ACCA FM · Sep 2025 – Jun 2026
Financial Management
Master Plan
7 lessons · 26 topics · Examiner intelligence from 4 sittings (MJ24–D25) · Section C priority guide · Common error tracker
Total lessons7
Total topics26
Exam duration3 hours
Pass mark50%
Section C weight40 marks
Examiner reports4 sittings
1Exam Structure
Section A · 30 marks
15 Objective Test Questions
2 marks each — all compulsory
Can cover any area of the syllabus — A through G
Mix of MCQ (single best answer), multiple response, number entry, drag-and-drop, true/false
Typically tests knowledge and straightforward application — calculations are short
Section B · 30 marks
3 Case OT Questions
5 × 2-mark OTs per case — all compulsory
Can cover any area of the syllabus
Each case presents a scenario then asks 5 linked questions — tests deeper application within a context
Recent cases: business valuations (D25), business finance/capital structure (MJ25), risk management (SD24 & MJ24)
Section C · 40 marks
2 Constructed Response Questions
20 marks each — all compulsory
Mainly from: Working Capital (C), Investment Appraisal (D), Business Finance (E)
Requires full written workings, commentary, and discussion — typed in the CBE spreadsheet/word processor
Part-marks available throughout — process marks even if a final figure is wrong
Exam Strategy
Section C is the battleground. 40% of all marks come from two 20-mark questions. Both typically combine calculation (NPV, WACC, working capital, valuations) with discussion (advantages/disadvantages, recommendations). Master the numerical methods AND be able to write 3–4 sentence discussions of each technique.
Section A + B breadth: 60% of marks — study every syllabus area including B (environment), F (valuations), and G (risk). The OT questions range widely. Do not neglect any topic.
2All 26 Topics — Build Tracker
Ref
Topic
Section C
Level
Status
LESSON 1
Financial Management Function
A1–A4
FM Function
Nature · Objectives · Stakeholders · Agency · NFP/VFM
Low
1–2
Built
LESSON 2
Financial Management Environment
A1
The Nature & Purpose of Financial Management
Financial management vs financial/management accounting · The three key financial management decisions (investment, financing, dividend) · Relationship between them
Low
1–2
Built
A2
Financial Objectives & Relationship with Corporate Strategy
Shareholder wealth maximisation · Profit vs cash vs wealth · Non-financial objectives · Financial objectives in different sectors
Medium
1–2
Built
A3
Stakeholders & Impact on Corporate Objectives
Stakeholder groups and conflicting objectives · Agency theory · Managing the agency problem · Corporate governance mechanisms
Medium
1–2
Built
A4
Financial & Other Objectives in Not-for-Profit Organisations
Value for money (economy, efficiency, effectiveness) · Multiple/conflicting objectives · Performance measurement without a profit motive
Low
1–2
Built
B1
Economic Environment
Macroeconomic targets · Fiscal/monetary/interest rate/FX policies · Government policy & business · Green policies
Low
1–2
Built
B2
Financial Markets & Institutions
Money & capital markets · Financial intermediaries · Stock market · Securities · Fintech
Low
1–2
Built
B3
Money Markets
Role of money markets · Banks & institutions · Interest-bearing · discount · derivative instruments
Low
1–2
Built
LESSON 3
Working Capital Management
C1
Nature of Working Capital
Elements · Cash operating cycle · Liquidity vs profitability · Working capital ratios
High ★
2
Built
C2
Inventory, Receivables, Payables & Cash
