AFM 文字宝典小红书

PartA Advanced investment appraisal

1 IRR & MIRR
IRR assumes that the cash flows after the investment phase (here time 0) are
reinvested at the project's IRR.
MIRR makes a more realistic assumption about the reinvestment rate at the investors
minimum required return (WACC)

2 Risk and uncertainty

Sensitivity % change in one variable would be needed for the NPV of a project to fall to zero.

Simulation more than 1 variable - affect the NPV

项目测算中
Duration is the average time to recover the present value of the project
The main problem with the duration calculation is interpreting what it actually
means.
The shorter the duration period, the the risk.
If the project is discounted at the internal rate of return, it is the time taken to
recover the initial investment.

indicates the time it takes to recover the

repayments of interest and capital of a bond, in present value terms. Duration
measures the sensitivity of bond prices to changes in interest rates.

VAR Risk - it can be confident that the present value will not fall by more than......

3 Theories of capital structure

A company should maximise its debt financing; and Too much debt can be harmful to
a company and there needs to be a balance between equity and debt financing.
Discuss the two theoretical propositions,as raised by Lahla Co's board of
directors(BoD), in relation to a company's capital structure. (6 marks)
•
• there is a attached to debt finance
• a tax shield results in the cost of capital
• The second proposition builds on this by arguing that at high levels of gearing
- financial distress costs
版权声明：讲义由蹇老师独家制作请尊重版权 微博：ACCA 蹇老师 CFA-CPA
购买视频文字资料请微信联系唯一正规渠道： “蹇老师的小助理” 微信号：mikexiaozhuli
• the cost of equity increasing significantly.
• the cost of debt starts to increase significantly
• These overrides the benefits gained from the tax shield. As a result, the cost of
capital .
• There is a between the and the

影响债务融资的因素
2017/12Q1 Discuss the possible reasons for the finance director’s suggestions that
Conejo Co could benefit from higher levels of debt with respect to risk, from
protection against acquisition bids, and from tax benefits. (7 marks)

Increasing the debt finance of a company relative to equity

overall risk profile
finance increases its financial risk
of the company
the company’s business risk has reduced

access to cash increase the debt capacity of the acquirer by using the
resources assets of the target company

[ER - 2019/03] Q1 Part (a) required a discussion of the factors to consider

• Quite a few candidates however received limited marks when they described the
theoretical capital structure models such as “Modigliani and Millers with and
without taxes”, not recognising the fact that the company in the scenario 1) pays
tax and 2) it is currently all equity financed and the amount it expects to borrow is
not high. 【MJ：答偏了】
• Some candidates explained that raising debt finance for an investment would
, without realising that the objective of the
investment is to increase the company’s annual cashflows, thereby potentially
increasing future dividends.【MJ：思路错了】

2021- 09/12 Q1 - 公布&回忆

 Zhichi Co has used a fixed discount rate of 10% to assess all investment
projects for some years now. None of the company's senior management can
remember why this rate was chosen: and
 Zhichi Co has continually funded new investment projects using equity finance
and the analysis concluded that this financing strategy sent the

(a)Discuss and justify the actions Zhichi Co should take to address the Two financial
版权声明：讲义由蹇老师独家制作请尊重版权 微博：ACCA 蹇老师 CFA-CPA
购买视频文字资料请微信联系唯一正规渠道： “蹇老师的小助理” 微信号：mikexiaozhuli
strategy policy failures (6 marks)

A fixed discount rate to appraise new investment projects, which Zhichi Co uses, can
be when a decision is being made whether or not to undertake the project.
This is because projects will have different risks attached to them and therefore the
returns required from these projects would differ.
This could result in low-risk projects being rejected which could have added to Zhichi
Co’s corporate value, and high-risk projects being accepted which could reduce
corporate value.
Zhichi Co should instead estimate an appropriate discount rate which accounts for
the risk of the project. In this way, the company can assess the value of projects
more accurately and thereby add to its corporate value.

may have advantages such as tax benefits and controlling the actions of
managers.
Investors have less information compared to managers and directors in a company,
and use companies’ actions on Issuing debt finance can
also be seen as that the company can fulfil its interest payment
commitments, and can therefore be considered to be stable and less risky by investors.
Information asymmetry between investors and a company’s managers sends signals
that the company is only raising equity finance when share prices have peaked or
shares are over-valued. This causes share prices to fall following announcements that
a company is raising new equity finance. It is likely that Zhichi Co has experienced
this.
Therefore, Zhichi Co should finance through a long-term strategy of internal finance,
followed by debt issues and then equity issues as a last resort.

