treasury function. Part (b)(i)
is on multi-lateral netting and is worth 6 marks. Part (b) (ii) is on hedging transactions
exposure using a forward market hedge, a money market hedge and currency options.
The calculations themselves are straightforward enough but, as is often the case with
Scott Goddard questions, the problem is the time allowed. This part of the question is
only worth 15 marks and requires you to construct three forward market hedges, three
money market hedges and an options hedge. Finally the question ends with a 6 mark
written part on the advantages and disadvantages of countertrade.
2) Jetter plc. This is a question on project appraisal using the CAPM. Part (a) (8 marks)
entails a choice between three investment opportunities by comparing expected returns
with required returns. To make the appraisal it is necessary to calculate the project betas.
This is followed by a five mark discussion on the likely accuracy of one of the betas given
information about the profitability index of one of the projects. In part (c) you are required
to calculate the company’s weighted average cost of capital and comment on the likely
effect on the cost of capital of undertaking one of the projects. Part (d) of the question
16
would have confused many candidates. It requires a discussion of the merits of an

(apparently arbitrary) adjustment to the project betas that has been suggested by a
consultant. However as it is only worth 3 marks it is not worth worrying about at this
stage. It is followed by a calculation to see whether the ranking will change if the adjusted
betas are used. This part is very easy provided you do what the question tells you to do
and do not worry too much about what you are doing! The question ends with an eight
mark written part on the CAPM and arbitrage pricing.
3) Strayer plc. This is an extremely straightforward question on the calculation of an APV

(12 marks) and a discussion of the advantages of APVs compared with NPVs.
4) Uniglow plc. This is the second question in a row on option pricing. Part (a) requires a
discussion on the significance of three of the “Greeks”, delta, theta and vega. It is worth 5
marks. Part (b) entails the construction and evaluation of a delta hedge. It requires a
calculation of N(d1).
5) Toutplut plc. This question is on the calculation and use of EVA as a performance
measure. In part (a) you need to estimate and comment on the EVA of a company (7
marks). Part (b), which only carries 2 marks, calls for an explanation of the relationship
between EVA and NPV. Part (c) (6 marks) is a straightforward discussion of the
advantages and disadvantages of EVA.
6) Question 6 is an essay on mergers and acquisitions. It is in three parts. You must

“identify and discuss” possible synergies that might arise in mergers and acquisitions (7
marks), potential problems in achieving the synergies (4 marks) and whether mergers
should be undertaken for the sole purpose of achieving corporate diversification.
The important points to note about the examination are as follows:
10) All of the questions come from the key areas of the syllabus identified earlier.
11) Depending upon the choice of optional questions in Section B of the paper between
47 and 62 of the marks are for discussion and 38 to 53 for doing calculations. The
compulsory Section A had 37 marks for discussion and 33 for calculations. In Section
B a maximum of 25 marks could have been earned without using a calculator. A
maximum of 20 marks were available for calculations.

17
12) This is the second real examination under the new syllabus and the second time that
option pricing has been examined. As suspected the examiner is obviously trying to
establish this as a core topic area. Will it come up for a third straight time in
December?
13) Investment appraisal has appeared in Section A of all three papers set for the new
syllabus.
14) Two of the new topics in the syllabus, EVA and arbitrage, pricing make their debut in
June.
15) Probably the biggest surprise was the absence of a question on business valuation in
Section A.
December 2001
The following questions came up in December 2001:
1) Wickern plc. Part (a) required a performance evaluation with a discussion of why the
actual results from an overseas investment were not as planned. It was worth 15
marks. Part (b), which was also worth 15 marks, required an evaluation of a decision
on the continuing operation of the overseas investment. The last part of this question
was a ten mark essay on the other factors to be considered in the decision making
process.
2) AVT plc. This was the widely predicted question on option pricing. Part (a) was a 6
mark written bit on the way in which the various variables in the Black Scholes model
affect the value of a call option. Part (b) involved the evaluation of share options from
the viewpoint of the company’s managers and required the valuation of an option
using the Black Scholes Model. The final part of the question required a
consideration of put options from the viewpoint of the company and the managers. It
also required some calculations using put – call parity theory.
3) Bentras plc. Part (a) required calculations to determine a company’s optimal capital
structure. It was not based on the MM analysis as changing the capital structure
affected the company’s credit rating and hence its cost of capital. Part (b) was a 7

18
mark written section on the factors that might affect a company’s choice of capital
structure.
4) Shawter plc. This was a question on the management of interest rate risk using
interest rate futures, options and FRAs. The question required a discussion of the
merits of the various techniques together with relevant calculations to assess the
impact of an increase in interest rates.
5) Beela Electronics. A largely written question on the measurement and management

of political risk.
6) An essay on share repurchases and stock splits that focussed on the effects these
strategies could have on the company’s share price.
The Pilot Paper
The Pilot Paper used the following questions:
1) Novoroast plc: Evaluation of a foreign direct investment. The question required a

calculation of a WACC followed by an NPV calculation. There were also two five
mark written bits. The first was on methods of repatriating funds where the host
government has imposed a block on dividend payments. The second required a
discussion of the ethical issues that may need to be considered. This is probably
about as far as the new element of the syllabus i.e. “ethical considerations” will go as
far as the examination is concerned.
2) Miniprice plc: This is a thirty mark question on a proposed takeover bid.
3) The question was in two parts. Both are modified versions of previous examination
questions. Part (a) required a forecast of future spot rates using the International
Fisher Effect and was based on a question in the December 1997 paper. Part (b)
involved the use of options to hedge an uncertain foreign exchange exposure
resulting from transactions between companies in Italy and Kuwait. It is based on a
question set in December 1996 modified to take account of the introduction of the
Euro.

19
4) Panon plc. The first part was a past examination question (June 1997) on the use of
interest rate futures to hedge risk. It required calculations on basis risk. Part (b) is
also based on a past question (December 1995 Noswis). It examined the use of a
swaption to manage exposure to interest rate risk.
5) Question 5 was on dividend policy. Part (a) was an eight mark discussion on the
effects of increasing dividends for a shareholder in a plc. Part (b) required
calculations showing the effects of various dividend policies on shareholder wealth.
Like most of the pilot paper it was based on a past question. This time it was Leedon
(December 1996).
6) This was an essay on the management of current account deficits and the effects
such deficits may have on multi-national companies. It was based on a question set
in the December 1997 examination with a additional requirement to discuss the role
of the IMF in such circumstances.
7.0 June 2003
As I have already noted all of the topics examined in the Pilot Paper and all of the new topics
in the SFM syllabus have now appeared in the real examinations. As a result there are no
“bankers” this time around. An important feature of the December 2002 examination was that
both of the questions in the compulsory Section A were multi-faceted and cover a number of
topics. It seems likely that these “mini case study” type questions will be the norm for Section
A in the future. Based on the limited amount of information available the following topics
seem likely to be important in June:
1) Financial planning and raising finance. There are a limited number of topics that can
provide the basis for a compulsory question. Last time the examiner achieved very broad
syllabus coverage but did not ask anything on the financing decision, which is an
important part of the syllabus. A question on financial planning is overdue. It could focus
on funding requirements, which would allow the examiner to combine it with a question
on raising finance, another overdue topic for examination.

20
2) The investment decision. This is topic area that produces the greatest number of Section
A questions. It was in the Pilot Paper and the first two real examinations. It did not come
up in December and could easily reappear in June. In most recent questions a calculation
of the appropriate discount rate has been an important part of the question. You should
also consider the possibility that an element of uncertainty may be introduced requiring a
sensitivity analysis.
3) Treasury management has been examined in Section A of the last two papers. It is
unlikely to provide a compulsory question next time but there is almost always at least
one question on treasury management in the examination. Look for it in Section B next
time and be prepared for a question on some more sophisticated hedging strategies. We
have had swaptions, collars and straddles thus far. Who knows what the future holds?
4) Option pricing. It has come up twice and was not in the last paper. I doubt if it will go
away! The only aspect of option pricing referred to in the study guide that has not yet
been examined is the limitations of the NPV rule and the importance of options
embedded in investments. This looks to be a real possibility.
5) Ratio analysis and interpretation of accounts is a good old examination standby. It has
not been examined in Section B for some time and may be due for reappearance.
6) General financial knowledge. It is in the pilot paper but we have not seen one of these
more “general knowledge” type questions in any of the last three papers. It could easily
come up next time.
You must recognise that the whole syllabus is examinable and more information may come to
light over the next five months. Remember that we were not given the revised formula sheet
and the standard normal tables until September 2001 for the December 2001 examination. I
am sure that every SFM lecturer in the world predicted a question on option pricing in the
December 2001 examination but the information that was the basis of that (accurate)
prediction was not available until September of that year. I have told you what I think will be
important for June based on the information currently available but this may change. My final
tips for the June 2003 examination will be given in Seminar 7 and will form the basis of the
mock examination.

21
Those of you who are planning to take the SFM next June would be wise to consider the
principle causes of failure in this examination. By so doing you may avoid the pitfalls that
have trapped so many of your fellow students in the past and ensure your success next June.
In his examiner’s reports on recent examinations the examiner has identified the causes of
failure as follows:
1) A failure to answer the specific question that was set. Candidates tend to write
general answers on the issue examined rather than answering the specific question
asked.
2) Lack of any background knowledge about the world of business and finance.
3) An inability to do even simple calculations that are presumed knowledge for the
examination and an apparent unwillingness to link the SFM programme to other
areas of the ACCA syllabi. For example many candidates appear unable to do even
the simplest calculation of EPS.
There seems little doubt that these problems will continue in the future. The implications for
your study for the June examination are obvious:
1) Concentrate on the core areas of the syllabus.

2) Remember the importance of writing rather than computations. Most of the marks are
for discussing the meaning and significance of the numbers rather than for
calculating them.
3) Work on your background financial knowledge. Remember that the examiner sets the
examination on the assumption that all Part Three students are regular readers of a
quality business newspaper. Make sure you are!
4) Be prepared to apply knowledge acquired elsewhere in your studies to SFM
examination questions.

22
8.0 The course outline
Specific topics that will be covered in the next six seminars are outlined below.
Seminar Topics covered
1) The nature of SFM. Organisational objectives. Corporate governance. Formulating a

corporate strategy. Analysis of performance. EVA, SVA and MVA. Free cash flows.
Short term and long term planning. Basic investment appraisal. Taxation and inflation
in project evaluation. Special cases of the investment decision.
2) Portfolio theory and the capital asset pricing model. Option valuation models. Options
embedded in investments.
3) Calculating the weighted average cost of capital. Financing decisions. Capital
structure theory. Company valuations.
4) Financing and investment interactions. Limitations to the use of the weighted average
cost of capital in project appraisal. Project specific WACCs. The adjusted present
value rule. Mergers and acquisitions. Reorganisations and reconstructions.
Management buy-outs and buy-ins.
5) Treasury management. The management of foreign exchange and interest rate risk.
Option valuation. The Black Scholes Model. The “Greeks”: delta, gamma, theta, vega
and rho.
6) The treasury function. International cash management. International transfer pricing.
Evaluating foreign direct investments. APVs within an international context. Financing
overseas investments.

23

S 37 L 0

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

S 37 L 0

Uploaded by

Copyright:

Available Formats

Paper 3.

7 Strategic Financial Management

In this introductory session we will:

© 2003 FTMS Online PTE Ltd

1.0 Meet the examiner

2.0 The examination

4) The examiner attaches considerable importance to general, background, financial

© 2003 FTMS Online PTE Ltd

3.0 The syllabus

© 2003 FTMS Online PTE Ltd

4.0 The core areas of the syllabus

The syllabus identifies five core areas. These are:

The key topic areas are:

© 2003 FTMS Online PTE Ltd

5.0 A Study guide

Organisational objectives. Corporate governance. Strategy formulation. Performance analysis

By the end of this unit you should be able to:

3) identify the key stakeholders in organisations;

© 2003 FTMS Online PTE Ltd

At the end of this unit you should be able to:

© 2003 FTMS Online PTE Ltd

At the end of this unit you should be able to:

© 2003 FTMS Online PTE Ltd

At the end of this unit you should be able to:

© 2003 FTMS Online PTE Ltd

4) calculate an adjusted present value (APV).

At the end of this unit you should be able to:

© 2003 FTMS Online PTE Ltd

© 2003 FTMS Online PTE Ltd

At the end of this unit you should be able to:

© 2003 FTMS Online PTE Ltd

6.0 Past Examinations

6) Question 6 is on Corporate Governance. Part (a) which carries 9 marks requires a

The important points to note about the examination are as follows:

© 2003 FTMS Online PTE Ltd

9) There are no “hot tips” for June!

The following questions came up in June 2002:

would have confused many candidates. It requires a discussion of the merits of an

3) Strayer plc. This is an extremely straightforward question on the calculation of an APV

6) Question 6 is an essay on mergers and acquisitions. It is in three parts. You must

The important points to note about the examination are as follows:

© 2003 FTMS Online PTE Ltd

The following questions came up in December 2001:

© 2003 FTMS Online PTE Ltd

5) Beela Electronics. A largely written question on the measurement and management

The Pilot Paper

The Pilot Paper used the following questions:

1) Novoroast plc: Evaluation of a foreign direct investment. The question required a

2) Miniprice plc: This is a thirty mark question on a proposed takeover bid.

© 2003 FTMS Online PTE Ltd

7.0 June 2003

© 2003 FTMS Online PTE Ltd

© 2003 FTMS Online PTE Ltd

1) Concentrate on the core areas of the syllabus.

© 2003 FTMS Online PTE Ltd

8.0 The course outline

Seminar Topics covered

1) The nature of SFM. Organisational objectives. Corporate governance. Formulating a

© 2003 FTMS Online PTE Ltd

You might also like