December 2016 Question # 1 - Summary points BY TAHA POPATIA

Answer # 1 (a)

 Shareholders are expected to accept a reasonable level of risk in order to generate returns in
excess of the risk free rate of return.
 Business risk is the exposure a company has to factors that will lower its profits or lead it to fail.
It depends on the decisions a business makes with respect to the services and products it offers
and consists of the variability in its profits. For example, it could be related to the demand for its
products, the rate of innovation, actions of competitors, etc.
 Financial risk relates to the volatility of earnings due to the financial structure of the business
and could be related to its gearing, the exchange rate risk it is exposed to, its credit risk, its
liquidity risk etc.
 A business exposed to high levels of business risk may not be able to take excessive financial risk,
and vice versa, as the shareholders or owners may not want to bear risk beyond an acceptable
level.
 Risk management involves the process:
o Of risk identification.
o Of assessing and measuring the risk through the process of predicting, analysing and
quantifying it.
o And then making decisions on which risks to assume, which to avoid, which to retain and
which to transfer.
 Risk mitigation is the process of transferring risks out of a business through, for example,
hedging or insurance, or avoiding certain risks altogether.
 Risk diversification is a process of risk reduction through spreading business activity into
different products or services, different geographical areas and/or different industries to
minimise being excessively exposed by focusing exclusively on one product/service.

Answer 1(b)

Report to the board of directors, Morada Co

Introduction

(First para of report must explain purpose of the report)

Discussion

(Over here discuss the main requirement of the question, write short paragraphs and refer appendix
where necessary)

Assumptions

 Assumed that beta asset is weighted average of the asset betas of each division
 Assumed that share price remains unchanged
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 December 2016 Question # 1 - Summary points BY TAHA POPATIA
 Assumed that current assets will change due to changes in profit after tax figure

Recommendation

(Write a short paragraph about conclusion / recommendation)

Report compiled by:

Date:

Answer 1(c)

 The proposals suggested by the first and second directors are likely to change the make-up of
the company, and cause uncertainty amongst the company’s owners or clientele. This is turn
may cause unnecessary fluctuations in the share price.
 The risk management process should be undertaken with a view to increasing shareholders
wealth.
 Frequent, non-controllable and /or severe risks should be eliminated. On the other where
company is of the opinion that it has a comparative advantage or superior knowledge of risks,
and therefore it is better able to manage them, it may come to the conclusion that it should
accept these. For example, it may take the view that is able to manage events such as flight
delays or hotel standards, but would hedge against currency fluctuations and insure against
natural disasters due to their severity or non-controllability.

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 December 2018 Summary points BY TAHA POPATIA
Question # 1 – mergers and acquisitions

(A) Management Buy-Out and Management Buy-In

 MBO involves the purchase of a company by the management running the company.
 MBI involves selling a company to a management team brought in from outside the company.
 MBI is preferred when there is a need of a team with skills and expertise gained externally.
 MBI also preferred when current management team had disagreements in the past.

(B) Portfolio restructuring and organisational restructuring

 Portfolio restructuring involves the acquisition of companies, or disposal of assets, business

units and/or subsidiary companies through divestments, demergers, spin-offs, MBOs and MBIs.
 Organisational restructuring involves changing the way a company is organised. This may
involve changing the structure of divisions in a business, business processes and other changes
such as corporate governance.
 A company, in going from a conglomerate business to one focusing on just two business areas,
can be seen as restructuring its portfolio.
 Shareholders who are closely linked to a particular business do not hold diversified investment
portfolios, and therefore benefit from diversification of risk undertaken by a company, investing
in many different areas.
 Institutional shareholders and other shareholders, who hold diversified portfolios, would not
benefit from a company undertaking risk management through diversification by becoming a
conglomerate.

(C) Computational

(D) Initial Public Offer and Reverse Takeover

 Initial Public Offer:

o conventional way to obtain listing
o follow the normal procedures and processes required by the stock exchange
o compliance with the regulatory requirements
o Expensive as it involves banks, lawyers and experts
o Takes much longer time
o No guarantee that IPO will be successful
o
 Reverse takeover:
o BOD of company willing to obtain listing initially take control of a shell company (listed
company) by buying some shares in that company and taking over as its BOD.
o The shell company was probably a normal listed company previously, but is no longer
trading.

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 December 2018 Summary points BY TAHA POPATIA
o New equity shares in the listed company would then be exchanged for the shares of
company willing to get listed, with the external appearance that the listed company has
taken over the company willing to get listed.
o In reality, the company has now effectively got a listing, having taken control of the
listed company, the name of the original listed company is also normally changed.
o Cheaper
o Takes less time
o The listed shell company may have potential liabilities which are not transparent at the
outset, such as potential litigation action.

Question # 2 – Foreign currency hedging

(A) Computational

(B) Forward contracts

 No premium payment.
 Gives a certain receipt for the purpose of budgeting.
 Contract has to be fulfilled, even if the transaction which led to the forward contract being
purchased is cancelled.
 No advantage to the holder of favourable exchange rate movements.

Reasons why exchange-traded derivatives are used

 Contracts can be bought and sold as required.

 Markets are regulated by an exchange, counterparty risk (the risk of the other party to the
transaction defaulting) should be minimised.

(C) Mark-to-market process

 Process begins with company having to deposit an amount (the initial margin) in a margin
account with the futures exchange when it takes out the futures.
 The margin account will remain open as long as the futures are open.
 The profit or loss on the futures is calculated daily and the margin account is adjusted for the
profit or loss.
 Maintenance margin it the minimum balance which has to be maintained on the margin
account.
 If the account balances reduces below maintenance margin, the exchange will make demand for
an extra payment to increase the balance on the account.

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 December 2018 Summary points BY TAHA POPATIA
Question # 3 – Adjusted Present Value

(A) Computational

(B) Long term finance policy to be adopted and the factors which may cause policy to change

 Risks:
o Not being able to maintain the required level of payment to finance providers
 Interest to debt providers
 Required level of dividend to shareholders
 Advantages:
o Lower costs of debt
o Tax relief on finance costs
o No legal requirement to pay dividend
 Board may consider using pecking order theory, retained earnings, then debt, then equity.
 Board may prefer this on the grounds that avoiding a new equity issue means that the
composition of shareholdings is unchanged.

Changing long-term financing policy

 A major change in the scope of the operations, with investment requirements being paramount,
may cause a change in financing policy.
 A company may have chosen solely to use debt if it has made a recent equity issue and does not
feel it can make another one so soon afterwards.
 The board may also be flexible at times and take advantage of whatever source of finance seems
to be offering the best terms for the company.
 A change in the business or economic environment may also lead to the board rethinking how
the company is financed. An economic recession, leading to falling share prices, may mean that
the results of a share issue are uncertain.

