Day 1

Performance Management
Webinar DAY 1
Instructor
ACCA FM Sep 2021 Rizwan Maniya
Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Know about the Tutor

• Have taught more than 14 years
• Papers – PM, FM, APM

• Have taught more than 6000 Students
• Currently teaching both Physically and Online to
International Students
• Have conducted:
8 ACCA PM Webinars
6 ACCA APM Webinars

How to remain connected after webinar
WhatsApp Number
+923212436266
How to remain during Webinar
Chat Box Given

Paper Structure Section Wise
Section A Section B Section C
Sections 15 OT Questions 3 Case Style 2 Constructed
3 Hours Paper 2 marks each Questions response
(1.8 Min Per Mark) (15 x 2) 30 Marks 10 marks each Questions
(10 x 3) 30 Marks
Investment Appraisal
Yes Yes Yes
Business Finance Yes

Yes Yes
(Including WACC)
Business Valuation Yes Yes Yes
Working Capital
Yes Yes Yes
Risk Management
Yes Yes No

FM Passing Rates - Last 7 attempts

Reason for Failure
1. Candidates are struggling in theory based Objective

test questions
2. Candidates are not covering the entire
3. Rounding off mistakes

Reason for Failure
1. Candidates do not read the scenario actively
2. Candidate do not relate answers with scenario
3. Rounding off mistakes

Reason for Failure
1. Candidates do not understand question requirements
2. Candidates are struggling to use spread sheets to optimum
3. Candidate do not relate answers with scenario
4. Candidates are not focusing on gaining easy marks
5. Candidates are answering what they thought they were being

asked, rather than what they were being asked.
Scope of Webinar
1. The Session will be 30% Knowledge and 70% Practice Based
2. Will focus on Section A and B OTs and Sec C Constructed response question
3. ACCA Platform will be used to understand Exam Environment

Day 1 – Investment Appraisal & WACC (Business Finance)
Day 2 – Business Valuation & Business Finance
Day 3 – Working Capital & Risk Management
Day 4- Grand Revision
Day 5- Live Practice Session


Net Present Value

Net Present Value 1. Inflation
1. Positive NPV = Accept
2. Taxation
2. Negative NPV = Reject 3. Fixed Cost
3. 0 NPV = Break even
Calculation 4. Working Capital
1. It considers time value of money.

2. It is an absolute measure and has a good correlation shareholder values.
Advantages 3. It is based on cash flows so decreases the probability of manipulation and subjective
decision.
4. Considers the whole life of the project.
1. Difficult to calculate and understand.
2. 2. The calculation is based on certain assumption such as timings and duration of the cash
Disadvantages
flows and appropriate cost of capital
3. Unlike profit measure it is not a good measure for motivating the managers.
Examination assumptions to be used in NPV calculations if otherwise stated in exam.
1. The initial investment will be made in year 0.
2. Any cash flow arising at the beginning of the year is assumed to have been occurred at the end of the previous year.
3. You are not required to take interest cost as it will be incorporated through the cost of capital.

Inflation
Types
▪ General Rate – Single rate of inflation
▪ Specific Rate – Different rates of inflation
Cash flows
▪ Real cash flow – Are cash flows without inflation
▪ Nominal cash flows – Are cash flow with inflation
Calculating Discount Rates
(1+nominal rate) (1 + Real rate)) (1 + Inflation)
Important note for discounting

➢ Discount real cash flow using real rate
➢ Discount nominal cash flow using nominal rate

Fixed cost & Working capital
1. If Irrelevant so don’t incorporate

2. If Relevant then
Fixed Cost ❑ Inflate fixed cost if required by question
❑ Step up in fixed cost should be considered if required by question
1. Initial investment in working capital will occur at the start of the project i.e.
year 0.
2. Any incremental investment in working capital in later years due to business
Working expansion.
Capital 3. In case of inflation working capital will be inflated.
4. All invested working capital will be shown as inflow in the last year of the
project.

Taxation
Assumptions
1. Tax payment
2. 25% WDA on reducing balance method. The balancing allowance or charge is then
calculated.
Calculation of balancing charge or allowance
Value of asset net of already claimed WDA xxxx
Asset disposal value xxx
Balancing charge or allowance xxxx
3. In case of taxation the discount rate used should be post- tax rate.
Important Note – When to claim capital allowances

• Asset purchased at start of year 1 – Start from Year 1
• Asset purchased at end of year 0 – Start from year 0
• Nothing mentioned so start from Year 1

Key Exam Tip –

1. Complete in 36 Minutes
2. Perform calculations that are carefully structured and clearly set out,
with all workings shown in an easy-to-follow layout.
3. Write accurately and coherently, using simple English rather than
long, rambling sentences which have no structure and no real content
Understanding Requirements
Break every requirement into Verb and Objects
What are Verbs What are Objects

Steps
1. Find the proxy beta i.e. appropriate equity beta of target industry
2. Degear the equity beta i.e. make an adjustment to convert it into asset beta
3. The ungeared beta value will then be adjusted for the company’s own gearing levels
i.e. gear the beta again.
4. Once the appropriate beta it calculated, use this to calculate cost of equity
5. The cost of equity will then be used to calculate risk adjusted WACC


Cost of Capital
▪ Cost of capital is the minimum rate of return which is required by the
providers of fund to the business.
▪ Cost of capital is the weighted average of:
▪ Cost of equity (Ordinary shares)
▪ Cost of preference shares
▪ Cost of debt

