ACCA FM cheat sheet

The three core financial management decisions are investment (which assets to acquire), financing (how to fund them) and dividend (how much profit to distribute).

Maximising shareholder wealth means maximising the present value of expected future cash flows, adjusted for risk and timing; it is not the same as maximising accounting profit.

Agency problem: managers may pursue their own goals such as empire building or excessive perks rather than shareholders' interests; monitoring, bonding and incentive schemes are responses.

Agency costs include monitoring costs, bonding costs and residual loss; they arise from the separation of ownership and control.

Shareholders and lenders conflict: shareholders prefer higher-risk, higher-return projects and higher dividends, while lenders prefer lower risk and retained cash.

Corporate governance codes typically require board independence, audit committees, separation of the CEO and chair roles, and transparent reporting.

Not-for-profit organisations pursue value for money, assessed through economy, efficiency and effectiveness, rather than shareholder wealth.

Financial management is concerned with financing, investment and liquidity; management accounting is concerned with internal planning, control and performance measurement.

Fiscal policy uses government spending and taxation; monetary policy uses interest rates and money supply to influence inflation and aggregate demand.

Money markets deal in short-term instruments with maturities up to one year; capital markets deal in long-term equity and debt.

Primary markets issue new securities; secondary markets allow investors to trade existing securities, providing liquidity and price discovery.

Financial intermediaries such as banks, pension funds and insurers channel funds from savers to borrowers and reduce transaction and information costs.

Strong-form market efficiency implies prices reflect all public and private information; semi-strong form implies all public information; weak form implies past prices only.

Purchasing power parity states that exchange rate changes reflect differences in inflation; interest rate parity states that forward premiums or discounts reflect interest rate differences.

A central bank's roles include monetary policy, lender of last resort, financial stability and oversight of the payment system.

Inflation distorts historical cost accounts; nominal cash flows must be discounted at nominal rates and real cash flows at real rates.

Working capital = current assets - current liabilities; it represents the net investment needed for day-to-day operations.

Cash operating cycle = inventory days + receivable days - payable days.

Economic order quantity (EOQ) = sqrt(2 × annual demand × order cost / holding cost per unit per year).

Cost of giving a settlement discount = [D / (100 - D)] × [365 / (N - D)], where D is the discount percentage and N is the normal credit period.

The Baumol model estimates the optimal cash balance using EOQ logic; Miller-Orr sets upper and lower cash limits for uncertain cash flows.

An aggressive working capital policy uses short-term finance for fluctuating current assets; a conservative policy uses long-term finance; matching aligns asset life with funding maturity.

Overtrading occurs when a business grows rapidly without sufficient long-term finance, leading to liquidity problems despite reported profits.

Factoring involves selling receivables to a factor; invoice discounting uses receivables as security for a loan while the company retains collection.

NPV = present value of cash inflows minus present value of cash outflows, discounted at the cost of capital; accept a project if NPV > 0.

IRR is the discount rate that makes NPV zero; accept a project if IRR is greater than the cost of capital.

Payback ignores cash flows after the payback period and the time value of money; discounted payback corrects the latter weakness.

Relevant cash flows are incremental, future and cash-based; exclude sunk costs, allocated overheads and financing costs, which are captured in the discount rate.

Tax and capital allowances affect project cash flows; operating cash flows are multiplied by (1 - tax rate), and tax savings from capital allowances are added.

Nominal cash flows are discounted at a nominal rate and real cash flows at a real rate; Fisher: (1 + nominal) = (1 + real) × (1 + inflation).

With capital rationing, rank divisible projects by profitability index = NPV / initial investment; for indivisible projects use trial combinations.

Equivalent annual cost = NPV of project / annuity factor for its life; it is used to compare assets with different lives.

Equity finance includes ordinary shares and retained earnings; debt finance includes bank loans, bonds and leases; hybrid finance includes convertibles and preference shares.

Rights issue pricing: TERP = (market value before issue + proceeds) / total shares after issue.

Gearing = debt / (debt + equity) or debt / equity; interest cover = operating profit / interest expense.

Modigliani-Miller with taxes: debt increases firm value through the tax shield, but financial distress costs offset this at high gearing.

Convertible bonds can be converted into shares at a predetermined price; their value is the higher of straight debt value and conversion value.

A finance lease transfers substantially all risks and rewards of ownership; an operating lease is short-term and cancellable; lease versus buy compares the NPV of cash flows.

Islamic finance prohibits interest (riba); murabaha is cost-plus sale, ijara is leasing, mudaraba is profit-sharing, musharaka is partnership, and sukuk are asset-backed certificates.

Crowdfunding raises funds from many small investors via an online platform; types include reward, equity, debt and donation.

WACC = (E / V) × Ke + (D / V) × Kd × (1 - T), where V = E + D; use market values where available.

Dividend growth model: Ke = D1 / P0 + g, where D1 = D0 × (1 + g).

CAPM: Ke = Rf + beta × (Rm - Rf), where beta measures systematic risk relative to the market.

Ungear equity beta: beta_a = beta_e × [E / (E + D(1 - T))]; regear for the project's gearing: beta_e = beta_a × [1 + (D / E)(1 - T)].

Cost of debt is the after-tax yield to maturity, Kd × (1 - T); for irredeemable debt, Kd = annual interest / market price.

Preference share cost = annual dividend / market price; preference dividends are not tax-deductible.

WACC assumes constant gearing and that new projects have the same business risk as existing operations.

Use a project-specific cost of capital when the project's risk differs from the company's average risk.

Net asset valuation uses assets minus liabilities; bases include book value, market value and liquidation value.

P/E valuation: value of equity = sustainable earnings × P/E ratio of comparable companies.

Dividend valuation model: equity value = D1 / (Ke - g); the model requires g < Ke.

Free cash flow to firm (FCFF) = EBIT × (1 - T) + depreciation - capital expenditure - increase in working capital.

FCFF is discounted at WACC to give enterprise value; subtract debt to obtain equity value.

Free cash flow to equity (FCFE) is discounted at the cost of equity to give equity value directly.

Synergy value = value of combined entity - (value of acquirer + value of target); it may arise from cost savings or revenue enhancements.

Private company valuations often apply a discount for lack of marketability and a control premium for majority stakes.

Transaction exposure affects specific foreign-currency cash flows; translation exposure affects reported financial statements; economic exposure affects long-term competitiveness.

Forward contracts lock in an exchange rate for a future date; futures are standardised and exchange-traded; options give the right but not the obligation to trade at a set rate.

Money market hedge: borrow in one currency, convert at spot and invest in the other currency to match the future cash flow.

Interest rate parity links spot and forward rates: the forward premium or discount reflects the interest rate differential between two currencies.

An interest rate cap limits the maximum interest cost; a floor sets a minimum; a collar combines a cap and floor to reduce the premium.

An interest rate swap exchanges fixed and floating interest payments; it manages interest rate risk without changing the underlying loan.

Netting offsets receivables and payables between group companies or counterparties; matching uses same-currency inflows and outflows.

Credit risk can be managed using credit checks, credit limits, letters of credit and the 5 Cs of credit: character, capacity, capital, collateral and conditions.