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 December 2019 Summary points BY TAHA POPATIA
Question # 1 – Adjusted present value and duration

(A) Why a company may prefer adjusted present value rather than the net present value method

 APV separate out a project’s cash flows and allocates a specific discount rate to each type of
cash flow, dependent on the risk attributable to that particular type of cash flow. NPV discounts
all cash flows by the average discount rate attributable to the average risk of a project.
 Using APV, company is able to determine how much value is being created by the investment
and how much by the debt financing.

(B) Report to the board of directors (BoD), Okan Co.

Introduction

Evaluation

Financing

Project return and risk

Justification

Report compiled by:

Date

Appendices

(C) Economic risk and its management

 Companies face economic exposure when their competitive position is affected due to
macroeconomic factors such as changes in currency rates, political stability, or changes in the
regulatory environment.
 In the case of Okan Co’s subsidiary company, economic risk may have occurred because interest
rates have been kept at a high level, causing the original parity conditions to break down.
 Tactics such as borrowing in international or Eurocurrency markets, sourcing input products
from overseas suppliers and ultimately shifting production facilities overseas can help manage
exposure to economic risk

(D) How each category of risk may be managed.

 Severe and frequent: immediate action needed. Avoiding certain actions or abandoning certain
projects, even if they could be profitable in the long term.

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 December 2019 Summary points BY TAHA POPATIA
 Not severe but frequent: Action needs to be taken so that such risks do not become severe in
future. Putting systems in place to detect these risks early and plans to deal with them if they do
occur.
 Severe but not frequent: Insure against these risks. Contingency plans could also be put in place
to mitigate the severity.
 Neither severe nor frequent: Monitored and kept under review. Monitoring such risks will
ensure that should they move out of this category into the more severe/frequent categories, the
company can start to take appropriate action.

Question # 2 – Dividend capacity and dividend policy

(A) Computational

(B) Computational and comments from analysis

(C) Theoretical answer based on scenario given

Question # 3 – Mergers and Acquisitions

(A) Possible sources of financial synergies and comment on the finance director’s concern that
synergy is often overestimated, including any steps which could be taken by Kerrin Co’ s board to
address this problem

 Possible sources of financial synergy:

o Target facing funding constraint whereas acquirer has significant cash reserves.
o Reduction in volatility of earnings, assuming cash flows of both companies are less than
perfectly correlated. This increases debt capacity.
o One company is able to utilise others unrelieved tax losses.
o Target is a privately owned company and the shareholders are therefore exposed to
diversifiable unsystematic risk. Therefore the acquisition may lead to potential
diversification and risk reduction benefits, leading to reduction in cost of capital and
increase in the value of the combined company.
 Overestimation of synergy value:
o Competition for targets increases acquisition premium.
o Deal advisers such as investment banks earn a large proportion of their fees from
mergers and acquisitions, their advice on whether an acquisition makes sense is
potentially biased if they do not look after their client’s interests.
o Management overconfidence in valuation and reluctance to admit mistakes when the
fact change, even when there is still time to back out of the deal.
o Difficulties in integrating companies due to different work cultures.
 Steps to address this problem:

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 December 2019 Summary points BY TAHA POPATIA
o Allocate responsibility to someone to ensure spare cash is utilised to invest in new
growth opportunities, that tax losses are offset and that the combined company avails
itself of cheaper financing.
o Effective due diligence ensures the financial documents which form basis of a valuation
are scrutinised and inspected.

(B) Computational

(C) Cash or share-for-share offer

 Cash offer:
o Provides target company shareholders with a certain and immediate return.
o However the premium is lower for target company shareholders as compared to share
for share offer.
o No dilution of control for existing shareholders of acquirer.
o Cash outflow for the acquirer.
 Share for share:
o Dilution of control for existing shareholders.
o Target company shareholders get the right to participate in the future growth of larger
company.

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 December 2020 Question # 1 - kingtim company
Question # 1

(A) – Feasibility and effectiveness of the defence strategies

Sell-off of garden centres

 This technique is known as selling the crown jewels.

 This involves selling some assets the company desires the most.
 This deters some acquirers looking to buy the company.
 Company can take this option if it is able to sell off individual centres without jeopardising its
overall existence.
 However if no particular use is made of the cash raised from the sales, the company would still
remain a tempting takeover target due to its cash surpluses.
 The surplus fund can be returned to shareholders as one-off dividend

Enhanced directors’ remuneration and contracts

 This would represent an increased burden for acquirers, either the costs of honouring them, or
the cost and the time involved in terminating the directors’ employment and compensating
them.
 This burden may deter acquirers, particularly if the decision to acquire is marginal.
 Corporate governance aspects are also important. As a listed company, Kingtim should have a
remuneration committee made up of non-executive directors, who should be reviewing the
executive director’s remuneration packages


(B)

Report to the board of directors, Kingtim co.

Introduction

(Inform users about content of report)

Cost of capital

 Two impacts on weighted average cost of capital:

o Cost of equity increased due to increased business risk and financial risk raising cost of
capital
o Higher proportion (Percentage of debt as compared to capital employed) of debt, with
lower cost than cost of equity and also being tax-deductible lowering cost of capital
 Overall, weighted average cost of capital has increased

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 December 2020 Question # 1 - kingtim company
Assumptions

 The asset beta used for the outdoor shops is a representative beta for similar companies and
may not be accurate for kingtim co.
 The weighting used for asset betas is the non-current assets in each business, which is assumed
to approximate to the size of each business.
 The share price and price of the existing bonds are assumed to remain unchanged when the new
investment is made.

Equity holders

 Returns from new investment may be considered insufficient comparing it with current returns
of 16% on the existing garden centres.
 Concerned about increased business and financial risk.
 Concerned about restrictive covenants attached to the new bonds that affect payment of
dividends.
 Some shareholders may sell their shares due to above concern leading to fall in share prices.

Bond holders

 Concerned about companies’ ability to meet its interest and repayment commitments.

Conclusion

(Conclude above discussion)

(C)

Approach taken

 Approach has business logic. Staff is paid according to their expertise, experience, seniority and
commitment.
 Company has duty to increase wealth of shareholders.
 There is a stakeholder conflict, as increasing the wages would lead to lower profits and lower
money available for distribution to shareholders.

Issue with approach

 Although the basic wage is not legally enforceable, it does represent society’s expectations
about what employees should be paid.
 Directors are given more lucrative contracts as a takeover defence mechanism, this undermines
the argument for limiting staff costs in order to maintain shareholders returns.

