Paper F9 - exam technique

Hello, my name's Jo, and I'm subject specialist at BPP
Today we're going to be having a look at ACCA's F9 paper on Financial Management
we're going to be thinking about business finance in syllabus area E

and in this presentation then I'm going to be talking to you
about the style of questions that you could expect from this area of the
syllabus, and the approach then that you can take to ensure
that you do you well in this area of the paper
So what is in syllabus area E then?
Well we could be looking at identifying suitable sources of finance then
after we've analysed a scenario
and thought about the financial position and performance of the company
So what does that mean then
well basically that we're looking at what the best way to raise money is
given the current circumstances of the company
We're going to be guiding you through some approaches then
and talking about the sort of things that you need to consider
when you are evaluating
the position and performance of the company
and making decisions about what sorts of finance would be suitable
The best answers then to these type of questions
will be ones which tailor
the knowledge then to the scenario
as you're progressing through your qualification
it's very important to make sure then
that you appreciate
that it's all about application
and about giving advice that's tailored to the scenario specifics
also make sure that you make a recommendation
and a conclusion
at the end, so round off your arguments
at the end of any discussion
so what sort of points then should we be considering
when we're analysing the company
well we'd need to think about the performance of the company
what sort of areas might that include, which could be things like growth
in turnover
growth in profits
margins, earnings
looking at trends over time
we might also have to look at what the cash is going to be used for
so how then that could impact
with regards to your timings, so repayments
we're also thinking about the impact it's going to have on the financial
position and the financial performance off the company
We'd also need to think about what that might do to
some of the key invester ratios
like gearing
and with regards to interest cover
we also need to think about comparing our data
that we calculate any benchmark information that's given in the scenario
industry norms then affect the company's ability
to raise finance and to raise cash
we also need to think about what the impact any financing will be on
the existing whack: the weighted average cost of capital
As a general rule then
increasing the level of debt finance will pull the whack down, providing we
don't have too much debt finance
and increasing the level of equity finance will increase the whack
and we need to think about how the different
forces of finance then
would suit the specifics of the scenario
and that's what we're going to look at on the next slide
So if we're thinking about the scenario specific points
you can use steadfast to help you
think about some of the points
not all of these points are going to be relevant in every company
it depends on the specifics of the scenario
the point of this is to give you a framework for remembering
and generating ideas
around what could be useful
for the company to consider
so we've got steadfast here then
but what's it actually all about
S then is the size of the company
larger companies will have access to a greater range of finance
companies then that are listed
will perhaps be able to issue new shares easier
and venture capital finance then isn't going to be an option for
large and already listed companies, the size of the company
and where it is in its life cycle will be important
thinking then about tax exhaustion and the tax shield then of debt
as we know then
the finance charge comes before the tax
so it might be that it will reduce the tax bill
if the company isn't making any profits then this isn't going to be relevant
think about the impact then that it will have on earnings per share
earnings per share then is a key inestor ratio
and
companies are always going to be concerned about the impact
of raising funds
on this ratio
and you might be required to calculate the impact that it would have on earnings
per share
to show that you've considered this
thinking about the assets available for security then debt financing is
available usually cheaper if you've got assets available to secure it on
the type of business then
and the nature of the assets will affect whether or not the security
is going to be available
without it debt finance might become more expensive
and therefore less attractive
Dilution of control
especially important in family-run and smaller businesses
where if new shares are issued
then this could see a loss of control for existing shareholders who
are unable or unwilling
to take up share options
thinking about finance then that's already in place
by this then, we mean the level of gearing that they've already got
companies without much debt finance then are likely to find it easier to raise
debt finance because they might have the assets for security, they might be able to take
benefits then
of the tax shield on debt
much more so than a company that's already got much higher than
industry average levels of gearing
thinking about the availability then
the take up
of the offer
so thinking then about the availability of finance, and how likely it is to be
taken up
if rights issues are considered
and thinking about whether or not
debt finance is likely to be available
thinking about the set up cost or the issue cost
typically then the issue costs with equity
are going to be more expensive
and the timeframe longer
than they're going to be with debt costs, so you might need to think about the
urgency
and also the amount of investment that can be made in getting this finance
finally thinking about the timing then of the cashflows
that will be generated from this investment to match to the repayment
schedules
if there's going to be a time lag between when
this investment is going to be making money
then debt finance might be less appropriate because remember then
that debt finance and the interest on that
is a legally binding agreement and the company will have to service that
debt. If there is a time lag
dividends might be more appropriate
because there's no obligations to pay these, perhaps just an expectation
from shareholders or the market
so steadfast and can help you think about the scenario specifics
What sort of questions then might you face in the exam?
well having a look at the next section in this presentation
we'll be looking at two questions
where there are marks going for calculations and for discussion
so the discussion areas are very important
as well as the calculations and you need to be prepared for both
and as I said, there'll be about a fifty-fifty split between discussion
elements
and the calculations
we need to make sure then that when you're practicing questions
you don't just practice calculating
endless reams of ratios
you also practice interpreting those
and saying what they mean
if you calculate a ratio, think 'so what?'
so what would anyone care why I've calculated this. Why is it going to be
important
So thinking about then the approach that we're going to take to these
questions then
think about how the business itself has actually performed
consider what the finance is going to be used for
as well as those ratios
and remembering at the end of all of this, you have to make a recommendation
even if that recommendation is not actually raised any finance because it's
unlikely that they're going to get any
Allocate your time wisely
remember then that you've got one point eight minutes per mark
so don't try and calculate every ratio under the sun
it's better to calculate fewer ratios
and actually discuss them
because the marks then will be capped for the calculations, and you'll need to
make sure that you have these discussions
We're going to start off then by having a look at question 2 from the
December 2010 exam
Nugfer
so in their requirement to this question, in part a, you are asked
to evaluate suitable methods of raising the 200million that
they require
and this evaluation should be supported with analysis and critical discussion
so we're being asked then
to think about what different options we've got available
and how these stack up in light of the company's financial position
and financial performance
and we were given information then
about the financial position and the financial performance of the company
and told that it was listed
and wanted the money
to acquire a competitor, so we've been given a clear reason
about why this money is required
and we've also been given information
about the competitors' forecast profits and levels of gearing
So let's start off then by having a look at the financial position of the company
and we're told then that five marks will be available
for actually looking at
understanding and discussing the current financial position of the
company
Having a look then, we can see
that we've got long term borrowings of a hundred million, which is
repayable in two years' time, but we've got short term borrowings then of a
hundred and sixty million
so the greater proportion of debt then
is actually short term
with a higher interest rate
and it accounts for over 68%
of the interest charge
Looking then at the relationship, the ratio of debt to equity
if we look at just the gearing based on debt over equity, so the long term
borrowings only, we've got a 45% gearing rate
so not too bad
but once you take into consideration the short term borrowings which look like
the company may be quite dependent upon
you can see that that rises to 118%
So it's important to look
at the big picture
rather than just looking at a couple of key numbers
If you also look at these figures then, you can see that we've only got
assets
non-current assets of
three hundred million
we're not told what these are
but two hundred and sixty million of debt suggests that there would be very little
available for security
if further debt finance were going to be raised
If we have a look then at the financial performance
here then there were a maximum of six marks for the discussion and calculation
around the financial performance
and what we can see here then
is looking for some trends that you'd want to do some calculations
it might be that you do more calculations than you actually end up using in your
answer, because you want to pick out the headline figures
and here we can see then the operating profit
margins
has gone down from 34% to 30%
so there's been a decrease but it's not too bad
and during that period both revenue and profits have continued to rise
but the most noteworthy points then here
are to do with the finance charge
they've almost tripled over the four periods
and we can see that interest cover has fallen from seven
down to four and then down to three
so dangerously low levels of interest cover
which would make it incredibly difficult
for a very geared company
to get more debt finance in the future
you might also want to look at average increases
so revenue on average has gone up by 15.4%
and operating profits by 10.8%
so there's a bit of a
difference there
the position then and the performance of the company are not brilliant
and that's been pulled out, so you can see then that it would be very difficult
for the company to justify to investors be they debt or equity
about raising this money
however