EOQ · JIT · Buffer stock · Settlement discounts · Factoring · Baumol · Miller-Orr
High ★
2
Built
C3
Working Capital Funding Strategies
Permanent vs fluctuating CA · Aggressive / conservative / matching · Matching principle
High ★
2
Built
LESSON 4
Investment Appraisal
D1
Investment Appraisal Techniques
Relevant cash flows · Payback · Discounted payback · ARR/ROCE · NPV · IRR · DCF superiority
High ★★
2
Built
D2
Inflation & Taxation in DCF
Real vs nominal (Fisher equation) · Tax-allowable depreciation (WDAs) · After-tax cash flows
High ★★
2
Built
D3
Risk & Uncertainty in Investment Appraisal
Sensitivity analysis · Probability analysis · Expected values · Simulation · Risk-adjusted rates
Medium
2
Built
D4
Specific Investment Decisions
Lease or buy · Asset replacement (EAC) · Capital rationing — PI · non-divisible combinations
High ★
2
Built
LESSON 5
Business Finance
E1
Sources of Business Finance
Short/long-term sources · Rights issue · Placing · Islamic finance (murabaha/ijara/mudaraba/sukuk/musharaka) · Dividend policy
High ★
2
Built
E2
Estimating the Cost of Capital
DGM · CAPM · Systematic vs unsystematic risk · Beta · Cost of debt (all types) · WACC
High ★★
2
Built
E3
Sources of Finance & Relative Costs
Risk-return relationship · Creditor hierarchy · Gearing problems · Financial gearing ratios · Interest cover · WACC in investment appraisal · CAPM project-specific rate
High ★
2
Built
E4
Capital Structure Theories
Traditional view · MM without tax · MM with tax · Market imperfections · Pecking order theory
Medium
2
Built
E5
Finance for SMEs
Funding gap · Maturity gap · Business angels · Crowdfunding · P2P · Supply chain finance · Government assistance
Low
1–2
Built
LESSON 6
Business Valuations
F1
Nature & Purpose of Valuation
Reasons for valuation · Information requirements · Limitations · all F1–F4 content in one file: FM-F-Business-Valuations-Complete
Low
1–2
Built
F2
Models for the Valuation of Shares
Asset-based (NBV/NRV/replacement) · P/E ratio · Earnings yield · DVM · DGM · DCF basis
Medium
2
Built
F3
Valuation of Debt & Other Assets
Irredeemable debt · Redeemable debt · Convertible debt · Preference shares
Medium
2
Built
F4
EMH & Practical Considerations
Weak / semi-strong / strong form · Marketability · Pricing anomalies · Behavioural finance
Low
1–2
Built
+
Supplementary — Mergers & Acquisitions, Corporate Governance
Not official F-section items, but valuable exam-adjacent content · FM-Extra1 / FM-Extra2
Bonus
–
Built
LESSON 7
Risk Management
G1
Foreign Currency Risk Management (official ACCA ref: G3)
FX exposure types · Forward contracts & bid-offer spread · Money market hedge · Leading/lagging · Netting · Futures/options (concepts)
Low
1–2
Built
G2
Interest Rate Risk Management (official ACCA ref: G4)
Sources of IR risk · FRAs and settlement · IR futures/options (concepts) · Swaps · Gap exposure · Basis risk
Medium
2
Built
G3
PPP & IRP — Exchange Rate Theory (official ACCA ref: G2)
Purchasing power parity · Interest rate parity · Fisher effect · Four-way equivalence · Time-period pro-rating
Medium
2
Built
G4
Managing Interest Rate Risk — Applied (official ACCA ref: G4)
Instrument selection framework · FRA vs swap vs option · Treasury policy · Integrated FRA calculations
Medium
2
Built
3Section C Priority — The 40-Mark Battleground
The syllabus states: “The two 20-mark questions will mainly come from the working capital management, investment appraisal and business finance areas.” Every candidate should be able to produce a complete Section C answer in each of these three areas.
