C ADVANCED INVESTMENT APPRAISAL 1. Discounted cash flow techniques and the use of free cash flows a) Evaluate the potential value added to a company arising from a specified capital investment project or portfolio using the net present value model. Project modelling should include explicit treatment and discussion of: i) Inflation and specific price variation ii) Taxation including capital allowances and tax exhaustion iii) Multi-period capital rationing to include the formulation of programming methods and the interpretation of their output iv) Probability analysis and sensitivity analysis when adjusting for risk and uncertainty in investment appraisal. b) Outline the application of Monte Carlo simulation to investment appraisal. Candidates will not be expected to undertake simulations in an examination context but will be expected to demonstrate an understanding of: i) Simple model design 2. ii) The different types of distribution controlling the key variables within the simulation iii) The significance of the simulation output and the assessment of the likelihood of project success iv) The measurement and interpretation of project value at risk. c) Establish the potential economic return (using internal rate of return and modified internal rate of return) and advise on a project’s return margin. d) Forecast a company’s free cash flow and its free cash flow to equity (pre and post capital reinvestment). e) Advise, in the context of a specified capital investment programme, on a company’s current and projected dividend capacity. f) Advise on the value of a company using its free cash flow and free cash flow to equity under alternative horizon and growth assumptions. 2. Application of option pricing theory in investment decisions and valuation a) Apply the Black-Scholes Option Pricing (BSOP) model to financial product/asset valuation: i) Determine, using published data, the five principal drivers of option value (value of the underlying, exercise price, time to expiry, volatility and the risk-free rate) ii) Discuss the underlying assumptions, structure, application and limitations of the BSOP model. b) Evaluate embedded real options within a project, classifying them into one of the real option archetypes. c) Assess and advise on the value of options to delay, expand, redeploy and withdraw using the BSOP model. d) Apply the BSOP model to estimate the value of equity of a company and discuss the implications of the change in value.  3. Impact of financing on investment decisions and adjusted present values Assess the appropriateness and price of the range of sources of finance available to a company including equity, debt, hybrids, lease finance, venture capital, business angel finance, private equity, asset securitization and sale. Assess a company’s debt exposure to interest rate changes using the simple Macaulay duration method.
c) Discuss the benefits and limitations of duration including the impact of convexity. d) Assess the company’s exposure to credit risk, including: Explain the role of, and the risk assessment models used by the principal rating agencies ii) Estimate the likely credit spread over risk free iii) Estimate the company’s current cost of debt capital using the appropriate term structure of interest rates and the credit spread.
e) Explain the role of BSOP model in the assessment of default risk, the value of debt and its potential recoverability. f) Assess the impact of financing and capital structure upon the company with respect to: i) Pecking order theory ii) Static trade-off theory iii) Agency effects. g) Apply the adjusted present value technique to the appraisal of investment decisions that entail significant alterations in the financial structure of the company, including their fiscal and transactions cost implications. h) Assess the impact of a significant capital investment project upon the reported financial position and performance of the company taking into account alternative financing strategies. 4. International investment and financing decisions a) Assess the impact upon the value of a project of alternative exchange rate assumptions. b) Forecast project or company free cash flows in any specified currency and determine the project’s net present value or company value under differing exchange rate, fiscal and transaction cost assumptions. c) Evaluate the significance of exchange controls for a given investment decision and strategies for dealing with restricted remittance. d) Assess the impact of a project upon a company’s exposure to translation, transaction and economic risk. e) Assess and advise upon the costs and benefits of alternative sources of finance available within the international equity and bond markets.
D ACQUISITIONS AND MERGERS 1. Acquisitions and mergers versus other growth strategies a) Discuss the arguments for and against the use of acquisitions and mergers as a method of corporate expansion. b) Evaluate the corporate and competitive nature of a given acquisition proposal. c) Advise upon the criteria for choosing an appropriate target for acquisition. d) Compare the various explanations for the high failure rate of acquisitions in enhancing shareholder value. e) Evaluate, from a given context, the potential for synergy separately classified as: i) Revenue synergy ii) Cost synergy iii) Financial synergy. 2. Valuation for acquisitions and mergers a) Outline the argument and the problem of overvaluation. b) Estimate the potential near-term and continuing growth levels of a company’s earnings using both internal and external measures. c) Assess the impact of an acquisition or merger upon the risk profile of the acquirer distinguishing: i) Type 1 acquisitions that do not disturb the acquirer’s exposure to financial or business risk ii) Type 2 acquisitions that impact upon the acquirer’s exposure to financial risk iii) Type 3 acquisitions that impact upon the acquirer’s exposure to both financial and business risk. d) Advise on the valuation of a type 1 acquisition of both quoted and unquoted entities using] i) ‘Book value-plus’ models ii) Market relative models iii) Cash flow models, including EVATM, MVA. e) Advise on the valuation of type 2 acquisitions using the adjusted net present value model. f) Advise on the valuation of type 3 acquisitions using iterative revaluation procedures. g) Demonstrate an understanding of the procedure for valuing high growth start-ups. 3. Regulatory framework and processes a) Demonstrate an understanding of the principal factors influencing the development of the regulatory framework for mergers and acquisitions globally and, in particular, be able to compare and contrast the shareholder versus the stakeholder models of regulation. b) Identify the main regulatory issues which are likely to arise in the context of a given offer and i) assess whether the offer is likely to be in the shareholders’ best interests ii) advise the directors of a target company on the most appropriate defence if a specific offer is to be treated as hostile. 4. Financing acquisitions and mergers a) Compare the various sources of financing available for a proposed cash-based acquisition. b) Evaluate the advantages and disadvantages of a financial offer for a given acquisition proposal using pure or mixed mode financing and recommend the most appropriate offer to be made. c) Assess the impact of a given financial offer on the reported financial position and performance of the acquirer.
