ACCA FM
ACCA Financial Management (FM) Flashcards
What are the two determinants of shareholder wealth?
What is the difference between maximising and satisficing?
What are the three categories of stakeholder?
What are the three Es used to measure value for money?
What is the primary financial objective of a company, and how is it normally expressed?
How does financial management differ from financial accounting and management accounting?
What is the agency problem in a company, and give two ways of reducing it.
State three commonly used financial objectives other than shareholder wealth maximisation.
How do the financial objectives of a not-for-profit organisation differ from those of a company?
Give the formula for return on capital employed (ROCE) and state what it measures.
Name the four main macroeconomic policy targets of a government.
What is the difference between fiscal policy and monetary policy?
What is a financial intermediary, and name two benefits it provides.
What is the difference between the money market and the capital market?
State the two principal functions of a stock market.
State three roles of the money markets.
What is the difference between an interest-bearing money market instrument and a discount instrument?
Give two ways in which Fintech is changing the role of financial markets and institutions.
How is the operating cycle (working capital cycle) calculated?
What is over-capitalisation (in a working capital context)?
What is overtrading?
What is meant by the aggressive funding of working capital?
What is meant by the conservative funding of working capital?
What are the four elements of working capital?
Describe the conflict between the two objectives of working capital management.
What is the matching (maturity-matching) principle of working capital funding?
Distinguish permanent current assets from fluctuating current assets.
How is the cash operating cycle calculated?
What is meant by the economic order quantity in inventory management?
What is meant by the just-in-time approach to inventory management?
State the EOQ formula exactly as it appears on the ACCA FM formulae sheet.
State the EOQ formula and what each term means.
At the economic order quantity, what is the relationship between annual ordering costs and annual holding costs?
When a bulk purchase discount is offered, how is the optimum order quantity determined?
Define buffer (safety) inventory and state the effect it has on the EOQ calculation.
How is the reorder level calculated when demand and lead time are certain?
State two advantages and one disadvantage of a just-in-time inventory system.
State three assumptions underlying the economic order quantity model.
What is 'non-recourse' factoring?
What is invoice discounting?
How is the annualised cost of an early settlement discount calculated?
How is the annualised cost of an early settlement discount calculated?
How is the benefit of a change in receivables policy evaluated?
What is a factor, and what three services can a factor provide?
Name four sources of information used to assess the creditworthiness of a new customer.
Name two techniques for managing the risk on foreign accounts receivable.
Why is trade credit described as a source of 'free' finance, and why is that description misleading?
Give the formulae for receivables days and payables days.
List the three reasons for a company to hold cash.
Name the two cash management models examinable in FM.
What is the Miller-Orr model of cash management?
When using the Miller-Orr formula, what is the relationship between the variance and the standard deviation of daily cash flows?
State the Baumol model formula for the optimum amount of cash to transfer from investments.
State the Miller-Orr formula for the spread between the upper and lower cash limits.
In the Miller-Orr model, how are the upper limit and the return point calculated?
State the Miller-Orr formulas for the spread, the upper limit and the return point.
State two limitations of the Baumol model as applied to cash management.
State three criteria a company should apply when selecting a short-term investment for surplus cash.
What is the definition of the payback period?
What is the definition of the Internal Rate of Return of a project?
What is meant by the term 'annuity'?
What is meant by the term 'perpetuity'?
Define the net present value of a project and state the decision rule.
How is return on capital employed (accounting rate of return) calculated for investment appraisal?
What is discounted payback, and what advantage does it have over ordinary payback?
State two reasons why NPV is theoretically superior to IRR.
State the interpolation formula used to estimate the IRR.
State two weaknesses of the payback period as an appraisal method.
Give the formula for the present value of an annuity of $1 per year for n years at rate r, as shown on the FM formulae sheet.
What is meant by the term 'incremental cost'?
What is meant by the term 'sunk cost'?
State the three characteristics of a relevant cash flow.
Why is depreciation excluded from a DCF appraisal?
How is the opportunity cost of using an existing material already held in inventory determined?
How are interest payments on the finance for a project dealt with in an NPV calculation?
What is tax-allowable depreciation (a capital allowance), and how does it affect a DCF appraisal?
What is a balancing allowance or balancing charge, and when does it arise?
How is working capital treated in an NPV calculation?
If a company pays tax one year in arrears, when is the tax on year 1 operating cash flows shown in the DCF?
What is meant by the term 'nominal (money) cash flows'?
What is meant by the term 'real cost of capital'?
In asset replacement questions, how is the equivalent annual cost calculated?
What is meant by the term 'capital rationing'?
