F9 Re v i s i o n C o u r s e

- Exam is 4 x 25 mark questions

Can be from any syllabus area
All the same number of marks so focus on syllabus content

- Recap syllabus content & apply to exam questions

Focus on exam technique & marks available
Make sure we know the BASICS well

- Mock exam
Full 3 hour past paper
You try under timed conditions
Then go through the recorded answers with me
 F9 Exam Te c h n i q u e

- This is NOT just a calculations paper!

Know the theory and discussion parts well
Leave enough time to do them!

- Most of the marks will be for your workings

Make them neat and tidy
Reference all workings clearly

- You will be under time pressure

Practice Practice Practice Practice Practice Practice.............
You MUST move on to the next question when time is up (1.8 minustes per mark)

- There are easy marks available

Know the basics of EVERYTHING....this will be enough
Common areas come up repeatedly - Know them!!!!!
Fi n a n c i a l O b j e c t i v e s

Investments

Financing Dividend Policy

Key Financial Objectives
Maximisation of Shareholder Wealth Share Price Growth + Dividends Paid

Increasing Profits But can be manipulated!

Increasing Earnings Per Share Earnings / No. Ordinary Shares

Sh a re h o l d e r We a l t h I l l u s t r a t i o n

Yr 1 Yr 2
Dividends 5c 6c
Share Price $1.50 $2.00

Shareholder Wealth Increase Per Share Share Price Growth + Dividends Paid

$2.00 - $1.50 = 50c + 6c = 56c Per Share

Shareholder Wealth Increase As % Increase Per Share / Share Price in Yr 1

56c / 150c = 37%

Dividend Yield (Percentage of Investment) Dividend Per Share Yr 2 / Share Price Yr 1

6c / 150c = 4%
Q ue s t i o n T i me !

June 2010 Q4 a)
 Di v i d e n d Po l i c y
Investors like...
Constant Dividend 200
Inflation Linked 150
Choice Growing
100
50
None 0
07 08 09 10

M & M Irrelevancy Theory (See next)

Signalling to the market
Theory
Bird In The Hand (Investors want return NOW)
Clientelle Effect (Stick to one policy)
Script Dividends (Shares not cash)
Di v i d e n d I r r e l e v a n c y Th e o r y

Miller & Modigliani Max S'Holder Wealth

(Share Price Growth & Dividend Paid)

Choice

Pay Dividend Reinvest earnings

or
Investors get dividend Share Price increases

Both Max S'holder wealth so Dividends Irrelevant!

Rational Investors
Assumptions No Transaction Costs
No Tax difference
Q ue s t i o n T i me !

June 10 Q4 (c)
 S o u rc e s o f F i n a n c e
Expensive, risk of failure & diluting
Initial Pubic Offering Exit method for owners

Equity Placing with Inst. Investors Cheaper & only 1 shareholder

Share Issue
Rights Issue Cheaper & keep current shareholders

Things to consider...

Risk
Debt
Gearing Bonds/Debentures

Available?
 Pe r f o r m a n c e A n a l y s i s
Current Assets
Gross/Net/Operating Profit Current
Margins Current Liabilities
Revenue Current Assets - Inv
PBIT Quick
Current Liabilities
Profitability ROCE Capital Employed Liquidity & Inventory
Efficiency Inv. Days x 365
Calculate ROE
PAT COS
Receivables
Ratios First Ord. Shares + Reserves Rec. Days x 365
Credit Sales
Check how many Payables
marks available.
Divs Per Share Pay. Days x 365
Div Yield COS
1.8 minutes per mark Share Price
Then move on to PAT Long Term Debt
discussion
Shareholders Div Cover Capital
Div Paid Gearing Equity
Share Price
Gearing PBIT
P/E Ratio Int. Cover
EPS Interest

Compare to Ind. Ave or previous years

Discuss each ratio calculated Good or bad movement & impact on performance
Keep within time constraints
Q ue s t i o n T i me !

June 2011 Q3
 R igh t s I s s u e & T H E R P

Dilutes EPS & Divs Per Share

Rights Issue Need for new capital?
Causes Future Profitability?
Uncertainty Reduction in Share Price

Theoretical Ex Rights Price (THERP) Lower Share Price After Rights Issue
ABC Ltd. has decided to raise Amount of Capital to raise $5m
capital via a rights issue.
No. of shares issued (6.25m / 5) 1.25m
The share price is currently $5.50 Share issue price ($5m / 1.25m) $4
and ABC intends to raise $5m. Number of Shares Share Price Total
There are currently 6.25m shares 5 $5.50 (5 x 5.50) = 27.5
in issue and ABC is offering a 1 for 1 $4 (1 x 4) = 4
5 rights issue.
6 31.5
Calculate the Theoretical Ex-Rights We now have 6 shares in issue at total value of $31.5 so the THERP is
Price. (31.5 / 6) = $5.25
Q ue s t i o n T i me !