Working Capital (C1–C3)
- Cash operating cycle calculation and interpretation
- EOQ model — calculate and discuss
- Receivables: settlement discount cost vs benefit
- Factoring — net benefit calculation
- Baumol model — optimal transfer size
- Miller-Orr model — spread, upper and lower limits
- Funding strategy: aggressive / conservative / matching identification (D25 examiner trap)
- Working capital investment level calculations
Investment Appraisal (D1–D4)
- NPV — identify relevant cash flows (add back depreciation, ignore sunk costs)
- IRR interpolation — double-negative denominator trap (MJ25)
- Tax-allowable depreciation (WDAs) — balancing allowance
- Real vs nominal rates — Fisher equation
- Sensitivity analysis — % change to break even
- Expected NPV with probabilities
- Capital rationing — profitability index for divisible projects
- Lease vs buy — after-tax cost of borrowing
- Equivalent annual cost — asset replacement
Business Finance (E1–E3)
- Rights issue: TERP calculation (MJ25 examiner example)
- Cost of equity via DGM — rearrange for Ke (SD24 trap: add g at end)
- Cost of equity via CAPM — beta, risk-free rate, equity risk premium
- Cost of debt: redeemable (pre-tax coupon, redemption value, YTM)
- Convertible debt: conversion or redemption indifference price
- WACC: book vs market value weightings
- Financial gearing: D/E and D/(D+E) — use market values not book (MJ25)
- Traditional vs MM capital structure discussion
4Examiner Intelligence — 4 Sittings (MJ24–D25)
| Sitting | Topic tested | Key examiner observation | The trap / common error |
|---|---|---|---|
| D25 | FRA — forward rate agreement | Apollo Co: 3-12 FRA on 9-month loan. Payment = 0.1% × 9/12 × $10m = $7,500 | Using annual rate not loan-period rate. Always time-adjust: multiply by (loan months ÷ 12) |
| D25 | Macroeconomics — inflation impact | Low inflation → domestic demand rises + WACC falls. Low inflation → currency appreciates (not depreciates) | Candidates thought low inflation depreciates the currency. Opposite: lower inflation = more competitive exports = currency appreciates |
| D25 | Working capital funding strategies | Cain (£17m LT debt, min WC £15m, max £20m) = Conservative. Abel (£18m LT debt, min £18m, max £24m) = Matching | Most candidates failed to identify the strategy correctly. Permanent CA = minimum level. Fluctuating CA = max − min. LT debt above permanent CA = conservative. |
| D25 | EPS via earnings yield / dividend yield chain | Remi Co: shares = $30m ÷ $0.50 = 60m. DPS = $3m ÷ 60m = $0.05. Price = $0.05 ÷ 4% = $1.25. EPS = $1.25 × 12% = $0.15 | Using $30m as number of shares instead of dividing by par value $0.50. Always: shares = total nominal ÷ par value |
| D25 | Business valuations — DGM (Section B) | Dividend “expected in the near future” = cum-div price. Dividend “just been paid” = ex-div price. Cum-div = (D0×(1+g)/(ke−g)) + D0 | Failing to recognise cum-div vs ex-div distinction. Near-future dividend → still to be received → add D0 to ex-div price |
| D25 | Convertible debt — indifference share price | Share price = redemption value ÷ conversion ratio = ($100 × 115%) ÷ 20 = $5.75 | Candidates did not know how to set up the indifference calculation — equate conversion value to redemption value |
| MJ25 | PPP — exchange rate forecasting | 3-month rate: adjust annual inflation to 3/12 first. €/£ = 1.18 × (1+0.007) ÷ (1+0.013) = €1.173 | Using annual inflation rates directly instead of adjusting to the time period. Always pro-rate inflation to match the period |
| MJ25 | Macroeconomics — policies to reduce growth | Currency appreciation + increased taxation both reduce growth. Rate cut and increased spending increase growth. | Candidates confused the direction of policies. Currency appreciation → dearer exports → lower growth |
| MJ25 | IRR interpolation | IRR = 7% + (35,000 ÷ (35,000 + 25,000)) × (11% − 7%) = 9.3% | Double-negative in denominator ignored: using (35,000 − 25,000) instead of (35,000 + 25,000) when NPV at higher rate is negative. Result: 21.0% (wildly overstated) |