What is 'hard' capital rationing?
What is 'soft' capital rationing?
What is meant by the term 'profitability index'?
Under single-period capital rationing with divisible projects, on what basis are the available projects ranked?
State the Fisher formula linking real and nominal rates as it appears on the FM formulae sheet.
State the two consistent approaches to inflation in an NPV appraisal.
In a lease-versus-buy evaluation, what discount rate is used and why?
What is the difference between 'risk' and 'uncertainty'?
What is meant by the sensitivity of a variable in the context of NPV decision making?
Give the formula for the sensitivity of a project variable and interpret a low result.
State two weaknesses of sensitivity analysis.
What is the expected net present value (ENPV), and state one weakness of using it.
What is a risk-adjusted discount rate?
What is simulation in the context of investment appraisal?
What is adjusted payback, and how is it used to allow for risk?
How does increasing project life affect the risk of a project's cash flows?
What is a simulation-free way of presenting the risk profile of a project using probabilities?
What is a rights issue of shares?
What is the main reason a company may make a bonus (scrip) issue of shares?
What choices are available to a shareholder who receives notification of a rights issue?
What is a scrip dividend?
What is venture capital?
What is the dividend irrelevance theory?
What is the residual theory of dividend policy?
Distinguish a placing from a public offer as a method of raising equity.
How are the theoretical ex-rights price and the value of a right calculated?
Name four practical influences on a company's dividend decision.
State three advantages to a company of obtaining a stock exchange listing.
What is the difference between redeemable and irredeemable debt?
What is convertible debt?
Distinguish an overdraft from a short-term loan.
Distinguish an operating lease from a finance lease.
State three advantages of leasing rather than borrowing to buy an asset.
What is a bond covenant, and give two examples.
What is a Eurobond?
State the creditor hierarchy and explain its connection with the cost of finance.
What is a warrant attached to a bond, and what is its attraction to the issuing company?
What is the 'funding gap' and the 'maturity gap' faced by small and medium sized entities?
Name four sources of finance particularly relevant to SMEs.
What is the difference between financial gearing and operating gearing?
Give two ways of calculating the gearing ratio, and state whether book values or market values should be used.
How is interest cover calculated, and what does a falling interest cover indicate?
State three problems arising from high levels of gearing.
Explain the relative risk-return relationship between equity and debt finance.
What is pecking order theory, and state the order it predicts.
Describe the traditional view of capital structure.
Distinguish business risk from financial risk.
Name three capital market imperfections that undermine the Modigliani and Miller conclusions.
How is operating gearing commonly measured?
What is mudaraba?
What is musharaka?
What is ijara?
What is riba, and how do Islamic financial instruments provide a return instead?
What is murabaha, and which conventional source of finance does it correspond to?
What is sukuk, and how does it differ from a conventional bond?
Name the five Islamic financial instruments examinable in FM and their conventional equivalents.
State two principles, besides the prohibition of riba, that govern Islamic finance.
According to the dividend valuation model, how is the market value of a share determined?
In Gordon's growth approximation (g = br), what do b and r represent?
What is the meaning of cum div and ex div share prices?
State the dividend growth model as it appears on the ACCA FM formulae sheet.
State the dividend growth model for the ex-div market value of a share.
How is the historic (geometric) dividend growth rate estimated from past dividends?
State Gordon's growth approximation and explain the terms.
How is the market value of irredeemable debt calculated?
How is the market value of redeemable debt calculated?
State three limitations of the dividend growth model.
How is the P/E ratio calculated?
What is the significance of a higher P/E ratio?
What are the three levels of market efficiency?
Name the three asset-based methods of valuing a business and state their principal weakness.
How is a business valued using the P/E ratio method, and what adjustment is made for an unquoted company?
How is the earnings yield method applied?
How is a business valued on a discounted cash flow basis, and why is it theoretically the best method?
What information is already reflected in share prices under each form of the efficient market hypothesis?
Give three reasons why a business may need to be valued.
What does behavioural finance contribute to the explanation of share prices?
State the WACC formula as it appears on the ACCA FM formulae sheet.
State the WACC formula and say which values must be used.
Why are market values, rather than book values, used to weight the WACC?
How is the cost of irredeemable debt to the company calculated?
How is the cost of redeemable debt to the company calculated?
How is the after-tax cost of redeemable debt calculated?
How is the cost of preference shares calculated?
How is the cost of convertible debt calculated?
How is the cost of bank debt estimated when there is no market value?
Distinguish the marginal cost of capital from the average cost of capital.
Explain the relationship between a company's cost of capital and its value.
State three assumptions of the dividend growth model when used to find the cost of equity.
Under what circumstances is it valid to appraise a project at the company's existing WACC?
What are the two components of the risk of a project that determine whether the existing WACC can be used?
State the advantage of CAPM over WACC in determining a project-specific discount rate.
Set out the steps for calculating a project-specific discount rate using CAPM.
What happens if a company appraises a low-risk project at its existing, higher, WACC?
When a project is financed by a specific source of finance, why is that source's cost not used as the discount rate?
What discount rate should be used where a project changes the company's level of gearing significantly?
According to Modigliani and Miller ignoring tax, what happens to the WACC as gearing changes?
According to Modigliani and Miller with corporate tax, what happens to the WACC as gearing increases?
State the assumptions underlying the Modigliani and Miller theory of capital structure.
Under Modigliani and Miller without tax, what happens to the cost of equity as gearing increases?
Under Modigliani and Miller with corporate tax, how is the value of a geared company related to that of an ungeared company?
Why is the Modigliani and Miller with-tax conclusion not observed in practice?
How does the traditional view differ from the Modigliani and Miller no-tax view?
What is tax exhaustion, and what is its effect on the gearing decision?
What are agency costs in the context of high gearing?
What is meant by the systematic risk of an investment?
What is meant by unsystematic risk?
The capital asset pricing model explains the relationship between the required return from an investment and which type of risk?
State the capital asset pricing model formula as it appears on the ACCA FM formulae sheet.
State the CAPM formula and explain each term.
What does a beta factor of 1 mean, and what does a beta of 0.5 mean?
Distinguish the market return from the equity risk premium in the CAPM formula.
State three limitations of the capital asset pricing model.
How does portfolio theory relate to CAPM?
What is the security market line?
What is the difference between an asset beta and an equity beta for a business?
Under what circumstances will the asset beta and the equity beta of a company be the same?
Assuming a company is geared, which is higher - the asset beta or the equity beta?
State the asset beta (ungearing) formula as it appears on the ACCA FM formulae sheet.
State the asset beta (ungearing) formula.
In the ungearing formula, why is the debt beta usually taken as zero in FM?
Why must a proxy company's equity beta be ungeared before it is used by another company?
When regearing an asset beta, which company's capital structure is used?
State two problems with using a proxy company's beta for a project-specific discount rate.
What is meant by purchasing power parity?
What is meant by interest rate parity?
State the purchasing power parity formula as shown on the ACCA FM formulae sheet.
State purchasing power parity and what it predicts.
State the interest rate parity formula as shown on the ACCA FM formulae sheet.
State interest rate parity and what it predicts.
What is four-way equivalence?
Name three causes of exchange rate fluctuations besides relative inflation and interest rates.
State two practical limitations of purchasing power parity as a forecasting tool.
What are the three types of foreign currency risk?
In Paper FM, what methods of reducing or removing foreign exchange risk are available?
What is meant by leading and lagging?
What is a forward exchange rate?
Distinguish transaction risk from economic risk.
Why is translation risk generally regarded as the least important type of currency risk?
Set out the steps in a money market hedge for a foreign currency receipt.
Set out the steps in a money market hedge of a future foreign currency RECEIPT.
Set out the steps in a money market hedge for a foreign currency payment.
Explain the difference between netting and matching.
State the key advantage of a currency option over a forward contract, and its cost.
What is the difference between fixed and floating interest rates?
What are four main reasons for differences in the interest rate quoted on loans?
What does the yield curve (term structure of interest rates) show?
What does an upward sloping yield curve signify about interest rates and time to maturity?
What is a forward rate agreement (FRA)?
What is an interest rate guarantee (IRG)?
What is gap exposure in interest rate risk?
What is basis risk?
Name the three theories explaining the shape of the yield curve.
Explain matching and smoothing as basic methods of managing interest rate risk.
Name the three main interest rate derivatives and state the examinability rule in FM.
What are the main responsibilities of a corporate treasury function?
State three advantages of a centralised treasury function.
State two advantages of a decentralised treasury function.
Distinguish a cost centre treasury from a profit centre treasury.
What is the purpose of a cash flow forecast, and name two management uses of it.
What is cash pooling?
Why should a treasury function distinguish hedging from speculation?
Which spreadsheet function is used to calculate the net present value of a series of cash flows, and what must be watched?
Which spreadsheet function returns the internal rate of return of a project, and what does it need?
Why should workings be shown in a separate part of the spreadsheet answer in Section C?
What is the advantage of building a spreadsheet model with cell references rather than typed-in numbers?
How should a discursive answer be presented in the FM computer-based exam?
Card 1 of 250. Question side.