IQS LOCAL VARIANCE

ICSA PROFESSIONAL PROGRAMME PART 2

CORPORATE FINANCIAL MANAGEMENT

Aim

The role of the Chartered Secretary necessitates an understanding of many financial aspects
which might, otherwise, be seen as being within the sole remit of the finance director of an
organisation.

As capital markets grow in diversity and globalisation increases, Chartered Secretaries will
increasingly encounter various financial concepts that will impinge on their work. Through their
study of this subject, the importance of comprehending the implications of the various forms of
raising capital, of rewarding stakeholders, of investment decision making, of business
restructuring, of sources of debt finance will become clear.

This understanding will assist the Chartered Secretary in one of their main responsibilities – that
of communicating with the board and shareholders of an organisation – and will also allow the
Chartered Secretary to justify their participation at board level and to be a valuable contributor to
board meetings.

The aim of this module is to address the need for the Chartered Secretary to be knowledgeable
and competent in the skills of corporate financial planning, and in understanding the impact of the
fiscal environment on the organisation and its decision making.

Pre-requisite Learning
Evidence of assessed pre-requisite knowledge and understanding in the following disciplines
must be demonstrated through the examinations, or those of equivalent qualifications which have
been approved as meeting the Institute's required curriculum and standards:
 Financial Accounting
 Corporate Law

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Learning Outcomes
At the conclusion of this module, candidates will be able to:
 understand the financial sources and requirements of the employing or client organisation;
 understand the role and efficiency of the capital markets;
 understand the nature and importance of capital structure and the cost of capital;
 understand and apply the principles of working capital management;
 understand the impact of global and multi-national operations on corporate financial
management;
 demonstrate competence in the skills of corporate financial planning.

Learning content

The aim of the module is ‘to address the need for the Chartered Secretary to be knowledgeable
and competent in the skills of corporate financial planning, and in understanding the impact of the
fiscal environment on the organisation and its decision-making.’

In previous studies, candidates will have gained a basic under-standing of management and
financial accounting. This module will extend the depth of knowledge and understanding of these
basics and will give the candidate the opportunity to develop the ability to apply the theories of
financial management to a variety of practical situations.

There are main areas within the Corporate Financial Management syllabus and candidates will
need to prepare effectively for this examination.

 Financial governance; objectives and environment

 Management performance measurement
 Making distribution to shareholders
 Long term investment decisions
 Business combinations and share valuation
 Capital investment appraisal
 Capital markets and long-term financing decision
 Working capital management and short-term financing
 Share and loan capital
 Corporate risk management
 Sources of finance
 International aspects
 Relevant Act and amendments

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1 Financial governance: objectives and environment

1.1. Objective and governance

 Financial decision making

 Types of company
 Objectives of companies
 Role of the finance function
 Risk
 Regulatory framework for companies
 Company stakeholders
 Agency theory: the principal-agent problem
 The audit
 Corporate governance : financial aspects
 Objectives of public sector organizations
 Charities

2 Management performance measurement

2.1 Management performance measurement

 Principles of ratio analysis

 Classification of accounting ratios
 Value for money (VFM)
 Economic Value Added (EVA)
 Overtrading, financial distress and insolvency

3 Making distributions to shareholders

3.1 Distribution

 Dividend policy and shareholder wealth

 The importance of dividends
 Factors determining the levels of dividends
 Scrip dividends
 Special dividends and share buy-backs

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4 Long term investment decisions

4.1 Investment appraisal

 The need for investment appraisal techniques

 Relevant factors in project appraisal
 Methods of project appraisal : Overview
 Payback period
 Accounting rate of return (ARR)
 Discounted cash flow techniques
 Net present value (NPV)
 Internal rate of return (IRR)
 Discounted payback period
 Taxation and investment appraisal
 Inflation
 Projects with unequal lives
 Capital rationing
 Approving and controlling investment projects

4.2 Project appraisal and risk

 Introduction
 Risk preference
 Sensitivity analysis
 Scenario analysis
 Simulations
 Expected net present value (ENPV)
 Event tree diagrams
 Risk-adjusted discount rate (RADR)
 Portfolio effect and risk reduction

4.3 Shareholder value analysis

 Shareholder value analysis (SVA)

 Value creation
 Economic Value Added (EVA)
 Measuring value creation : total shareholder return (TSR)
 Measuring value creation : market value added (MVA)

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5 Business combinations and share valuation

5.1 Business combinations

 Rationale for mergers and acquisitions

 Economic justification for growth by acquisition
 Methods of purchase consideration
 Mergers and shareholder wealth
 Resistance devices
 Regulatory and procedural issues
 Rationale for mergers and acquisitions
 Valuation of a take-over target
 Stock market methods
 Cash flow and dividend based methods
 Asset based methods
 Divestment and de-merger activity

6 Capital Investment Appraisal

 Compare different methods used in appraising long term investments

 Discuss the advantages of any one method over the others
 Use present value and annuity tables
 Explain the importance of the time value money
 Explain the relationship between the rate of inflation and interest rates
 Evaluate projects on a real terms and nominal terms basis
 Calculate capital allowances and associated tax relief (NB:25% reducing balancing basis
only)
 Assess the impact of tax relief on the cost of borrowed finance
 Compare the different methods of financing investments
 Compare finance leases with operation leases
 Contrast leasing with other methods of credit finance such as hire purchase

7 Capital markets and long-term financing decisions

7.1 Financial markets and institutions

 The roles played by stock markets?