Debt finance &

Zhichi Co's board of directors(BoD)is considering whether to raise funds for forth
coming projects either through new debt finance or through
In addition to its manufacturing business, Zhichi Co receives rental income on some
of its factory premises and its plant and machinery which it hires to other companies.
The BoD is of the opinion that it should
whether Zhichi Co should raise future funding through
new debt finance or through asset securitisation.(6 marks)

Conventional debt finance would raise an initial borrowed amount, on which Zhichi
Co will as required. When using asset
securitisation, the borrowing aspect for Zhichi Co is in terms of

版权声明：讲义由蹇老师独家制作请尊重版权 微博：ACCA 蹇老师 CFA-CPA

购买视频文字资料请微信联系唯一正规渠道： “蹇老师的小助理” 微信号：mikexiaozhuli
The are the on which the borrowing takes place.
In order to mitigate or take account of risk, lenders of conventional debt would
probably impose restrictive covenants on Zhichi Co and require a charge to be
placed on specific assets.
It is likely that raising conventional debt would be cheaper. This is because markets
for conventional debt are more readily available.
provides a means to
, , and then use this asset as a means of
borrowing funds.
Converting the future rental income into an asset would likely be undertaken through
the use of a special purpose vehicle (SPV). Zhichi Co would then manage the rent
collection and

It is likely that obtaining funding through asset securitisation can be due to

search costs, legal fees and continuing administrative costs.
The advantages of asset securitisation are that Zhichi Co’s
for future projects, and it provides a way for Zhichi Co of utilising
income from non-core business areas.
Ultimately, the choice to Zhichi Co between debt finance and asset securitisation is
that the latter provides greater flexibility and opportunity, but at a higher cost.

Credit Rating Criteria

assessment of

Country lower than the credit ratings of its country

the Co’s position within the industry compared with

Industry
competitors

Management

return on capital employed

future earnings growth
gearing

4 Adjusted present value

Discuss why a company may prefer to use the adjusted present value (APV)
method, rather than the net present value (NPV) method. (4 marks)

版权声明：讲义由蹇老师独家制作请尊重版权 微博：ACCA 蹇老师 CFA-CPA

购买视频文字资料请微信联系唯一正规渠道： “蹇老师的小助理” 微信号：mikexiaozhuli
Adjusted present values (APVs) separate out a project’s cash flows and allocate a
to of cash flow. Net present value (NPV) discounts
all cash flows by the average discount rate attributable to the average risk of a project.
The company’s managers will be able to see which part of the project generates
what proportion of the project’s value.
Furthermore, allocating a specific discount rate to a cash flow part helps determine the
value added or destroyed.
In this example, the Co is able to determine
and
For complex projects, investment related cash flows could be distinguished
by their constituent risk factors, where applicable.

5 Overseas - to gain competitive advantage

Discuss how investing in overseas projects may enable Washi Co to gain
competitive advantage over its competitors, who only invest in domestic projects. (5
marks)
1. easier and cheaper access to it needs.
2. access to which may not be readily available in home country
3. access to new - develop a market for its products in locations where
none existed before
4. access to resources
5. related to logistics may be reduced if products are manufactured close to
the markets
6. Economic risk resulting from long-term currency fluctuations, may be reduced
where costs and revenues are matched

Overseas - dividend remittances

(b) Explain possible strategies Colvin Co could adopt to avoid a block on dividend
remittances if Canvia’s opposition party was to win the election. (4 marks)
I. Transfer pricing, where the parent company sells goods or services to the
subsidiary and obtain payment.
II. Royalty payments, when a parent company grants a subsidiary the right to
make goods protected by patents.
III. Loans by the parent company to the subsidiary. If the parent company
makes a loan to subsidiary, it can set the interest rate high or low
IV. Management charges may be levied by the parent company for costs
incurred in the management of international operations.

Transfer pricing - currency controls

版权声明：讲义由蹇老师独家制作请尊重版权 微博：ACCA 蹇老师 CFA-CPA

购买视频文字资料请微信联系唯一正规渠道： “蹇老师的小助理” 微信号：mikexiaozhuli
Transfer pricing can be used to avoid currency controls in the host country. For
example, a constraint in profit repatriation could be avoided by the parent company
charging for raw materials, or higher fees for services provided to the
subsidiary.
The parent company will have higher profits and a higher tax liability and the
subsidiary will have lower profitability and a lower tax liability.
Governments worry about transfer price manipulation because they are concerned
with the loss of revenues through and they dislike the loss
of control.

Overseas - adjusting the discount rate

Colvin Co is based in the eurozone region. When the company obtained a listing five
years ago, the founder retained a small minority shareholding. The remaining shares
are held by
Discount rate
The board proposes financing the project with a mix of equity and debt in such a way
that the existing capital structure remains unchanged. For the purposes of this project,
the chief executive believes
should be on the basis that Canvia is a
developing economy and appears to be than the eurozone
countries. She made this decision after consulting a country risk index, which
compares the standard deviation of market returns in various countries.
Additional factors taken into consideration include foreign exchange risk, the fact that
there have been in Canvia and the main opposition
party has if elected.
You have therefore been asked to use a discount rate of to appraise this
investment project.