E CORPORATE RECONSTRUCTION AND RE-ORGANISATION 1. Financial reconstruction a) Assess a company situation and determine whether a financial reconstruction is the most appropriate strategy for dealing with the problem as presented. b) Assess the likely response of the capital market and/or individual suppliers of capital to any reconstruction scheme and the impact their response is likely to have upon the value of the company. c) Recommend a reconstruction scheme from a given business situation, justifying the proposal in terms of its impact upon the reported performance and financial position of the company. 2. Business re-organisation a) Recommend, with reasons, strategies for unbundling parts of a quoted company b) Evaluate the likely financial and other benefits of unbundling. c) Advise on the financial issues relating to a management buy-out and buy-in
F TREASURY AND ADVANCED RISK MANAGEMENT TECHNIQUES 1. The role of the treasury function in multinationals a) Describe the role of the money markets in: i) Providing short-term liquidity to industry and the public sector ii) Providing short-term trade finance iii) Allowing a multinational company to manage its exposure to FOREX and interest rate risk. b) Explain the role of the banks and other financial institutions in the operation of the money markets. c) Explain the characteristics and role of the principal money market instruments i) Coupon bearing ii) Discount instruments iii) Derivative products. d) Discuss the operations of the derivatives market, including: i) The relative advantages and disadvantages of exchange traded versus OTC agreements ii) Key features, such as standard contracts, tick sizes, margin requirements and margin trading iii) The source of basis risk and how it can be minimized. Risks such as delta, gamma, Vega, rho and theta, and how these can be managed. Explain the role of the treasury management function within: i) The short term management of the company’s financial resources ii) The longer term maximization of shareholder value iii) The management of risk exposure. 2. The use of financial derivatives to hedge against forex risk a) Assess the impact on a company to exposure in translation, transaction and economic risks and how these can be managed. b) Evaluate, for a given hedging requirement, which of the following is the most appropriate strategy, given the nature of the underlying position and the risk exposure: i) The use of the forward exchange market and the creation of a money market hedge ii) Synthetic foreign exchange agreements (SAFE’s) iii) Exchange-traded currency futures contracts iv) Currency swaps v) FOREX swaps vi) Currency options. c) Advise on the use of bilateral and multilateral netting and matching as tools for minimizing FOREX transactions costs and the management of market barriers to the free movement of capital and other remittances. 3. The use of financial derivatives to hedge against interest rate risk a) Evaluate, for a given hedging requirement, which of the following is the most appropriate given the nature of the underlying position and the risk exposure: i) Forward Rate Agreements ii) Interest Rate Futures iii) Interest rate swaps iv) Options on FRA’s (caps and collars), Interest rate futures and interest rate swaps. 4. Dividend policy in multinationals and transfer pricing a) Determine a company’s dividend capacity and its policy given: i) The company’s short- and long-term reinvestment strategy ii) The impact of any other capital reconstruction programmes on free cash flow to equity such as share repurchase agreements and new capital issues iii) The availability and timing of central remittances iv) The corporate tax regime within the host jurisdiction b) Develop company policy on the transfer pricing of goods and services across international borders and be able to determine the most appropriate transfer pricing strategy in a given situation reflecting local regulations and tax regimes
G EMERGING ISSUES 1. Developments in world financial markets Discuss the significance to the company, of latest developments in the world financial markets such as the causes and impact of the recent financial crisis, growth and impact of dark pool trading systems, the removal of barriers to the free movement of capital, and the international regulations on money laundering. 2. Developments in international trade and finance Demonstrate an awareness of new developments in the macroeconomic environment, establishing their impact upon the company, and advising on the appropriate response to those developments both internally and externally.
C ADVANCED INVESTMENT APPRAISAL 1. Discounted cash flow techniques and the use of free cash flows a) Evaluate the potential value added to a company arising from a specified capital investment project or portfolio using the net present value model. Project modelling should include explicit treatment and discussion of: i) Inflation and specific price variation ii) Taxation including capital allowances and tax exhaustion iii) Multi-period capital rationing to include the formulation of programming methods and the interpretation of their output iv) Probability analysis and sensitivity analysis when adjusting for risk and uncertainty in investment appraisal. b) Outline the application of Monte Carlo simulation to investment appraisal. Candidates will not be expected to undertake simulations in an examination context but will be expected to demonstrate an understanding of: