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HKICPA QP Module 5 study materials
HKICPA QP Module 5 study resources

HKICPA QP Module 5: Module 5: Corporate Finance and Investment Appraisal

HKICPA QP Module 5 · Work through your exam, one topic at a time.

All guide sections

Module 5: Corporate Finance and Investment Appraisal

Module 5 tests how you apply corporate finance to a real decision: appraising an investment, deriving the discount rate, choosing a financing mix and valuing a business - with Hong Kong regulatory overlays. Questions are scenario-based: compute the number, then justify the decision and flag the constraints that could change it.

Core rules and concepts

  • Discount incremental cash flows, not profits. Exclude sunk costs, include opportunity costs and working capital, and release working capital at project end.
  • Never subtract interest when discounting at WACC - the cost of debt already sits in the rate. Financing flows belong to the financing decision.
  • Tax: 16.5% for corporations, with 8.25% on the first HK$2 million under the two-tiered regime for qualifying corporations. The shield comes from tax depreciation allowances, not accounting depreciation.
  • WACC = E/V × Ke + D/V × Kd × (1 − t), at market values. Ke from CAPM using an Exchange Fund Note yield as the risk-free proxy, and a beta relevered from a pure-play comparable when project risk differs from firm risk.
  • Capital structure: MM with tax values the tax shield; the trade-off view adds financial distress costs; the pecking order explains observed financing behaviour.
  • HK overlay: HKEX Listing Rules Chapter 14 size tests (assets, profits, revenue, consideration, equity capital) classify an acquisition as discloseable, major or very substantial; Chapter 14A connected transactions need independent shareholders' approval and an IFA opinion. Cap. 622 governs buy-backs, capital reductions and distributions.

Worked example

Outlay HK$50m, four-year life, tax depreciation straight-line over four years, year-1 revenue HK$40m, cash operating costs HK$18m, working capital HK$5m now, released at year 4, tax 16.5%, WACC 10%.

Annual operating cash flow = (40 − 18 − 12.5) × (1 − 0.165) + 12.5 = HK$20.43m. PV of four years at 10% = 20.43 × 3.1699 = HK$64.77m. PV of working capital release = 5 × 0.6830 = HK$3.42m. NPV = 64.77 + 3.42 − 50 − 5 = HK$13.2m. Positive, so accept; the IRR comfortably exceeds 10%.

Traps that cost marks

  • Deducting interest and also discounting at WACC - double counting the cost of debt.
  • Using book value weights or the coupon rate instead of market values and market yield.
  • Mixing nominal cash flows with a real discount rate, or a HK$ rate with foreign-currency cash flows.
  • Treating depreciation as a cash outflow and then adding a tax shield - the shield is already the only depreciation effect.
  • Recommending "proceed" while ignoring the Listing Rules timetable: a very substantial acquisition needs shareholder approval and a circular, which can break the completion deadline.