Need Question Here!

Dec 2011 Q3
 Wo r k i n g C a p i t a l
Requirement Needs to be met - Cash/o’draft

Current Assets
Current Inventory Bal X
Current Liabilities
Receivables Bal X
Current Assets - Inv Payables Bal (X)
Quick
Current Liabilities
Required X
Cycle
Overtrading = Lack of Cash
Inventory Days X
Receivables Days X Signs
Deteriorating Current/Quick Ratio
Payables Days (X)
Inventory Days Up
Cycle X Receivables Days Up
Payables Days Down
Wo r k i n g C a p i t a l I l l u s t r a t i o n
1,200 3
Current
400
500
Quick 1.25
400
Sales 3,000
COS 2,000 700
Inventory 700 Inventory x 365 128
2,000
Receivables 500
Payables 400 500
Receivables x 365 61
3,000

400
Payables x 365 (73)
2,000

Cycle 116
Wo r k i n g C a p i t a l I l l u s t r a t i o n

Sales 3,000 New Days

COS New Balance = Old Balance X
2,000 Old Days
Inventory 700
Receivables 500 100
Payables 400 Inventory 700 x 547
128

Change days to: New Old 70

Inventory 100 128 Receivables 500 x 574
61
Receivables 70 61
Payables 50 73 50
Payables 400 x 274
73
Wo r k i n g C a p i t a l I l l u s t r a t i o n

Sales 3,000 Income Statement

Balance = Item / 365 x Number of Days
COS 2,000

Number of Days
Inventory 80 Inventory 2000 / 365 x 80 438

Receivables 60
Payables 40 Receivables 3000 / 365 x 60 493

Calculate the balance on:

Inventory, Receivables + Payables Payables 2000 / 365 x 40 219

Q ue s t i o n T i me !

Dec 2009 Q4 b)
Wo r k i n g C a p i t a l F i n a n c i n g
Short Term
Finance
Inexpensive
80

60 Fluctuating Current Assets

40
Permanent Current Assets
20
Non Current Assets Aggressive Moderate Conser vative
0
Long Term
Current Liabilities > 50% = Aggressive Finance
Assess: < 50% = Conservative
Expensive

Current Assets
Q ue s t i o n T i me !

Dec 2009 Q4 c) & d)

 I n ve n t o r y & E O Q
Co = Cost of order
2 x Co x D = EOQ D = Annual Demand
Ch Optimum amount to order each time Ch = Cost of holding

Total Annual Cost of Inventory Policy

Annual Demand x Co
Ordering =
EOQ
Equal at EOQ EOQ
Holding = x Ch
2
Purchases = Unit cost x Annual Demand

Add them all together to get total annual cost

 I n ve n t o r y & E O Q
Buffer Stock Re-order level - Usage in Lead Time
Calculate EOQ as normal
Calculate total costs as normal
Add on holding cost for buffer

Discount for bulk ordering

Annual Demand Calculate EOQ as normal
Ordering = x Co
Discount Level Calculate total costs as normal for EOQ
Discount Level Calculate total cost at discount level
Holding = x Ch
2 Compare & choose
Q ue s t i o n T i me !

June 2008 Q3 d)
 R e c e i v a b l e s
Offer Discount?
Discounts
Cost Discount Discount % x Sales x % Take up
Interest
Policy Change in receivables
Collection Saving x Overdraft %
Clear Policy
Cost 2% x (36,500 x 30%) 219
Current Policy 60 days New Receivables
Receivables 6,000 (36,500 / 365 x 40 x 0.3) 1,200
Sales 36,500 (36,500 / 365 x 60 x 0.7) 4,200
Overdraft Cost 7%
Total 5,400
NEW
Old Receivables 6,000
2% Discount if paid in 40 days
Difference 600
30% expected to take discount 42
Saving 600 x 0.07
Q ue s t i o n T i me !

Dec 2010 Q3
 Cash M a n a g e me n t
F = Cost
Baumol Model C= 2xFxT T = Total Demand
Amount of Cash to
Move
i i = Interest

T
Moving Costs xF
C
C= 2 x 20 x2,000,000
Holding Costs C = 31,622
xi
2 0.08
2m
Moving 31,622 x 20 = 1,265
Example
F = 20, T = 2 million, i= 8% Holding 31,622 x 0.08 = 1,265
2
 M i l l e r O r r
80 Upper Limit
Buy Securities
60
Return Point
40 Sell Securities

20 Lower Limit

0
1/3
Spread 3( 0.75 x T x Var )
Daily interest
Variation Standard Deviation x Standard Deviation
Return Point Lower limit + 1/3 x Spread
T Transaction Cost
Q ue s t i o n T i me !