| MJ25 | Islamic finance — mudaraba vs musharaka | Board wants equity finance WITHOUT management participation → Mudaraba. Musharaka entitles capital provider to management participation. | Confusing mudaraba and musharaka. Mudaraba = sleeping partner (no management rights). Musharaka = active partner (has management rights) |
| MJ25 | NPV — relevant cash flows (Section C) | Forecast loss includes R&D amortisation (sunk cost) and depreciation. Both must be added back. Only incremental, future, cash flows are relevant. | Including sunk costs (R&D already incurred) and non-cash items (depreciation) in NPV without adding back. NPV requires cash flows, not accounting profit |
| MJ25 | Capital rationing — profitability index (Section C) | PI = NPV ÷ Initial investment. Rank by PI descending. Allocate capital in PI order for divisible projects. | Using IRR or NPV alone to rank (incorrect for capital rationing). PI accounts for relative NPV per £ invested |
| MJ25 | Rights issue — TERP (Section B) | LSL Co: 1-for-6 at 20% discount on $2.75 = $2.20. TERP = ($3,300m + $440m) ÷ 1,400m shares = $2.67 | Adding reserves to calculate market value of equity. Market value = shares in issue × market price only. Never add retained earnings. |
| MJ25 | Financial gearing using market values (Section B) | MV of debt = $800m × 97.5% = $780m. MV of equity = 1,200m shares × $2.75 = $3,300m. Gearing (D/E) = $780m ÷ $3,300m = 23.6% | Three errors: (1) using book values not market values; (2) using D/(D+E) instead of D/E; (3) adding retained earnings to equity market value |
| SD24 | Redeemable debt valuation | Snow Co: pre-tax coupon $6 × annuity factor (4 yrs, 8%) + redemption ($100 × 113%) × PV factor. MV = $102.93 | Using post-tax coupon ($4.80) instead of pre-tax ($6) for market valuation. Market value uses pre-tax cash flows at investor’s required yield — tax only affects cost of debt to the company |
| SD24 | Money market instruments | Irredeemable loan notes and preference shares are NOT money market instruments — they are long-term. Money markets are for short-term finance. | Thinking all financial instruments are available in money markets. Money markets = short-term only (bills, commercial paper, banker’s acceptances) |
| SD24 | DGM — cost of equity | Ke = (D0 × (1+g) / P) + g. Sunny Peaks: (7m × 1.02 / 42m) + 0.02 = 19%. Must add g at the end. | Forgetting to add g: getting (D0 × (1+g) / P) = 17% only. The +g term is essential — always add the growth rate at the end |
| SD24 | Forward contract vs lead payment (Section B) | Grift Co buying pesos: use ask/offer rate at spot (8.0927) and forward (7.8534). Cost saving = forward cost − spot cost | Using wrong side of the bid-offer spread. Buying foreign currency: use the rate that gives fewer foreign currency units per dollar (bank buys low, sells high) |
| SD24 | Gap exposure and basis risk | Negative gap = interest-sensitive liabilities EXCEED interest-sensitive assets. Basis risk requires two variable rates on different bases — not just any variable rate debt. | Thinking negative gap = assets exceed liabilities (opposite). Thinking any variable rate gives basis risk — need two differently-based variable rates to create basis risk |
| MJ24 | EMH — semi-strong form | Semi-strong: prices reflect all public information. Share price moves on takeover announcement (news becomes public). Insider dealing must be banned to maintain confidence. | Thinking unpredictability only applies to strong form. All three forms exhibit unpredictable price movements. Semi-strong includes all public info but NOT private. |
| MJ24 | Buffer stock / inventory management | Buffer = Reorder level − (consumption per week × lead time). Blanc Co: 30,000 − (8,000 × 3) = 6,000 units | Confusing buffer stock with consumption during lead time (24,000 units) or with reorder level (30,000 units). Buffer = reorder level MINUS expected lead time consumption |