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 December 2020 Question # 2
(b) Strategies to avoid a block on dividend remittance

 Increase transfer price paid

 Levy a management charge or royalty
 Make a loan to subsidiary, at high interest rate

(c) Validity to adjust discount rate

 Investment does not involve change in business risk or capital structure

 Chief executive has incorporated other factors, such as political risk and foreign exchange
risk in determining premium
 Any uncorrelated risk across different markets can be diversified away at no cost to
investors
 No rational investor would pay a premium for risk that can be avoided
 Institutional investors are well diversified across global markets and asset classes
 Only component of total risk that could justify a premium to cost of capital is market risk
or undiversifiable risk

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 December 2020 Question # 3
Question # 3

(A) – Computations

(B)

Advantages of interest rate swaps compared with collars

 Swaps are over the counter arrangements; they can be arranged in any size whereas the amount
covered by collars based on traded options is determined by the size of the option contract.
There may be over or under hedging.
 Traded options available may last for a short period, lesser maybe than the period of the loan.
Swaps can be arranged for a much longer period.

Disadvantages of interest rate swaps compared with collars

 Swaps are subject to counterparty risk (not generally the case if a bank arranges the swap).
 As company is swapping into a fixed rate commitment, it cannot take advantage of favourable
interest rate changes as it could, to some extent, if it uses collars.

(C)

Significance of the time until expiry in the context of option valuation

 An option’s price consists of two elements, its intrinsic value and its time premium. The time
premium diminishes over time to zero at the point that the option expires.
 Theta measures how much time value is lost over time. It is generally expressed as an amount
lost per day. Theta reduces the value of both put and call options for holders.

Significance of interest rate in the context of option valuation

 Rho measures how the option price varies with changes in interest rates. An option’s rho is the
amount of change in value for a 1% change in the option’s risk free interest rate.
 The rho is positive for call options if the risk-free interest rate increases and negative for put
options.

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 December 2021 Question # 1 summary points BY TAHA POPATIA
Question # 1

(a)

Post-completion audits

 It is a part of monitoring and appraising capital investment projects.

 Compares actual income, costs and timing of projects against budgets.
 It can be a useful learning tool to manage projects more effectively and efficiently in the future.

Fixed discount rate

 A fixed discount rate to appraise new investment projects can be ineffective when a decision is
being made whether or not to undertake the project.
 This is because projects will have different risks attached to them and therefore the returns
required from these projects would differ.
 This could result in low-risk projects being rejected which could have added to company’s
corporate value, and high-risk projects being accepted which could reduce corporate value.

New project finance

 Debt finance many advantages such as tax benefits. Issuing debt finance can also be seen as a
sign of confidence that the company can fulfil its interest payment commitments, and can
therefore be considered to be stable and less risky by investors.

(b)

Report to the board of directors (BoD)

Introduction

 (Write basic requirement of the question)

Evaluation

 (refer working and explain with reference what is good for the company)
 (mention that sensitivity analysis can be undertaken to assess the impact of changes in the input
variables instead relying solely on the results obtained)

Assumptions

 It is assumed that the asset beta, representing a suitable proxy for the business risk of
environmentally friendly motor scooters, can be computed and used to estimate the all-equity
financed discount rate.
 It is assumed that all input variables are known with certainty or reasonable accuracy.

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 December 2021 Question # 1 summary points BY TAHA POPATIA
 It is assumed that the interest rates of the subsidised loan and the corporate tax rates remain
unchanged for the period of the project.
 In the computations, debt beta is assumed to be zero, although in practice, corporate debt is not
free of default risk.

Adjusted present value or net present value

 With NPV, future cash flows are discounted using average cost of capital. However the discount
rate often does not take into account the changing business risk or the changing financial risk.
 APV method will provide significantly more information about the sources of value and also
about the different levels of risk applicable to different cash flows. APV method considers the
risk elements separately and considers the cash flow impact of each. It also assigns a suitable
cost of capital which is relevant to each cash flow (for example, the ungeared cost of equity to
base case NPV and the cost of debt to the financing side effects).

Conclusion

 (write a conclusion based on your findings)

Report compiled by:

Date

(c)

Debt finance or asset securitisation

 Conventional debt finance would raise an initial borrowed amount, on which company will pay
interest and make capital repayments as required.
 When using asset securitisation, the borrowing aspect for company is similar in terms of
repayments of interest and capital. The main differences are the bases on which the borrowing
takes place.
 Lenders of conventional debt would probably impose restrictive covenants and require a charge
to be placed on specific assets or a pool of assets.
 Asset securitisation is converting non tradable assets into tradable securities. For example
converting the future rental income into an asset and transferring it to a special purpose vehicle.
The SPV will borrow funds on the basis of the asset. Rental income obtained is used to pay
interest and capital over a specified time period.
 Asset securitisation is an expensive to undertake process in comparison to borrowing debt.

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 June 2016 Summary points BY TAHA POPATIA
Question # 1

(a)

Purchasing power parity and economic pressure

 Purchasing power parity predicts that the exchange rates between two currencies
depend on the relative differences in the rates of inflation in each country.
 If one country has a higher rate of inflation compared to another, then its currency is
expected to depreciate over time.
 Economic exposure refers to the degree by which a company’s cash flows are affected by
fluctuations in exchange rates. It many also affect companies which are not exposed to
foreign exchange transactions, due to actions by international competitors
 If PPP holds, then companies may not be affected by exchange rate fluctuations, as lower
currency value can be compensated by the ability to raise prices due to higher inflation
levels. This depends on markets being efficient.
 However, a permanent shift in exchange rates may occur, not because of relative
inflation rate differentials, but because a country lose their competitive positions. In this
case the “law of one price” will not hold, and prices readjust to a new and long-term or
even permanent rate.

(b)

Discussion paper

Discussion paper to the board of directors (BoD), Lirio Co

Discussion paper compiled by

Date

Purpose of the discussion paper

The purpose of the discussion paper is:

(i)

(ii)

Background information

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Project assessment

Possible issues

(Highlights issues)

Areas for further discussion by the BoD

(What needs to be discussed for which type of issue)

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 June 2017 – Question # 1 – reverse takeover and ipo - Summary points BY TAHA
POPATIA
Question # 1

(a)

 A reverse takeover enables a private, unlisted company, to gain listing on the stock exchange
without needing to go through the process of an initial public offer (IPO).
 Steps:
o The private company merges with a listed “shell” company.
o The private company initially purchases equity shares in the listed company and takes
control of its board of directors.
o The listed company then issues new equity shares and these are exchanged for equity
shares in the unlisted company, thereby the original private company’s equity shares
gain a listing on the stock exchange.
o Often the name of the listed company is also changed to that of the original unlisted
company.

