Professional
Qualification - Strategic level
Management
Accounting Financial Strategy
First examined in May 2005
Syllabus outline
The syllabus comprises:
Topic |
Study
weighting |
| A
|
Formulation
of Financial Strategy |
20%
|
| B |
Financial
Management |
30%
|
| C |
Business
Valuations and Acquisitions |
25%
|
| D |
Investment
Decisions and Project Control |
25%
|
Learning aims
Students should be able to:
- understand and apply contemporary
thinking on strategic financial management,
- understand and utilise appropriate
tools for strategic financial management,
- evaluate strategic financial
management options in light of the needs of management and
the policy of the enterprise,
- characterise and describe
the enterprise’s financial strategy and use that characterisation
to develop optimal financial strategy for all stages of
the life-cycle, and
- assess and evaluate proposed
strategies.
Assessment strategy
There will be a written examination
paper of three hours, with the following sections.
- Section A - 50 marks
A maximum of four compulsory questions, totalling 50 marks,
all relating to a single scenario.
- Section B – 50 marks
Two question, from a choice of four, each worth 25 marks.
Short scenarios will be given, to which some or all questions
relate.
Learning Outcomes and Syllabus
Content
A - Formulation of Financial
Strategy - 20%
Learning outcomes
On completion of their studies
students should be able to:
- identify an organisation’s
objectives in financial terms and evaluate their attainment;
- discuss the interrelationships
between decisions concerning investment, financing and dividends;
- identify and analyse the
impact of internal and external constraints on financial
strategy (e.g. funding, regulatory bodies, investor relations,
strategy, and economic factors);
- evaluate current performance,
taking account of potential variations in economic and business
factors;
- recommend alternative financial
strategies for an organisation.
Syllabus content
- The financial and non-financial
objectives of different organisations (e.g. value for money,
maximising shareholder wealth, providing a surplus).
- The three key decisions
of financial management (by which mean investment, financing,
dividend) and their links.
- Benefits of matching characteristics
of investment and financing, e.g. in cross-border investment.
- Identifying the financial
objectives of an organisation and the economic forces affecting
its financial plans, e.g. interest, inflation and exchange
rates.
- Assessing attainment of
financial objectives.
- Developing financial strategy
in the context of regulatory requirements (e.g. price and
service controls exercised by industry regulators) and international
operations.
- Modelling and forecasting
cash flows and financial statements based on expected values
for economic variables (e.g interest rates) and business
variables (e.g. volume and margins) over a number of years.
- Analysis of sensitivity
to changes in expected values in the above models and forecasts.
- Identifying financing requirements
(both in respect of domestic and international operations)
and the impacts of different types of finance on the above
models and forecasts.
- Assessing the implications
for shareholder value of alternative financial strategies,
including dividend policy. Note: Modigliani and Miller’s
theory of dividend irrelevancy will be tested in broad terms.
The mathematical proof of the model will not be required,
but some understanding of the graphical method is expected.
- Current and emerging issues
in financial reporting (e.g. proposals to amend or introduce
new accounting standards) and in other forms of external
reporting (e.g. environmental accounting).
B - Financial Management -
30%
Learning outcomes
On completion of their studies
students should be able to:
- identify and describe optimal
strategies for the management of working capital and satisfaction
of longer term financing requirements;
- identify and evaluate key
success factors in the management of the finance function
and its relationship with other parts of the organisation
and, where necessary, with external parties;
- discuss the role and management
of the treasury function;
Syllabus content
- Working capital management
strategies. (Note: No detailed testing of cash and stock
management models will be set since these are covered at
the Managerial level.)
- Types and features of domestic
and international long-term finance: share capital (ordinary
and preference shares, warrants), long-term debt (bank borrowing
and forms of securitised debt, e.g. convertibles) and finance
leases, and methods of issuing securities.
- The lender’s assessment
of creditworthiness.
- The lease or buy decision
(with both operating and finance leases).
- The operation of stock exchanges
(e.g. how share prices are determined, what causes share
prices to rise or fall, and the efficient market hypothesis).
(Note: No detailed knowledge of any specific country’s stock
exchange will be tested.)
- The capital asset pricing
model (CAPM): calculation of the cost of equity using the
dividend growth model (knowledge of methods of calculating
and estimating dividend growth will be expected), the ability
to gear and ungear betas and comparison to the arbitrage
pricing model.
- The ideas of diversifiable
risk (unsystematic risk) and systematic risk. (Note: use
of the two-asset portfolio formula will not be tested.)
- The cost of redeemable and
irredeemable debt, including the tax shield on debt (numerical
questions on the cost of convertible debt will not be tested).
- The weighted average cost
of capital (WACC): calculation, interpretation and uses.
- Criteria for selecting sources
of finance, including finance for international investments.
- The effect of financing
decisions on balance sheet structure and on ratios of interest
to investors and other financiers (gearing, earnings per
share, price-earnings ratio, dividend yield, dividend cover
gearing, interest cover).
- Management of the finance
function and relationships with professional advisors (accounting,
tax and legal), auditors and financial stakeholders (investors
and financiers).
- The role of the treasury
function in terms of setting corporate objectives, liquidity
management, funding management, currency management.
- The advantages and disadvantages
of establishing treasury departments as profit centres or
cost centres, and their control.
C - Business Valuations and
Acquisitions - 25%
Learning outcomes
On completion of their studies
students should be able to:
- calculate values of organisations
of different types, e.g. service, capital intensive;
- identify and calculate the
value of intangible assets (including intellectual property);
- identify and evaluate the
financial and strategic implications of proposals for mergers,
acquisitions, demergers and divestments;
- compare and recommend alternative
forms of consideration for, and terms of, acquisitions;
- calculate post-merger or
post-acquisition value of companies;
- identify and evaluate post-merger
or post-acquisition value enhancement strategies;
- discuss and illustrate the
impact of regulation on business combinations;
- evaluate exit strategies.
Syllabus content
- Valuation bases for assets
(e.g. historic cost, replacement cost and realisable value),
earnings (e.g. price/earnings multiples and earnings yield)
and cash flows (e.g. discounted cash flow, dividend yield
and the dividend growth model).
- The strengths and weaknesses
of each valuation method and when each is most suitable.
- Recognition of the interests
of different stakeholder groups in mergers, acquisitions
and company valuations.
- Application of the efficient
market hypothesis to business valuations
- Selection of an appropriate
cost of capital for use in valuation.
- The impact of changing capital
structure on the market value of a company. (Note: An understanding
of Modigliani and Miller’s theory of gearing, with and without
taxes, will be expected, but proof of their theory will
not be examined.)
- Forms of intellectual property
and methods of valuation.
- The reasons for merger or
acquisitions (e.g. synergistic benefits).
- Forms of consideration and
terms for acquisitions (e.g. cash, shares, convertibles
and earn-out arrangements), and their financial effects.
- The post-merger or post-acquisition
integration process (e.g. management transfer and merger
of systems).
- The implications of regulation
for business combinations. (Note: Detailed knowledge of
the City Code and EU competition rules will not be tested.)
- The function/role of management
buy-outs, venture capitalists.
- Types of exit strategy and
their implications.
D - Investment Decisions and
Project Control - 25%
Learning outcomes
On completion of their studies
students should be able to:
- analyse relevant costs,
benefits and risks of an investment project;
- evaluate investment projects
(domestic and international) taking account of potential
variations in business and economic factors;
- recommend methods of funding
investments, taking account of basic tax considerations;
- evaluate procedures for
the implementation and control of investment projects;
- recommend investment decisions
when capital is rationed.
Syllabus content
- Identification of a project’s
relevant costs (e.g. infrastructure, marketing and human
resource development needs), benefits (including incremental
effects on other activities as well as direct cash flows)
and risks (i.e. financial and non-financial).
- Linking investments with
customer requirements and product/service design
- Linking investment in IS/IT
with strategic, operational and control needs (particularly
where risks and benefits are difficult to quantify).
- Calculation of a project’s
net present value and internal rate of return, including
techniques for dealing with cash flows denominated in a
foreign currency and use of the weighted average cost of
capital.
- The modified internal rate
of return based on a project’s “terminal value” (reflecting
an assumed reinvestment rate).
- The effects of taxation
(including foreign direct and withholding taxes), potential
changes in economic factors (inflation, interest and exchange
rates) and potential restrictions on remittances on these
calculations.
- Recognising risk using the
certainty equivalent method (when given a risk free rate
and certainty equivalent values).
- Adjusted present value.
(Note: The two step method may be tested for debt introduced
permanently and debt in place for the duration of the project.)
- Capital investment real
options (i.e. to make follow-on investment, abandon or wait).
- Project implementation and
control in the conceptual stage, the development stage,
the construction stage and initial manufacturing/operating
stage.
- Post completion audit of
investment projects.
- Single period for capital
rationing for divisible and non-divisible projects. (Note:
Multi-period rationing will not be tested.)
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