Pilot Paper Q3
In v e s t m e n t A p p r a i s a l

Incorporating Risk & Uncertainty

Probability analysis Expected Values

Stages Quantifies Risk Outcome x % Likelyhood

ID Opportunities Sensitivity Analysis What-if Analysis

Screen Deals with Uncertainty NPV / PV of Item
Appraise
Risk-Adjusted Discount
Implement Rate See Later
Review Adjusts for different risk

Shorten Pay-back Reduces Uncertainty

 Us i ng C a s h F l o w s
Cash
Relevant Future
Incremental
Payback Period
$3m Investment for 300k per annum
Constant Cash
3m
Flows 10 years
300k

YR Cash Cumulative
Cumulative 1 1.5m 1.5m
Investment
Cash Flows 2 2m of $4m 3.5m Get $4m
3 3m 6.5m back here
 Ne t Pre s e n t Va l u e
Analysis of relevant cash flows Discount & compare to Investment
3 year project with net annual cash inflows before tax of $300m in todays terms. Inflation is expected to be 3% and
the company uses a real discount rate of 6.8%.
Initial Investment of $700m with WDA’s allowable SL over the project. Tax rate is 30% payable 1 year in arrears

1. Inflate figures 2. Writen Down Allowance? 3. Working Capital

Yr1 = $300m x 1.03 = 309 WDA = $700m / 3 = $233 per yr None here but allow for
Yr2 = $300m x 1.032= 318 movement each year if required
Yr3 = $300m x 1.033= 328 Tax Saving = $233 x 30% = $70

5. Set out Pro-forma

4. Discount Rate? 0 1 2 3 4
Net Cash Flows 309 318 328
If Cash flows inflated use NOMINAL
Discount rate Tax -93 -95 -98
WDA Tax Saving 70 70 70
Convert REAL to NOMINAL Discount
rate: (1+m) = (1+r) (1+inf) Capital Investment -700
Total Cash Flows -700 309 295 303 -28
(1+m) = (1+0.068) (1+0.03)
1+m = 1.10 Discount Rate (10%) 1 0.909 0.826 0.751 0.683
m = 10% Discounted Cash Flows -700 281 244 227 -19

NPV = $33m
 Ca s h F l o w s C o n t i n u i n g
$100m per year forever. D. Rate 10%
Cash Flows beyond time horizon
100m
Cash Per Year = $1000m
Constant = Present Value 0.1
Discount Rate
$100m per year growing at 3%
forever. D. Rate 10%
Cash Flows (1 + G)
Growing = Present Value 100m x (1.03)
Discount Rate - G = $1471m
0.1 - 0.03
$100m per year starting Yr 3
growing at 3% forever. D. Rate 10%
Growing Cash Flows (1 + G) 100m x (1.03)
but start Discount Rate - G x D. Rate for Yr x 0.826
0.1 - 0.03
later
= Present Value =$1215m
Q ue s t i o n T i me !

June 2011 Q1
 AR R / R O C E
ARR/ROCE
Average Profit
Average Investment
Cash Inflows- Depreciation
Average Profit
No. Years of Project
Cost + Residual Value
Average Investment
2

Timing Risk?
Simple Cons
Pros Time Value Cash?
Understandable Profit?
AR R I l l u s t r a t i o n
Cash flows $30m
Capital Investment $10m

Investment Depreciated to $2m over 5 year project

Calculate the ARR / ROCE

(30 - 8)
Average Profit $4.4m
5
Average Investment 10 + 2
$6m
2
4.4
ARR 73%
6
 IRR
What? Discount rate at which NPV = 0
If our discount rate is lower = Profit
Why?
If our discount rate is higher = Loss
L = Low Discount Rate
L+( NPV L ) (H - L) H = High Discount Rate
NPV L - NPV H
NPV L/H = NPV at that Discount Rate
Discount rate 5% 15%
NPV 100,000 (15,000)
100,000
5+( ) (15 - 5) = 13.69%
100,000 - (-15,000)
Q ue s t i o n T i me !