Advantages of reverse takeover relative to an IPO

 Quick process
o An IPO takes a long time because it involves preparing a prospectus and creating an
interest among potential investors
 Less cost
o An IPO is expensive due to involvement of various parties, such as investment banks, law
firms etc.
 Success ratio
o In periods of economic downturn, recessions and periods of uncertainty, an IPO may not
be successful.

Disadvantages of reverse takeover relative to an IPO

 Liabilities
o The shell listed company being used in the process may have hidden liabilities.
 Lack of expertise
o The senior management of an unlisted company may not have the expertise and/or
understanding of the rules and regulations which a listed company needs to comply with.
The IPO process involves greater involvement from external experts

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 June 2017 – Question # 3 – Currency swap - Summary points BY TAHA POPATIA
Question # 3

(a)

The currency swap will involve Buryecs Co. taking out a loan in Euros and making an arrangement with a
counterparty in Wirtonia, which takes out a loan in $. Buryecs Co will pay the interest on the
counterparty’s loan and vice versa.

Advantages

 Payment of interest in $ can be used to match the income Buryecs Co. will receive from the rail
franchise, reducing foreign exchange risk.
 Company will be able to obtain the swap for the amount it requires. Other methods of hedging
may be less certain. The cost of a swap may also be cheaper than other methods of hedging,
such as options.

Drawbacks

 The counterparty may default. This would leave Buryecs Co. liable to pay interest on the loan in
its currency. The risk of default can be reduced by obtaining a bank guarantee for the
counterparty.
 Buryecs Co is swapping a fixed rate commitment in the Eurozone for a floating rate in Wirtonia.
Inflation is increasing in Wirtonia and there is a risk that interest rates will increase as a result,
increasing Buryecs Co’s finance costs.
 If the government decides to impose exchange controls in Wirtonia, Buryecs Co. may not be able
to realise the receipt at the end of Year 3, but will still have to fulfil the swap contract.

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 June 2018 Summary points BY TAHA POPATIA
Question # 1 – mergers and acquisitions

(A)

 Diversifying in different business lines increases shareholder’s value and decreases risk if the
shareholder’s investment is concentrated in one company. The diversification will reduce
unsystematic risk for them.
 Institutional shareholders are likely to be well-diversified and therefore not exposed to
unsystematic risk.
 Company can also focus on one core business and increase value through identifying areas of
synergy benefits:
o Acquiring a company with ineffective management and replacing the existing
management.
o Acquiring a company which have strategic assets or product pipelines and are not
exploiting these fully.
o Acquiring a company in same line of business to achieve economies of scale.

(B)

 Net present value assumes that an investment needs to be taken on a now or never basis, and
once undertaken, it cannot be reversed.
 Real options take into account the fact that in reality, most investments have within them
certain amounts of flexibility:
o Undertake the investment immediately or delay the decision.
o Follow on opportunities
o Cancel an investment opportunity after it has been undertaken
This flexibility has value, known as the time value of an option
 Net present value captures just the intrinsic value of an investment opportunity, whereas real
options capture both the intrinsic value and the time value, to give an overall value of an
opportunity.

(C)

Report to the board of directors (BoD), Chikepe Co.

Introduction

Conclusion

Report compiled by:

Date

APPENDICES:
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 June 2018 Summary points BY TAHA POPATIA
Appendix 1 (Part (c) (i)): Foshoro Co, estimate of current value

Appendix 2 (Part (c) (ii)): Estimate of value created from combining Chikepe Co and Foshoro Co

Appendix 3: Synergy benefits and their distribution

Limitations of valuation method

 Assumptions and estimations for valuation:

o Future growth rate of free cash flows is based on past growth rates and it is assumed
that this will not change in the future.
o It is not explained how target company’s cost of capital is calculated/estimated. Such an
estimate may be more difficult to make for private companies.
o The assumption of perpetuity is made when estimating the values and this may not be
valid.
 The cost related to the acquisition process would need to be factored.
 Basis for synergy benefits such as higher growth rates of sales revenue and profit margins needs
to be explained and justified

(D)

Mandatory bid rule and principle of equal treatment are designed to ensure that the minority
shareholders are protected financially and are not exploited by the acquirer

Mandatory bid rule

 Provides minority shareholders with the opportunity to sell their shares and exit the target
company at a specified fair share price.
 This price should not be lower than the highest price paid for shares, which have already been
acquired within a specified period

Principle of equal treatment

 Requires the acquiring company to offer the same terms to minority shareholders as were
offered to the earlier shareholders from whom the controlling interest was acquired.

Purpose of poison pills and disposal of crown jewels is to make the target company unattractive to
the acquirer

Poison pills

 Give existing shareholders in the target company the right to buy additional shares in their
company at a discount once the acquiring company has bought a certain number of shares in
the target company.

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 June 2018 Summary points BY TAHA POPATIA
 The aim is to make the target company more expensive to purchase, as the acquirer needs to
buy more shares in the target company.

Crown Jewels

 Selling the target company’s most valuable assets, and therefore making the target company
less attractive to the acquirer.
 Disposing of key assets could substantially weaken a company’s competitive advantage and
therefore its future potential.

Question # 2 - Adjusted Present Value

(A)

 Calculate Base Case Net Present Value using ungeared cost of equity, with the assumption that
project is 100% financed with equity.
 Adjust financing side effects:
o Issue costs of debt
o Present value of tax shield on loan
o Subsidy: Benefit due to reduced tax rate and tax relief lost

(B)

Advantages of convertible loan notes

 Directors are subscribers as well, demonstrating their commitment to the company.

 Conversion terms also mean that the loan notes will not necessarily have to be repaid.

Drawbacks of convertible loan notes

 Treated as debt, increasing gearing, which may concern the other shareholders.
 Interest to be paid.
 Option to convert may also change the balance of shareholdings.

Question # 3 – Dividend policy

(A)

 Computational part

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 June 2018 Summary points BY TAHA POPATIA
(B)

(i)

 The new policy will ensure that Arthur Co. will have sufficient funds to pay the required level of
dividends.
 Arthur Co. is taking up almost all of post-tax earnings of Bowerscots Co. as dividend. Bowerscots
Co. operates in a highly competitive environment and a slight fall in it’s earnings will mean that
the dividend will not be availalble.
 The amount of investment Bowerscots Co. can undertake with the reduced funds available may
be insufficient to sustain earnings levels and hence dividends to Arthur Co.
 An increase in dividends will mean an increase in withholding tax.

(ii)

 An agency relationship exists when one party, the principal, employs another party, the agent,
to perform a task on their behalf.