 Financial markets
 Other source of finance
 Efficient market hypothesis (EMH)
 Alternatives to the EMH

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7.2 Main source of long-term finance

 Ordinary share capital (or equity)

 Other types of share
 Share warrants
 Raising equity via retentions
 Borrowing : debt and other forms of loan capital
 Leasing
 Hire purchase
 Securitization of assets
 Government assistance
 Raising long term finance : identification of financing needs
 Raising long-term finance : methods of issuing shares
 Private Finance Initiative (PFI) and Public Private Partnership (PPP)

7.3 The cost of capital

 The importance of the cost of capital

 Cost of equity : the dividend valuation model and the dividend growth model
 Cost of equity: the capital asset pricing model (CAPM)
 Cost of preference shares
 Cost of debt capital
 Weighted average cost of capital (WACC)

7.4 Capital Structure

 The meaning of capital structure

 Financial gearing and its effect on risk and return
 Factors influencing the level of financial gearing
 Measuring financial gearing
 The capital structure debate

7.5 Business restructuring /reorganization

 Explain the different types of expansions and the motives behind them
 The methods used to finance the expansions
 Discuss the reasons for a public company becoming private
 Discuss Debt-Equity swaps
 Distinguish between acquisitions and mergers
 Explain the different types of mergers
 Discuss the motives for mergers
 Understand the different methods used to evaluate companies for the purpose of merging
 Calculate share values using such methods as asset valuation and dividend growth
model
 Explain the difference between a management buy-out and a management buy-in
 Predict the possibility of company failure using different models
 Consider the reasons for divestment

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8 Working capital management and short – term financing

8.1 Working capital

 The nature and purpose of working capital

 Working capital cycle
 Working capital needs of different form of business
 Ratios associated with the assessment of working capital
 The financial impact of changes to working capital policies
 The management of inventories
 The management of receivables
 The management of cash
 The management of payables

8.2 Short term financing

 Bank lending and overdrafts

 Bills of exchange
 Customer credit
 Retained profits and provisions
 Reducing levels of inventory
 Tighter credit control over trade receivables
 Delaying payment to trade payables

9 Share and loan capital

 Distinguish between Authorised and Issued Share Capital

 Explain different forms of share issue
 Highlight the advantages of Rights Issues over other forms of share issues
 Explain the purpose and impact of making bonus issues, scrip dividends and stock splits
 Recognise the relevance of a company’s dividend policy
 Explain the use of preference shares
 Distinguish between convertible debentures and debentures issued with a warrant
 Assess the effect on EPS of method used to finance a company
 Consider the Dividend and Interest Cover ratios
 Value shares using the dividend growth model and price earnings ratio.
 Value debentures

10 Corporate risk management

10.1 Corporate risk management

 The nature of risk

 Operating and financial risk
 Key risk concepts
 Risk responses
 The relationship between risk and expected return
 Risk management policies
 Credit risk and market risk
 Methods for hedging financial risk

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11 Sources of finance

 Understand the role of the primary and secondary financial markets

 Explain the requirement for a ‘listing’
 Discuss the implications of the Efficient Market Hypothesis for corporate policy and
financial management
 Discuss the advantages and disadvantages of going public
 Understand the risk-return trade-off
 Explain how markets can influence finance decision
 Distinguish between different forms of debt finance offered by commercial banks
 Identify the international money and capital markets and outline their operation.
 Explain other sources of finance including government aid and grants.

12 International aspects

 Discuss the reasons companies, entering international market

 Distinguish between an international and a multinational corporation
 Understand the different forms of foreign exchange (FX) risk
 Understand different methods of hedging against risk
 Discuss the use of the forward market
 Discuss the use of the futures market.
 Discuss the use of options in managing FX risk
 Discuss the various methods that can be used to finance overseas investments.
 Understand the issues surrounding the repatriation of profits.
 Discuss the best methods of overcoming country risks
 Calculate the cost of hedging for import and export situations
 Calculate expected future exchange rates given the premium or discount.

The areas listed above are not discreet areas. There is much overlapping. For example, the
valuation of a share might give candidates the return required by a shareholder which can
influence capital structure, which in turn can influence the cost of capital and hence the net
present value of a potential investment. Candidates should be aware of this overlap throughout
their studies.

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Study Materials and Resources
Study Text

Fundamentals of Corporate Finance (3rd Edition) by Jonathan Berk/Peter Demarzo/Jarrad

Harford

Recommended Reading List

Arnold, G.C. Corporate Financial Management, Financial Times Pitman: London.

Valdez, S. An Introduction to Global Financial Markets, Macmillan: London.
Weston, J.F. and Brigham, E.T. Essentials of Managerial Finance, Dryden: London

Magazines, Journals and Newsletters

There is a wide variety of magazines and journals servicing the accountancy market. Some are
quite academic, and will be of limited use to ICSA students. Others, particularly the regular
magazines and newsletters produced by the accountancy professional bodies, are worth regular
review. In many cases, article archives are posted on these organizations’ web-sites. Newsletters
specifically targeted at professional accounting students are also often available in downloadable
format.
Accountancy The monthly journal of the The Institute of Chartered Accountants in England and
Wales (ICAEW).
CA Magazine Monthly magazine of the Institute of Chartered Accountants of Scotland
Accounting & Business The monthly magazine from ACCA
Financial Management, CIMA
Public Finance Bi-monthly magazine from C I Public Finance Association (CIPFA)

Web Resources

Accountancy magazine www.accountancymagazine.com

Association of Chartered Certified Accountants (ACCA) www.accaglobal.com
Chartered Institute of Management Accountants (CIMA) www.cimaglobal.com
The Institute of Certified Public Accountants of Singapore (ICPAS) www.icpas.com.sg
The Chartered Institute of Public Finance and Accountancy (CIPFA) www.cipfa.org.uk
The Financial Times www.ft.com
The Institute of Chartered Accountants in England and Wales (ICAEW) www.icaew.co.uk
The Institute of Chartered Accountants of Scotland (ICAS) www.icas.org.uk

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