they want to do it to acquire a competitor
and that competitor doesn't have any gearing
so acquiring a competitor then
would actually
reduce the level of gearing and would also improve the interest
cover ratio
if - and it's a big if - they were able to get those funds in the first place
In the notes then, we can see that the detail is also important too
and we've pulled out the fact that these bonds are of a lower interest rate
and are repayable in just a couple of years
and that there's a huge dependence on this more expensive overdraft
remember with an overdraft then, it can be recalled at any time
they haven't got any cash
so very poor and weak answers
would suggest that they use some cash to buy this
when they don't actually have any in their current
assets despite actually having current assets
no dividends have been paid in the last four years
and that's a very big indication that
unless things were forecast to improve quite drastically, so the margins to
go up
and there's some scope to be paying dividends
it's very unlikely that equity shareholders would be prepared to invest
more in this company
unless they're going to actually see some returns
so you might need to think about how those returns are going to be achieved
would it be through
the profits perhaps of the other company
we're also told then information about the
lack of debt as I've already said and the forecast profits then of the
new company, so we could calculate the impact that they would have
on interest cover
one thing that I would say is when you look through the
solutions that are given for these
it's important to realise that these are all encompassing solutions
it's not what you would necessarily be expected to write in the time
it's better that you make
a few goods points which a well reasoned
and make sure then
that you've got the calculations to back those up
and have a considered approach before you start, rather than just a scattered load of
calculations
So planning your approach to these questions before you start writing is
very important
It's about the quality of what you write
and not the quantity of calculations that you do
because you have to explain why you've done then
and what they show
so there isn't one right answer here
it's about coming to a conclusion based on the facts
from the scenario, and that's very important to remember
Another question then which focused on this was from June 2011

question 3, YNM

first of all then in this question you were asked to look at evaluating the
company's performance
which, similar to the last one
was quite weak
the company wasn't doing particularly well
and we had to think about how they could raise
the proposal to raise fifty million dollars worth of debt finance to support
existing operations
Only worth three marks, so the amount of detail that was going to be required would be less here
but it's interesting to note first of all what the money is for. It's for existing operations, so
it's not going to give a massive boost like it did with the last one in terms of
operating profits
it's just for the existing operations, and you need to think about
how that fits then with the other finance that the company had in place
so thinking about servicing that finance
and repayment of the other long term loans
then you had to talk about the different sources of finance, so the structure of
this question was quite different
thinking about whether this money could come from equity finance, so thinking
about the suitability then of shares, and this time in the scenario
information was provided about the share price, so there were different ways then
different features for analysis here
and thinking about a different option which is that of sale and leaseback
so you're thinking about looking
at the assets that they have available and whether or not that money
could be raised through a sale and leaseback
In both of these questions then, you could have used the steadfast approach
to try and think about what the most appropriate points were to pull out, so assets available
would be much more important in the second question because of the proposal
for a sale and leaseback
if you'd like more practice then on these areas, you can
have a look at JJG
from the June 2009 paper
and Echo from December 2007, which talk about different
sources of finance for different companies, where you get a chance then to practice
using steadfast and to get you to think about one of the most important things to
consider
There are also some articles available on the ACCA website
which you might like to have a look at if you want to know more
there's one then from June 2011
looking at analysing the suitability
of financing alternatives
and then one from March 2011 thinking about business finance
these then and the examiners' reports can all be downloaded from the ACCA
website
Good luck with your F9 examination
and don't forget then to practice the discussion elements as well as the calculation of the ratios in preparation