Problems

 The policy limits the discretion of Bowerscots Co’s management by restricting the amounts of
retained funds available.
 Arthur Co. may wish to oversee Bowerscots Co more closely, given the dependence of its
dividend capacity on the amount received from the subsididiary. Increased supervision will
involve increased agency costs in terms of time spent by Arthur Co’s management.
 New policy threatens remuneration of Bowerscots Co’s management, as the limited funds
available for investment will adversely affect the company’s ability to maintain its profit levels.

Resolving agency problems

 Making remuneration less dependent on Bowescots results. However by weakening the link
between results and remuneration, it lessens their incentive to strive to produce the results
needed to maintain the required level of dividend.
 Bowerscots Co’s management team should have the opportunity to make a case for retaining a
greater percentage of funds, as they may have better investment opportunities than those
available to the parent.

Question # 4 – Foreign Currency Risk and Multilateral Netting and Transfer Pricing

(A)

 Computational part

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 June 2018 Summary points BY TAHA POPATIA
(B)

(i)

 Computational part

(ii)

Advantages of multilateral netting by a central treasury function

 Coordination of information about inter-group balances.

 Smaller number of transactions, which will mean lower commission and transmission costs.
 Foreign exchange rates available may be more advantageous as a result of large transaction
sizes resulting from consolidation.

(C)

Market-price system of transfer pricing

 Enables a fair assessment of both the buying and selling divisions.

 There are certain cost savings due to internal sales which must be shared between buying and
selling division on a fair basis.
 If the selling division has spare capacity, selling at incremental costs rather than market price
provide greater certainty that the buying division will use the selling division.
 Less intervention is needed by central department, however even in case of market-price based
system the central department may have to intervene to set a market price if the product is such
that its market price is difficult to determine or it fluctuates widely. Also, intervention is needed
for fair distribution of expenses saved due to internal sales.

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 June 2019 Summary points BY TAHA POPATIA
Question # 1 – Real Options and Net Present Value

(A) Incorporating real options into net present value decisions

 Net present value assumes that a decision must be

o Made immediately or not at all, and once made,
o It cannot be changed.
 Real options, on the other hand, recognise that many investment appraisal decisions have some
flexibility. Such as:
o Decisions may not have to be made immediately and can be delayed to assess the impact
of any uncertainties or risks attached to the projects.
o Once a decision on a project has been made, it can be changed, if circumstances
surrounding the project change.
o There can be potential future opportunities, if the initial project is undertaken.
 Real options help to assess the additional value attributable to such flexibility.
 By incorporating the value of any real options available into an investment appraisal decision,
company will be able to assess the full value of a project.

(B) Report

Report to the board of directors (BOD), Talam Co.

Introduction

Assessment

Assumptions

 Assumed that Honua Co.’s asset beta would provide a good approximation of the business risk
inherent in drone production.
 Assumed that all variables such as inflation rates, tax rates, interest rates and volatility figures,
remain as forecast through the period of each project.
 BSOP model assumes:
o That the volatility or risk of the underlying asset can be determined accurately and
readily.
o That a market exists to trade the underlying project or asset without restrictions.
 Real option assumes that any contractual obligations involving future commitments made
between parties will be binding, and will be fulfilled.

Conclusion

Report compiled by:

Date
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 June 2019 Summary points BY TAHA POPATIA
Appendices:

(C) Sustainability and Ethical issues

 Moving production to Dunia will presumably lower the cost and allow Talam to reduce selling
prices, making product more affordable.
 This may impact negatively on Talam co’s stated aim of maintaining high ethical standards.
 Company can suffer from long-term loss of reputation, and this may cause substantial and
sustained financial damage to the company.
 Company could consider moving to another location, if this was feasible.
 If after taking into consideration all factors, Talam concludes to contine in Dunia, it would need a
sustained public relations campaign to defend its position and demonstrate how it ensures that
the teenage children have not been exploited, but are gainfully employed and receiving a good
education to help them progress in life.

Question # 2 – Interest rate hedging

(A) Computational

(B) Advantages and Disadvantages of using swaps

Advantages

 Swap of variable rate to a fixed rate allows forecasting finance costs on the loan with certainty.
 Swaps are over the counter arrangements. They can be arranged in any size and for whatever
time period is required, unlike traded derivatives.

Disadvantages

 Swaps are subject to counterparty risk. If it is arranged through a bank, the bank can provide a
guarantee that the swap will be honoured.
 As swaps are over-the-counter instruments, they cannot be easily traded or allowed to lapse if
they are not needed or become no longer advantageous.

(C) Work carried out by treasury department

 Less experiences staff may lead to a sub-optimal decision making.

 Senior staff are also needed to manage the work of less experienced staff to prevent or mitigate
the effect of mistakes which may be costly.
 Experienced staff will also have greater knowledge of law, accounting standards and tax
regulations, which can help the business to avoid penalties and perhaps structure its dealings so
that it can, for example, minimise the level of tax paid.

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 June 2019 Summary points BY TAHA POPATIA
Question # 3 –mergers and acquisitions, demerger, change in wacc

(A) Advantages and Disadvantages of demerger

Advantages

 The new company’s management will have the ability to determine the finance structure which
best suits the new business.
 Newimber Co’s shareholders will continue to own both companies. If shareholders are
concerned about the diversification of their portfolio, this will remain unchanged.
 The demerger may allow Newimber Co’s management team to focus on the formal clothing
division.

Disadvantages

 There will be legal costs associated with the demerger.

 Setting up new structure will take up a lot of management time.
 Both companies may suffer adverse effects through being smaller entities, for example
economies of scale may be lost.
 Rise of overheads as each company will need its separate infrastructure and service
departments.

(B) Computational

(C) Factors which may determine the policies that Poynins Co should adopt for communication of
information to its shareholders and other significant stakeholders

 Investors are likely to be particularly interested in:

o How future strategies for Poynin may differ from those which have been pursued
recently.
o Risk management policies.
o Changes in finance policy, particularly if dividend policies are likely to differ.
 Directors will also have to be mindful of the need to communicate what their plans, are to other
important stakeholders:
o Employees: changes in working conditions.
o Suppliers: changes to payment arrangements.
 Directors will have to consider if, and how, they use integrated reporting. Although they are not
bound to prepare integrated report but as Newimber Co is going to do so, Poynin will have to
follow it as otherwise it may suggest to investors that the directors are not keep to disclose
information about how the business is using its resources and maintaining relationships.

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 June 2021 Question # 1 Summary points BY TAHA POPATIA
Question # 1

(a) Need for regulatory framework related to mergers and acquisitions to protect interest of
shareholders and other stakeholders

 To ensure that the interests of stakeholders are protected

 It aims to establish that shareholders of the target company are not affected negatively by
ensuring that:
o Minority shareholders’ rights are protected
o Target company’s management cannot block a M&A where it is in commercial and
economic interest of shareholders; and
o Sufficient time is made available for a proposal to be properly scrutinised
 With respect to other stakeholders, the aim of the regulatory framework is to ensure that there
is not a substantial lessening of competition after the M&A has taken place.

(b) Proposition # 1 (proposition – a statement or assertion that expresses a judgement or opinion) – A

company should maximise its debt financing

 The first proposition posits (put forward as fact or as a basis for argument) that since debt is
cheaper than equity and there is a “tax shield” attached to debt finance, it is better for a
company to be financed by as much debt as possible
 This is the view presented by Modigliani and miller with taxes model
 Since interest is paid before a company pays corporation tax, but dividends are not, a company
does not have to pay taxes on profits used to pay interest, this is referred to as tax shield
 The presence of tax shield results in the cost of capital reducing as the proportion of debt
financing increases

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 June 2021 Question # 1 Summary points BY TAHA POPATIA
Proposition # 2 – Too much debt can be harmful to a company and there needs to be a balance
between equity and debt financing

 Although debt carries with it the advantage of a tax shield, at high levels of gearing this position
no longer holds true
 Here, financial risk increases significantly and the company experiences increasing levels of
financial distress, resulting in the cost of equity increasing significantly
 This overrides benefits gained from tax-shield. As a result, the cost of capital increases
 At very high levels of gearing, even the cost of debt starts to increase significantly

(c) Report to the board of directors, Lahla co.

 On purely financial grounds, share-for-share offer gives a higher return compared to the
demerger and hence this is the best option for Kawa co’s shareholders
 The value estimates are based on predicted variables, it is likely that there will be changes to the
actual variables, and it is recommended to undertake sensitivity analysis
 In case of share for share exchange acquisition:
o Kawa company shareholders will become part of a larger company with interests both in
hotels and coffee shops
o Kawa company shareholders will own approximately 36% shares. As such, they may feel
that they do not have sufficient influence in the major decisions the company makes
therefore they may be of the opinion that operating as a stand-alone demerged
independent company may give them a better opportunity to shape the company’s
strategy
o Kawa company shareholders cannot be certain whether 26.7% additional value is realistic
or not.
o Lahla is an unlisted company and exit from company for kawa shareholders must be a
concern

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 June 2021 Question # 1 Summary points BY TAHA POPATIA
REPORT FORMAT

Heading
Introduction
Conclusion
Report compiled by
Date
Appendices

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 June 2021 Question # 3 Summary points BY TAHA POPATIA
Question # 3

(b) Advantages of exchange-traded options

 Price and contract details are readily available

 Can be sold any time before expiry, it may not be possible to sell over-the-counter options
 Less risky, due to regulations by exchange. The exchange also requires participants to set up an
initial margin, so that counterparty risk should not be a problem

Disadvantages of exchange-traded options

 Contract size and maturity date are fixed

 Subject to hedge inefficiencies if the exact amount being hedged is not matched by the option
contracts

(c) Role of treasury function in relation to the management of economic risk

 Economic risk is the long-term risk that the present value of future cash flows may be increased
or reduced by exchange rate movements
 Treasury function needs to identify the cash flows which may be affected by exchange rate
movements
 Treasury function must also identify the factors affecting exchange rate movements in the
longer term and assess what their impact is likely to be
 One aspect of economic risk management is matching any assets held in a foreign country with a
loan in that country’s currency. The treasury function will determine the suitability of borrowing
abroad and the best possible arrangement if foreign currency loans are required
 Economic risk can also be managed by diversifying customer, supplier and operational bases and
changing pricing policy

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 March 2020 Summary points BY TAHA POPATIA
Question # 2

(a) Rationale for hedging policy

 M and M framework states hedging policy is irrelevant, where markets are efficient and
information symmetrical, hedging creates no value if shareholders are well diversified.
 However, in real world where market imperfections exist, hedging protects shareholder value
by avoiding the distress costs associated with potentially devastating foreign exchange
fluctuations.

Communication of policy with stakeholders

 A well communicated hedging strategy allows debt providers to make informed decisions
about company’s ability to service its debt.
 A consistent hedging policy reduces the risks faced by employees which may serve to
benefit company in the form of motivational and productivity improvements.
 Well communicated hedging policy to suppliers increases their belief that their claims will be
honoured by the company and hence they may invest in production systems which create
value in the form of lower costs.
 Well communicated hedging policy to customers increases their belief that the promises of
high quality and after-sales service levels will be fulfilled by the company.

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 March / June 2023 Question # 3 – Mergers and Acquisitions
3(a)

 Blackbosca has access to data from its home market, which can be used to test the
accuracy of the model’s predicitions. This would allow company to determine the
predictive power of the model.
 Based on the cash flows provided in the scenario, it is questionable that the non-linearity
assumption only applies to revenue but not the fixed operating costs. If the latter were
also truly exponential, the project’s NPV would be significantly lower, almost certainly
negative. There is also no basis provided for the contribution margin of 40% even though
competition is likely to be fierce in the early years of a new market

3(b)

Financial risk

 The investment will introduce currency risk to the company for the first time and could
have a negative impact on the project’s cash flows.
 There is a potential for credit risk if counterparties are unable to meet their obligations in
accordance with the agreed terms. The financial institutions which process customer
payments will be a concern and in the context of a developing country, this risk may be
significant.
 Risk associated with transferring foreign currency across international borders, which
may be less secure and involve long delays, even with electronic payments also needs to
be considered.

Business risk

 Restrictions on remittances may be re-introduced if there is another change in

government.
 The board will need to consider fiscal risk since the project’s NPV is based on an
assumption that the tax rates in both countries are constant and that the bilateral tax
treaty remains in place throughout.
 Company needs to familiarise itself with employment laws in Uskistan.

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 September 2018 Summary points BY TAHA POPATIA
Question # 1 – International Investment Appraisal

(A) Competitive advantage of investing in overseas project

 Investing overseas gives access to new markets.

 Investing overseas may give easier and cheaper access to raw material.
 Investing overseas may give access to cheaper labour resources and/or access to expertise
which may not be readily available locally.
 Closer proximity to markets, raw materials and labour resources may enable a company to
reduce its costs.
 Economic risk resulting from long-term currency fluctuations may be reduced where costs and
revenues are matched and therefore naturally hedged.
 International investments might reduce both the unsystematic and systematic risks for a
company if its shareholders only hold well diversified portfolios in domestic markets, but not
internationally.

(B) Advantages and drawbacks of exchange traded option contracts compared with over-the-counter
options

 Advantages:
o ETOs are readily available on the financial markets, their price and contract details are
transparent, and there is no need to negotiate these.
o Tight regulations make these less risky.
o Transaction costs can be lower.
o Option buyer can sell (close) the options before expiry.
 Disadvantages:
o Maturity date and contract sizes for exchange traded options are fixed, whereas over-
the-counter options can be tailored to the needs of parties buying and selling the
options.
o ETOs tend to be of shorter terms, so if longer term options are needed, then they would
probably need to be over-the-counter.

(C) - Computational

(D) Treasury department

Benefits of a centralised treasury department

 Avoids the need to have many bank accounts and may therefore reduce transactions costs and
high bank charges

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 September 2018 Summary points BY TAHA POPATIA
 Large cash deposits may give company access to a larger, diverse range of investment
opportunities and it may be able to earn interest on a short-term basis, to which smaller cash
deposits do not have access.
 If bulk borrowings are required, it may be possible for company to negotiate lower interest
rates, which it would not be able to do on smaller borrowings.
 Hiring experts, which smaller, diverse treasury management departments may not have access
to.
 May be better able to access what is beneficial for company as a whole, whereas treasury
functions may lead to dysfunctional behaviour.

Benefits of separate decentralised treasury departments

 Better able to match and judge the funding required with the need for asset purchases for
investment purposes on a local level.
 Quick responses, when opportunities arise and so could be more effective and efficient.
 No lengthy bureaucratic delays.
 May make the subsidiary companies’ senior management and directors more empowered and
have greater autonomy, this in turn may increase their levels of motivation, as they are more in
control of their own future, resulting in better decisions being made.

Question # 2 – Performance analysis and behavioural factors

(A) Performance Analysis

(B) How behavioural factors may have resulted in company’s share price being higher than is
warranted by a rational analysis of its position

 Company’s share prices may be overvalued because share prices generally are too high.
 Share prices have been increasing consistently recently and this could be encouraging investors
to buy more shares, further increasing share prices.
 Investors possibly following a herd instinct, investing because others have been investing in the
expectation of future gains.
 Investors paying excessive attention to the most recent set of results, rather than seeing them in
the context of whether they can be sustained in the future.
 If investors are attempting to make a valuation, they could prefer using a model which confirms
what they believe the shares are worth (confirmation bias), rather than one which gives a more
reliable indication of value.

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 September 2018 Summary points BY TAHA POPATIA
Question # 3 – mergers and acquisitions

(A) Computation

(B) Reliability of synergy estimates

 Synergies relating to size and services offered will depend on the ability to gain large contracts
and neither company has had recent success in doing this.
 Synergies relating to operations and working practices may be difficult to obtain if it is difficult to
change the employment conditions of Selorne Co. drivers.
 Some synergies may be easier to obtain:
o Duplication of premises in some locations should be eliminated easily, provided Chawon
Co. does not have onerous rental contracts and there is space on Selorne Co’s sites.
o Combining central administrative functions should reduce some staffing costs.

Problems with achieving synergies

 Lack of unity at the top level and no clear post-acquisition plan.

 If Chris Chawon is given the leading role he requires, there may be a change in management
style which may upset long-serving Selorne Co staff. Some may leave, jeopardising the continuity
which seems to have been an important part of Selorne Co’s success.
 Different remuneration arrangements.
 Integration may be difficult to achieve
o Chawon Co’s staff will not have the necessary license to drive the Selorne Co lorries and
may not wish to go through the process of obtaining this license.
o Selorne Co’s drivers may be reluctant to drive the smaller vehicles.

(C) Factors which a company will consider when determining which source or sources of finance are
chosen to finance a possible cash bid for the share capital of Chawon co.

 Availability
o No guarantee that all possible sources of finance will necessarily be available.
o Success of rights issue may well depend on the willingness and abilitiy of the director-
shareholders to subscribe.
o Obtaining a bank loan or mezzanine finance may be difficult if a company is viewed as
highly geared.
 Cost
o The cost of equity will normally be viewed as higher anyway than the cost of debt.
o Issue costs of equity are likely to be higher than those of debt.
 Director preference
o Board’s attitude to gearing.

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 September 2018 Summary points BY TAHA POPATIA
o The board may feel that the company has reached a level of gearing that is considered
desirable.
 Control
o Control is not diminished in case of rights issue.
o Convertible debt would change the balance of shareholdings.
o Mezzanine finance may also offer conversion rights, but possibly these could only be
exercised if company defaults, which the board may view as unlikely.
o Bank loan will have no impact on share capital, but the bank may impose certain
restrictions, such as restrictions on the sale of assets, limitations on dividends etc.
 Mix of finance
o Board may also consider the possibility of a mix of finance.

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 ACCA AFM past paper analysis june 2018 to june 2023
Contents:

1. Summarised analysis – just specifying topic

2. Detailed analysis – details of what was tested in the question

Summarised analysis

J18 D18 J19 D19 M20 D20 J21 D21 J22 S22
MnA Q1 Q1 Q3 Q3 Q1 Q1 Q1 Q3 Q3 Q3
CR Q1 Q3 Q3 Q1 Q1 Q1 Q3 Q3 Q3
APV Q2 Q3 Q1 Q2 Q1
DC Q3 Q2
RM Q4 Q2 Q2 Q1 Q2 Q3 Q3 Q2 Q2 Q2
RO Q1 Q1
BSOP Q1 Q1
NPV/IIA/WACC Q1 Q1 Q3 Q2 Q1 Q1
D22 J23
MnA Q2 Q1/Q2 MnA – mergers and acquisitions
CR Q2 Q1/Q2 CR – Corporate reconstruction
APV APV – Adjusted present value
DC DC – Dividend Capacity
RM Q1 RM – Risk management
RO RO – Real options
BSOP BSOP – Black Scholes Option Pricing
NPV/IIA/WACC Q3 Q3 NPV/IIA/WACC – Net present value, international
investment appraisal and weighted average cost of capital

Detailed analysis

June 2018
Question # 1 Chikepe Co. (50marks)
Contents:
 Mergers and Acquisitions
 Types of synergy benefits
 Report
 Free cash flows
 Growth rate computation
 Premium payable
 Mandatory bid rule and principle of equal treatment

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 ACCA AFM past paper analysis june 2018 to june 2023
Question # 2 Tippletine co. (25marks)
Contents:
 Adjusted present value
 Tax depreciation
 M and m proposition linking geared and ungeared equity (rarely tested)
 Advantages and drawbacks of convertible loan notes
Question # 3 Arthuro co. (25marks)
Contents:
 Dividend capacity
 Remittance of dividend
 Benefits and problems of a dividend policy
 Agency problem
Question # 4 Adverane Group (25marks)
Contents:
 Money market hedge
 Futures
 Multilateral netting
 Transfer price
December 2018
Question # 1 Opao co. (50marks)
Contents:
 Mergers and Acquisitions
 Management buy-out and management buy in
 Portfolio restructuring
 Report
 Cash offer, share offer and mixed offer
 Free cash flows model
 Initial public offer and reverse take-over
Question # 2 Nutourne co. (25marks)
Contents:
 Foreign currency hedging
 Forwards, futures and options
 Benefits and drawbacks of forward contracts
 Mark-to-market process
Question # 3 Amberle co. (25marks)
Contents:
 Adjusted present value
 Loan repayment in annuity
 Factors which may determine long term finance policy
 Factors which may cause the policy to change

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 ACCA AFM past paper analysis june 2018 to june 2023

June 2019
Question # 1 Talam co. (50marks)
Contents:
 Real options
 Report
 Assumption of BSOP and other assumptions
 Net present value
 Sustainability and ethical issues theory
Question # 2 Lurgshall co. (25marks)
Contents:
 Interest rate risk management
 Swaps
 Advantages and Disadvantages of swap
Question # 3 Newimber co. (25marks)
Contents:
 Demerger
 WACC
 Free cash flows
 Communication of information to shareholders and stakeholders
December 2019
Question # 1 Okan co. (50marks)
Contents:
 Adjusted present value
 Project duration
 Foreign exchange risk management – forward market and money market
 Exposure to economic risk
 Risk management
Question # 2 Cadnam co. (25marks)
Contents:
 Dividend capacity
 Simple analysis of dividend pay-out, growth in dividend and share price movement
 Dividend policy
Question # 3 Kerrin co. (25marks)
Contents:
 Mergers and acquisitions
 Sources of financial synergy
 Synergy overestimation problem
 P/E ratio model
 Share for share exchange
 Change in shareholders wealth
 Cash offer and share for share offer

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 ACCA AFM past paper analysis june 2018 to june 2023

March 2020
Question # 1 Westparley co. (50marks)
Contents:
 Mergers and Acquisitions
 Behavioural factors
 Report
 P/E ratio model and free cash flows
 Asset beta and equity beta
 Factors to consider when financing acquisition
Question # 2 Boullain co. (25marks)
Contents:
 Foreign currency hedging
 Forwards, futures and options
 Marking to market
 Initial margin and maintenance margin
Question # 3 Hathaway co. (25marks)
Contents:
 Advanced investment appraisal
 Net present value and expected net present value
 Capital investment monitoring
 Post completion audit
September/December 2020
Question # 1 Kingtim co. (50marks)
Contents:
 Defence strategies
 Report
 WACC
 Bond valuation using yield curve
 Employee remuneration
Question # 2 Colvin co. (25marks)
Contents:
 Net present value
 International investment appraisal
 Dividend remittance theory
 Discount rate theory
Question # 3 Fitzharris co. (25marks)
Contents:
 Interest rate hedging
 Swap and collar
 Theory about swap
 Option valuation theory

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 ACCA AFM past paper analysis june 2018 to june 2023

March/June 2021
Question # 1 Chakula co. (50marks)
Contents:
 Mergers and acquisitions
 Cost of capital
 Demerger
 Free cash flows and P/E model
 Cash offer and share offer
Question # 2 Robson co. (25marks)
Contents:
 Adjusted present value
 Bank loan with equal repayment instalments
 Beta asset and beta equity
 Factors different stakeholders consider while funding
Question # 3 Gogarth co. (25marks)
Contents:
 Foreign currency hedging
 Forwards, futures and options
 Advantages and disadvantages of exchange traded options
 Role of treasury function
December 2021
Question # 1 Zhichi co. (50marks)
Contents:
 Post-completion audit
 Report
 Beta equity and Beta asset
 Adjusted present value
 Debt finance and asset securitisation
Question # 2 Brandon co. (25marks)
Contents:
 Theory about treasury department
 Interest rate hedging
 FRAs, futures and options
 Theory about smoothing
Question # 3 Hanwood shoes co. (25marks)
Contents:
 Corporate restructuring
 Free cash flows
 Impact on statement of financial position
 Implications on profits and future liquidity

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 ACCA AFM past paper analysis june 2018 to june 2023

March/June 2022
Question # 1 Prysor co. (50marks)
Contents:
 Theory about world trade organisation
 Report
 Net present value
 International investment appraisal with transfer pricing
 Duration and sensitivity analysis
 Theory about ethical issues and reputation risk
Question # 2 Frongoch co. (25marks)
Contents:
 Foreign currency hedging
 Futures, forwards and options
 Theory about basis risk
 Theory about treasury department
Question # 3 Charborough co. (25marks)
Contents:
 Corporate restructuring
 Free cash flows
 Impact on statement of financial position
 Theory specific to question scenario
September 2022
Question # 1 Para fuels co. (50marks)
Contents:
 Real options
 Traditional net present value compared
 Report
Question # 2 Lough co. (25marks)
Contents:
 Multilateral netting
 Forward market hedge
 Money market hedge
 Centralisation of treasury department
Question # 3 Felinhen co. (25marks)
Contents:
 Corporate restructuring
 Free cash flows
 Impact of various options
 Theory specific to question scenario

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 ACCA AFM past paper analysis june 2018 to june 2023

December 2022
Question # 1 Fondir co. (50marks)
Contents:
 Foreign exchange rate risk management
 Interest rate risk management
 Margin requirement
 Report
Question # 3 Propleis co. (25marks)
Contents:
 Mergers and acquisitions
 Free cash flows
 Synergy
 Premium payable
 Assumptions and discussion of whether synergies will be achieved
 Actions to ensure proper integration of companies
Question # 3 Tonpantau co. (25marks)
Contents:
 Net present value
 Cost of equity
 Bond valuation
 Cost of debt
 Real options
 BSOP
March/June 2023
Question # 1 Joshua co. (50marks)
Contents:
 Mergers and acquisitions
 Agency problem
 Report
 Post-acquisition weighted average cost of capital
 Synergy
 Share for share offer
 Comparison of shareholders wealth
Question # 2 Oxwick co. (25marks)
Contents:
 Mergers and acquisitions
 Acquisition of supplier
 Free cash flows
 P/E ratio model

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 ACCA AFM past paper analysis june 2018 to june 2023
Question # 3 Blackbosca co. (25marks)
Contents:
 International investment appraisal
 Treatment of royalty and contribution
 Financial risk
 Business risk

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