| MJ24 | P/E ratio valuation | Otis Co P/E = market cap ÷ total earnings = $2,750m ÷ ($550m × $0.25) = 20. Apply to Alfreda Co EPS $0.45 → share value = 20 × $0.45 = $9 | Using retained earnings (not total earnings) for Alfreda EPS. Calculating Otis share price instead of Alfreda share price. |
| MJ24 | Interest rate policy → cost of capital → NPV | Rate cut → lower Ke and Kd → lower WACC → higher NPV → more projects viable → demand for products increases | Thinking rate cut increases cost of capital (opposite). The chain: lower rates → lower discount rate → higher NPV → more investment → more demand |
5Top Common Errors — By Topic
EPS Calculation
Using total nominal capital as share count instead of dividing by par value. Shares = total nominal ÷ par value per share
★★★ Very common
IRR Interpolation
Ignoring double-negative: denominator = (positive NPV + absolute value of negative NPV), not the difference
★★★ Very common
DGM — Cost of Equity
Forgetting to add g at the end: Ke = (D0×(1+g)/P0) + g. The +g is essential
★★★ Very common
NPV Relevant Cash Flows
Including sunk costs and non-cash depreciation. Add back depreciation; exclude sunk costs; use incremental cash flows only
★★★ Very common
Redeemable Debt MV
Using post-tax coupon instead of pre-tax for market valuation. Market value always uses pre-tax cash flows
★★ Common
FRA Time Adjustment
Not adjusting FRA payment for loan period. Multiply by (loan months ÷ 12)
★★ Common
PPP Time Period
Using annual inflation rate for a shorter period hedge. Pro-rate: 3-month inflation = annual × 3/12
★★ Common
WC Funding Strategy
Cannot identify aggressive / conservative / matching. Permanent CA = minimum. Conservative = LT funds part of fluctuating CA too
★★ Common
Gearing — Market Values
Using book values. Adding retained earnings to equity MV. Using D/(D+E) when D/E required (or vice versa)
★★ Common
TERP — Rights Issue
Adding retained earnings to MV of equity. MV of equity = shares × market price only
★★ Common
DGM Cum-div vs Ex-div
“Expected soon” = cum-div (add D0 to ex-div price). “Just been paid” = ex-div (no addition)
★ Common
Buffer Stock
Confusing buffer stock with lead time consumption. Buffer = reorder level − expected lead time usage
★ Common
Islamic Finance
Confusing mudaraba (sleeping/equity, no management) and musharaka (active/equity, has management rights)
★ Common
EMH Semi-Strong
Thinking unpredictability only applies to strong form. All three forms show unpredictable prices
★ Occasional
Gap Exposure
Negative gap = liabilities exceed assets (not opposite). Basis risk needs two differently-based variable rates
★ Occasional
6Topic Frequency — Section A & B Questions (MJ24–D25)
How to read this
Based on the four examiner reports (MJ24, SD24, MJ25, D25) — topics that were explicitly tested in highlighted Section A or Section B questions. Section C topics are always investment appraisal, working capital, and business finance.
| Topic | MJ24 | SD24 | MJ25 | D25 | Appearances |
|---|---|---|---|---|---|
| Working capital funding strategies (aggressive/conservative/matching) | — | — | — | ✓ | 1 |
| EPS / earnings yield / dividend yield chain | — | — | — | ✓ | 1 |
| DGM — share valuation (cum-div / ex-div) | — | — | — | ✓ | 1 |
| DGM limitations (Section B multi-response) | — | — | — | ✓ | 1 |
| Convertible debt — indifference share price | — | — | — | ✓ | 1 |
| Preference share valuation | — | — | — | ✓ | 1 |
| Macroeconomics — inflation / policies | ✓ | — | ✓ | ✓ | 3 |
| IRR interpolation | — | — | ✓ | — | 1 |
| Islamic finance (mudaraba / musharaka) | — | — | ✓ | — | 1 |
| PPP — exchange rate forecasting | — | — | ✓ | — | 1 |
| Rights issue — TERP | — | — | ✓ | — | 1 |
| Capital structure — traditional view / MM | — | — | ✓ | — | 1 |
| Financial gearing (market values) | — | — | ✓ | — | 1 |
| Internal sources of finance (retained earnings) | — | — | ✓ | — | 1 |