June 2009 Q2
 Cos t o f E q u i t y
Dividend
Constant
Dividend Valuation Share Price
Method Dividend (1 + G)
Growing +G
Share Price

Capital Assets Pricing Model CAPM Theory

Ke = Rf + β (Rf - Rm)
Rf - Risk Free
Rm - Average Return of Market
(Rf - Rm) - Risk Premium
β - How much premium i.e Risk?
Systematic Risk = Risk in the System
Unsystematic Risk = Company specific risk
Portfolio Theory = Diversify away Unsystematic Risk
CAPM is a measurement of Systematic Risk
Beta tells us how much risk that Co. has
 Co s t o f De b t
Interest (1 - T) Pref. Div
Irredeemable Market Value Preference Shares Market Value

Bank Debt Interest Rate x (1-T)

Redeemable Use IRR Formula
EG. 5 Year 10% Debt. Tax Rate of 30%
Why? Current Market Value is $102
DR
Fact : Market Value of Debt is PV of Year ITEM $ DR 5% PV PV
15%
Interest & Capital discounted at Kd Interest
1-5 7 4.329 30.30 3.352 23.46
($100 x 10% x 0.7)
We know Market Value
5 Capital 100 0.784 78.40 0.497 49.70

We know Interest & Capital Amount Market Value -102 -102

6.70 -28.84
We don’t know Kd
6.70
IRR finds it 5+( ) (15 - 5) = 6.89%
6.70 - (-28.84)
 WAC C
Steps
What?
1. Calculate cost each item (Debt & Equity)
Cost to Business
Use methods we looked at so far
Debt - Interest
2. Get Market Value of each
Equity - Dividends Market Value
WACC is weighted Ave SFP Amount x
Nominal Value
Cost of these 3. Fill in the WACC Table
ABC has the a cost of equity of 18% and cost of Market
Item Weight Cost Total
debt 6%. The following is on their SFP: Value
$ Debt X X/Y X X
Ordinary Shares ($1) 2,000
Equity X X/Y X X
Loan Notes 1,000
Y WACC X
Share Price $4, Loan Value $104
Market
Market Values: Item
Value
Weight Cost Total

Equity 8000 8000/9040 18 15.93

Equity = (2,000 x $4/$1) = $8,000
Debt 1040 1040/9040 6 0.69
Debt = (1,000 x $104/$100) = $1,040 9040 WACC 16.62
Q ue s t i o n T i me !

June 2011 Q2 a & b)

 Capi t a l St r u c t u r e
Expected Annual Value of
WACC
Earnings Company
($10m / 0.1)
Company A $10m 10%
= $1000m

($10m / 0.12)
Company B $10m 12%
= $83m

Suggests that the lower the WACC the more

valuable the company!
 Capi t a l St r u c t u r e
Traditional View M & M No Tax M & M With Tax
Cost
Cost Ke Cost Ke Ke

WACC
WACC WACC
Kd
Kd Kd

Gearing Gearing
X Gearing

As gearing increases Ke still goes

The WACC can be minimised. As gearing increases Ke goes up.
Swapping cheaper debt for expensive Investors need more return for
equity lowers it to a point. increased risk.
...but as gearing increases Ke goes up This increase is set-off by the lower
further as investors need more return Kd to leave the WACC constant.
for increased risk.
....but ignores:
This causes the WACC to increase. Tax
Transaction Costs
up.
The benefit of taking on debt is that
the interest is tax deductible.
More debt = more tax benefit so the
WACC goes down with more debt.
....but ignores:
Bankruptcy Risk
Transaction Costs
Q ue s t i o n T i me !

June 2011 Q2 c)
 Mo r e De b t
Convertible
Same as Redeemable* (IRR)
Cash...or
* Except Capital repaid is higher of Conversion Value
E.G 5 year 10% Convertible debt (Tax Rate 30%)
Convert at Par Share Market Value is $18
Choice in 5 years Or with 3% growth expected
Get 5 Shares per nominal per year
DR
Year ITEM $ DR 5% PV PV
15%
Cash 100 1-5
Interest
7 4.329 30.30 3.352 23.46
($100 x 10% x 0.7)

5 Capital 104.33 0.784 81.79 0.497 51.85

Convert 18 x 1.035 x 5 104.33
Market Value -102 -102
10.10 -26.68
IRR 5 + ((10.1 / 10.1 - (-26.68)) (15 - 5) 7.8%
W h a t D i s c o u n t R a t e?
WACC
Small Project
Same Risk
No New Capital

Project Specific Discount Rate

New Business Area
Big Project
Q ue s t i o n T i me !