Cost of Equity Dividend

Valuation model
Constant Growth at fixed rate
Formula - Ke = D/Po Formula – Ke = D1/Po + g

Ke = D/Po Ke = cost of equity
Ke = cost of equity D1 = Dividend in one year time in perpetuity
D = Dividend in one year time in perpetuity Po = Current share price ex-dividend (Year 0)
Po = Current share price ex-dividend (Year 0) G= Growth rate
Note: Growth can be calculated on the basis of

1. Past Divided Pattern 2.Earning retention model
1. The shareholder’s future income stream will only be from dividend

Assumptions 2. Such dividend will be constant or will grow at fixed rate
3. Dividend payment will be in perpetuity
1. The assumption that dividend will remain same or will grow at fixed rate is questionable in reality.
2. The current share price may be inaccurate and can vary in short term due to some factors such takeover
Disadvantages bids.
3. No consideration of earning is taken in DVM.
Cost of equity
• Time value money return Capital Asset Pricing model Relationship between risk and
• Additional risk return expected return.
(Business and financial risk)
Rf = Risk free return βe > 1 - Company risk is high therefore

Ke =RF + (Rm-Rf) βe higher return
RM = Market return
RM – Rf = Equity risk premium βe < 1 - Company risk is low therefore
low return
Unsystematic risk Types of risk Systematic risk
❑ The risk that is specific to ❑ Systemic risk may apply to a certain
an industry or firm. country or industry, or to the entire
❑ This type of risk can be global economy.
reduced by managing Portfolio theory ❑ It is impossible to reduce systematic
diversified portfolio. even through diversification.
An investor should make investment in diversified portfolio to ensure all eggs are not in one basket

Capital Asset Pricing model

Assumption
1. The investors have well

2. Investors will require excess 3. As the systematic risk varies
diversified portfolios so the
return in order to compensate them between companies, so investor will
unsystematic risk is eliminated
for systematic risk. require different returns for different
systematic risk.
1. It incorporates the systematic risk.
Advantages 2. It considers the market based risk and returns relationship.
3. It can be used to calculate risk adjusted cost of equity.
1. It ignores unsystematic risk completely which may not be the case.
2. Beta may also change over time as it an estimate.
Disadvantages 3. The model consider returns but does not differentiate between dividends and capital gains
which is important from taxation point of view
4. The research shows that in some cases CAPM results are not as expected.

Preference share & Cost of debt
Cost of Debt
Bank loan Important Note

Kd = Interest rate x (1-Tax rate)
(Non-tradable)
There is no payment of principle and interest is paid
Irredeemable debt
in perpetuity
(Tradable)
Formula
Kd= I(1-t) / MV
Redeemable debt The interest is paid till the redemption and the
(Tradable) redemption will be at par or premium or discount.
Formula = IRR for Both r and kd
A debt that can be converted into a predetermined
amount of the company's equity at certain times
Preference share
during its life, usually at the discretion of the
bondholder.
Convertible debt The same approach as used in
Steps involved:
(Tradable) calculating cost of equity
1. Assess both the options by calculating their Preference
Formula (Assumption is constant
value i.e. cash option and conversion option share
dividend)
2. Choose the higher value.
Kp = D/Po
3. Calculate the IRR of the flows i.e. of the
option selected for both r and kd.
Calculating WACC
Steps:
1. Estimate the cost of each source of capital
2. Calculate the weights for each source of capital by using market values or book values
3. Multiply the cost of each source of capital with the weights of each of source of capital
4. Add the result of step 3 to arrive at weighted average cost of capital
Important Note
▪ While calculating WACC, market value will be given preference over book values, where both are given in the
question.
▪ In case of book values, equity = Ordinary share capital + Share premium + Retained profits
▪ In case of Market values, equity and debt will be calculated using the formula.

Key Exam Tip –

1. Complete in 18 Minutes
2. Actively read scenario-based questions, highlighting the information

that is relevant for each part of the requirement

Questions or comments?

Thank you
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Performance Management

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Know about the Tutor

• Papers – PM, FM, APM

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

How to remain connected after webinar

Chat Box Given

Business Finance Yes

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

FM Passing Rates - Last 7 attempts

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Reason for Failure

1. Candidates are struggling in theory based Objective

2. Candidates are not covering the entire

3. Rounding off mistakes

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Reason for Failure

1. Candidates do not read the scenario actively

2. Candidate do not relate answers with scenario

3. Rounding off mistakes

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Reason for Failure

1. Candidates do not understand question requirements

2. Candidates are struggling to use spread sheets to optimum

3. Candidate do not relate answers with scenario

4. Candidates are not focusing on gaining easy marks

5. Candidates are answering what they thought they were being

3. ACCA Platform will be used to understand Exam Environment

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Day 1 – Investment Appraisal & WACC (Business Finance)

Day 2 – Business Valuation & Business Finance

Day 3 – Working Capital & Risk Management

Day 4- Grand Revision

Day 5- Live Practice Session

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Net Present Value

1. It considers time value of money.

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Important note for discounting

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Fixed cost & Working capital

1. If Irrelevant so don’t incorporate

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Important Note – When to claim capital allowances

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Key Exam Tip –

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Cost of Equity Dividend

Constant Growth at fixed rate

Formula - Ke = D/Po Formula – Ke = D1/Po + g

Note: Growth can be calculated on the basis of

1. The shareholder’s future income stream will only be from dividend

Rf = Risk free return βe > 1 - Company risk is high therefore

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Capital Asset Pricing model

1. The investors have well

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Bank loan Important Note

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Key Exam Tip –