| Redeemable debt valuation | — | ✓ | — | — | 1 |
| Money market instruments | — | ✓ | — | — | 1 |
| DGM — cost of equity | — | ✓ | — | — | 1 |
| FX hedging — lead payment vs forward contract | — | ✓ | — | — | 1 |
| Gap exposure and basis risk | — | ✓ | — | — | 1 |
| Interest rate derivatives | — | ✓ | — | — | 1 |
| IRP / exchange rate theory | — | ✓ | — | — | 1 |
| EMH — semi-strong form | ✓ | — | — | — | 1 |
| Buffer stock / inventory management | ✓ | — | — | — | 1 |
| P/E ratio valuation | ✓ | — | — | — | 1 |
| Interest rate → WACC → NPV chain | ✓ | — | — | — | 1 |
| Financial intermediaries | — | ✓ | — | — | 1 |
7Key Formulas — Quick Reference
| Formula | Expression | Watch out for |
|---|---|---|
| NPV | Sum of (Cash flow × discount factor) − Initial investment | Use cash flows, not profit. Add back depreciation. Ignore sunk costs. |
| IRR (interpolation) | IRR = ra + [NPVa ÷ (NPVa − NPVb)] × (rb − ra) | NPVb is negative: denominator = NPVa + |NPVb|, not NPVa − NPVb |
| Fisher equation | (1 + nominal rate) = (1 + real rate) × (1 + inflation rate) | Do not simply add rates: nominal ≠ real + inflation (except approximation) |
| DGM — share price | P0 = D0(1+g) / (ke − g) [ex-div] or P0 = D0(1+g)/(ke−g) + D0 [cum-div] | Cum-div: dividend expected soon → add D0. Ex-div: just been paid → no addition |
| DGM — cost of equity | ke = [D0(1+g) / P0] + g | Must add +g at the end. Forgetting it is the most common error. |
| CAPM | ke = Rf + β(Rm − Rf) | (Rm − Rf) is the equity risk premium, not Rm. Beta of 1 = market risk. |
| WACC | WACC = (E/(E+D)) × ke + (D/(E+D)) × kd(1−t) | Use market values for weightings. kd is post-tax for company. Pre-tax for market valuation. |
| Cost of equity (Gordon growth) | ke = D1/P0 + g where D1 = D0 × (1+g) | D1 = next year’s dividend = current dividend grown by g |
| Redeemable debt MV | MV = Coupon × annuity factor + Redemption value × PV factor | Pre-tax coupon (investors pay tax separately). Include redemption premium. |
| Cost of redeemable debt (post-tax) | After-tax coupon × annuity factor + Redemption × PV factor = MV (solve for kd) | After-tax coupon = coupon × (1−t). This is the cost to the COMPANY. |
| TERP (rights issue) | TERP = (Current MV + Rights proceeds) ÷ (Old shares + New shares) | Current MV = old shares × current price. Never add retained earnings. |
| PPP (exchange rate) | S₁ = S₀ × (1 + h of the numerator (counter) currency) ÷ (1 + h of the base currency) | Pro-rate inflation to time period first (×3/12 for 3 months). Higher inflation country’s currency weakens. |
| IRP (exchange rate) | F = S₀ × (1 + i of the numerator (counter) currency) ÷ (1 + i of the base currency) | Higher interest rate country’s currency weakens in forward market. |
| EOQ | EOQ = √(2 × D × Co / Ch) | D = annual demand; Co = cost per order; Ch = annual holding cost per unit |
| Profitability Index (capital rationing) | PI = NPV ÷ Initial investment | Rank highest PI first for divisible projects. For non-divisible: enumerate combinations. |
| EAC (asset replacement) | EAC = NPV of costs ÷ annuity factor for asset life | Choose asset with lowest EAC (least annual cost). Compare across different asset lives. |
| FRA payment | Settlement to FRA buyer = (Actual rate − FRA rate) × notional × (loan period ÷ 12) | Always adjust for loan period. Pay if market rate < FRA rate (for borrower who bought FRA). |
| Money market hedge (pay FC) | Borrow in home currency → convert at spot → invest in foreign currency → use to pay | Borrow home currency amount = FC needed ÷ (1 + FC deposit rate × period) |
| Gearing (D/E) | MV of debt ÷ MV of equity × 100 | Market values always. MV equity = shares × price. MV debt = nominal × market price %. |
| TSR | (Capital gain + Dividend) ÷ Opening share price × 100 | Capital gain = closing price − opening price. Divide by opening price, not closing. |
8Quick Reference Cards — Final 48-Hour Revision
Working Capital Management