June 2008 Q1
Pro je c t Sp e c i f i c D i s c o u n t R a t e

Business Risk
Proxy company in New Area βe x
Financial Risk (Gearing)
1. Remove their Financial Risk to get just Business Risk (βa)
Ve Ve = Market Value Equity in Proxy
Ungear βa = βe ( ) Vd = Value Debt in Proxy
Ve + ((Vd(1 - T)
2. Bring in our Financial Risk to get new βe
Ve + ((Vd(1 - T) Ve = Market Value Equity in Our Firm
Re-gear βe = βa ( ) Vd = Value Debt in Our Firm
Ve
3. Fill into CAPM
CAPM PSDR = Rf + βe (Rm - Rf)
 PSDR I l l u s t r a t i o n
ABC Proxy
Debt 400 500 Tax rate 30%
Rf 4
Equity 600 500
Rm 14
βe 1.2 1.3

500
Ungear βa 1.3 ( ) 0.76
500 + (500 x 0.7)
600 + (400 x 0.7)
Regear βe 0.76 ( ) 1.11
600

CAPM PSDR 4 + 1.11 (14 - 4) 15.1%

Q ue s t i o n T i me !

December 2010 Q1 c)
 B u s i n e s s Va l u a t i o n s
Net Assets DVM (Share Price Valuation)
Total Assets - Liabilities Dividend
Pros Cons Constant Div
Ke
Simple Ignores Intangibles
Good Starting Point Not based on earnings Dividend (1 + G)
Values Assets Undervaluation Growing Div
Ke - G
P/E Ratio
Total Earnings Present Value Future Cash
Value of Company x Flows
P/E Ratio Same as for NPV - set out the
EPS cash-flows then discount
Share Price x them.
P/E Ratio
Q ue s t i o n T i me !

December 2007 Q1
Fo r e i g n E x c h a n g e R i s k
Risk of Loss incurred in translating
Translation
foreign A & L’s at Y/E

Risk of fluctuation in currency bet ween

Transaction
settling and agreeing transaction

Economic Long-term FX transaction risk

Leading Bring for ward FX payment

Internal Risk
Lagging Delay FX payment
Management
Netting Net FX receipts & payments
 FX Ca l c u l a t i o n s
Foreign Receipt
Counter $ : £ 1.45 - 1.55
use rate on right!
Base Spread
For ward Contract Money Market Hedge
Predicting FX Rates
Agree rate with Bank Transfer money now
Purchasing Power Parity
1 + Inf(Counter) Contract Even if not due yet
Spot Rate x
1 + Inf(Base) Exact Amount Borrow if don’t have it
Futures Options
Interest Rate Parity
1 + Int(Counter) Exchange traded Right but not obligation
Spot Rate x Bet in opposite direction Use if advantageous
1 + Int(Base)
Fixed Contract Always pay premuim
 Mo n e y M a r k e t
UK US
UK Based Company
Borrowing 5% 7%
Spot Rate = $:£ 1.45 - 1.55
Deposit 3% 6%

$200,000 to pay in 3 months $200,000 receipt in 3 months

1. Amount of $ Needed (Discount at Foreign rate) 1. Amount to borrow (Discount at Foreign Rate)
Deposit in US (6 x 3/12) 1.5% Borrow in US (7 x 3/12) 1.75%
200,000/1.015 $197,044 200,000/1.0175 $196,560
2. Borrow at home & transfer now (Spot Rate) 2. Transfer Now (Always at spot rate)
$197,044/1.45 £135,893 $196,560/1.55 £126,813
3. Tfr Amount + Interest on borrowings 3. Deposit in UK + interest = Total Receipt
Borrowing cost = (5 x 3/12) = 1.25% Deposit Interest in UK = (3 x 3/12) = 0.75%
£135,893 x 1.0125 £126,813 x 1.0075
Total Cost £137,591 Total Receipt £127,764
Q ue s t i o n T i me !

June 2011 Q4 a)
 Le a s e v B u y
1. NPV Calculation for both

2. Discount both at Post Tax borrowing rate

3. Choose Lowest Relevant Costs

Buy Lease
Capital Payments
WDA’s Tax Saving
Maintenance
(Tax Savings)
Eq u i v a l e n t A n n u a l C o s t

When Best to Replace Assets

1. NPV Calculation for replacing for

each choice

NPV
2. EAC =
Annuity Rate
Capi t a l R a t i o n i n g

Hard Externally Imposed

Soft Internally Imposed

To choose bet ween projects

Profitability Index
Divisible ? NPV
Investment

Non-Divisible ? Trial & Error

Q ue s t i o n T i me !

December 2009 Q1
 M o c k E x am

December 2012 - All

Full 3 hour past paper
You try under timed conditions
Then go through the recorded answers with me