Cash Operating Cycle= Inventory days + Receivables days − Payables days
Inventory days= (Inventory / CoS) × 365
Receivables days= (Receivables / Revenue) × 365
Payables days= (Payables / Purchases) × 365
EOQ= √(2 × D × Co / Ch)D=annual demand, Co=order cost, Ch=holding cost pa
Early settlement discount cost= d/(1−d) × 365/(N−D) × 100%d=discount%, N=normal credit days, D=discount days
Receivables days uses Revenue; Payables uses credit purchases (use cost of sales if purchases are not given)
Accept discount if cost % < cost of finance
Investment Appraisal
NPV= PV of cash inflows − Initial investment
IRR (interpolation)= a + [NPVa/(NPVa−NPVb)] × (b−a)
Annuity factor= [1−(1+r)^−n] / r
Perpetuity= Cash flow / r
Tax-allowable depreciation25% reducing balance; tax saved = WDA × tax rate, 1-year delay
Use INCREMENTAL cash flows — exclude sunk costs and apportioned overheads
WC: outflow at start, full recovery at end
Inflation: either nominal rate with nominal CF or real rate with real CF — never mix
Business Finance & Capital Structure
WACC= Ke×Ve/(Ve+Vd) + Kd(1−t)×Vd/(Ve+Vd)
Ke (dividend growth)= D₁/P₀ + g = D₀(1+g)/P₀ + g
Kd (irredeemable)= I(1−t) / MV
Kd (redeemable)= IRR of after-tax cash flows
Gordon Growthg = r × b (retention rate × return on reinvestment)
Use MARKET values for WACC weights, not book values
Kd uses after-tax interest = I × (1−t)
Preference dividends are NOT tax-deductible
CAPM & Risk
CAPMKe = Rf + β(Rm − Rf)Rm−Rf = equity risk premium
Asset beta (ungear)βa = βe × Ve/(Ve + Vd(1−t))
Equity beta (regear)βe = βa × (Ve + Vd(1−t)) / Ve
Ungear the proxy company’s beta → regear to target’s capital structure → apply CAPM to get project-specific Ke
Asset beta reflects business risk only; equity beta includes financial risk
βa = β of an ungeared company (or βd ≈ 0)
Business Valuation
P/E methodValue = EPS × P/E ratioUse the P/E of a similar quoted company / sector; discount 20–30% for an unquoted target
Dividend valuationP₀ = D₀(1+g) / (Ke−g)
Asset-basedNet assets at MV or replacement cost
Free cash flow to equityPAT + Dep − ΔWC − Capex + Net new debt
Asset valuation ignores goodwill/intangibles — minimum floor not fair value
P/E valuation depends heavily on which P/E is used — always state assumption
Foreign Exchange Risk
Forward rate (interest rate parity)F = S × (1 + foreign r) / (1 + base r)
Purchasing power parityE(S) = S × (1 + foreign inflation) / (1 + base inflation)
Money market hedge (receipt)Borrow foreign → convert spot → invest domestic
Money market hedge (payment)Borrow domestic → convert spot → invest foreign
Quote: $/£ 1.52–1.58: buy $ at 1.52 (lower), sell $ at 1.58 (higher) from bank’s perspective
Transaction exposure = contractual foreign currency; translation = balance sheet restatement; economic = future competitive position
Interest Rate Risk
FRA settlement= (Actual rate − FRA rate) × Notional × (loan months ÷ 12) — undiscounted at FM level
Futures: borrow → SELL contracts (lock in rate by selling; profit if rates rise)
Futures price = 100 − interest rate; price FALLS when rates rise
Basis = Spot − Futures; basis risk = risk that basis ≠ expected at close
Dividend Policy
MM (no tax, perfect markets): dividend policy irrelevant to value
Traditional view: dividends valued more than retained earnings (certainty)
Signalling: dividends signal management’s confidence in future earnings
Clientele effect: investors self-select based on preferred dividend policy
Scrip dividend: shares instead of cash; preserves cash; dilutes EPS
Share buyback: returns cash; reduces shares; increases EPS; signals confidence
In practice: dividends do matter — signalling, taxation, clientele effects all relevant
Key Financial Ratios
Current ratioCA / CL
Quick ratio(CA − Inventory) / CL
Gearing (D/E)Debt / Equity (market values)
Interest coverEBIT / Interest
ROCEEBIT / Capital employed
EPSPAT − Pref div / Weighted shares
P/E ratioMarket price / EPS
Dividend yieldDPS / Market price × 100%