Discuss the validity of the chief executive’s reasons for adjusting the discount rate
used in appraising the project in Canvia. (6 marks)
Colvin Co’s investment in Canvia
. The company’s would normally
be expected to provide a reasonable measure of risk for the new project. 【MJ：最基
本的这点要会写】
The chief executive’s justification for a risk premium is based on the increased risk
the company is exposed to in Canvia, a developing economy, compared to Eurozone.
The chief executive has incorporated other factors, such as political risk and foreign
exchange risk in determining this premium.【MJ：抄题，别放弃努力】
Furthermore, are likely to be well diversified
across global markets and asset classes. The potential for further risk reduction by
Colvin Co from diversifying operations globally is therefore limited when the

版权声明：讲义由蹇老师独家制作请尊重版权 微博：ACCA 蹇老师 CFA-CPA

购买视频文字资料请微信联系唯一正规渠道： “蹇老师的小助理” 微信号：mikexiaozhuli
shareholders can achieve this more efficiently on their own.【MJ：Risk diversify 是
爱考点，所以这句套路要会，现在的 PM】

6 Determinants of the option price

Discuss how a in the value of each of the determinants of the option price is
likely to change the price of a (5marks)
I. The price of the security - less valuable.
II. The exercise price of the option - more valuable
III. Time to expiry of the option - less valuable, as the time premium element
of the option price has been decreased.
IV. Volatility of the security price - .
V. Risk free rate of return - A decrease in the risk free rate will mean that a call
option becomes less valuable.

Delta value
A member of Awan Co’s treasury team has suggested that if option contracts are
purchased to hedge against the interest rate movements, then the number of contracts
purchased should be determined by a hedge ratio based on the delta value of the
option.
Required: Discuss how the delta value of an option could be used in determining the
number of contracts purchased. (6 marks)

The delta value measures the extent to which

such as an option, changes as the
For example, indicates that when the underlying asset increases in value
by $1, the value of the equivalent option contract will increase by only $0·80.
And thus, a company would need to purchase to hedge
against a rise in price of an underlying asset of that contract size, known as the

The option delta is from the Black-Scholes Option Pricing (BSOP)

formula. This means that the delta is when the volatility or
time to expiry change.
Therefore even when the delta and hedge ratio are used to determine the number of
option contracts needed, this number needs to be to reflect the
new delta.

Gamma
Explain the possible characteristics of a with a (3
marks)
Gamma measures the rate of change of the delta of an option.
版权声明：讲义由蹇老师独家制作请尊重版权 微博：ACCA 蹇老师 CFA-CPA
购买视频文字资料请微信联系唯一正规渠道： “蹇老师的小助理” 微信号：mikexiaozhuli
Deltas range for a long call option which is , where
the price of the option is insensitive to changes in the price of an underlying asset,
for a long call option which is , where the price of the
option moves in line and largely to the same extent as the price of the underlying asset.
When the long call option is , the delta is 0·5but also changes rapidly.
Hence, the for a long call option which is at-the-money.
The gamma is also when the option is closer to expiry. It would seem,
therefore, that the option is probably trading near at-the-money and has a relatively
short time period before it expires.

Theta
Explain the significance of the time until expiry in the context of option valuation.
Time
An option’s price consists of two elements, its intrinsic value and its .
at the point that the option expires.
The change in theta for in the money and out of the money options is broadly
linear.
Theta for at
the money options does not change in a linear fashion, but changes more rapidly as
the expiry date approaches.

7 Why Real options？

[2018/06] Discuss how using real options methodology in conjunction with net
present value could help establish a of the potential value of
companies, as suggested by Director C. (5 marks)
[2019/06Q1] Discuss how incorporating real options into net present value decisions
may Talam Co with its investment appraisal decisions. (5 marks)
[ER 2019/12] explain why the presence of real options may mean that the
2022/06]

Net present value assumes that a decision must be made immediately or not at all,
and once made, it cannot be changed.
Real options recognise that many investment appraisal decisions have some
flexibility.
, decisions may not have to be made immediately and can be delayed to
assess the impact of any uncertainties or risks attached to the projects.
This flexibility has value, known as the .
Net present value captures just the intrinsic value of an investment opportunity,
whereas real options capture both the intrinsic value and the time value, to give
an for an opportunity.
版权声明：讲义由蹇老师独家制作请尊重版权 微博：ACCA 蹇老师 CFA-CPA
购买视频文字资料请微信联系唯一正规渠道： “蹇老师的小助理” 微信号：mikexiaozhuli
Assumptions of the Black-Scholes model
The BSOP model was developed for financial products and not for ,
on which real options are applied.
The BSOP model assumes that a market exists to trade the underlying asset
without restrictions.
The BSOP model assumes that the can be
determined accurately.
Whereas for traded financial assets this would most probably be reasonable, as there
is likely to be sufficient historical data available to assess the underlying asset’s
volatility.
However, this is probably not going to be the case for real options. For large, one-off
projects, there would be no historical data available.

8 Monitoring & post-completion audits.

Capital investment monitoring
Capital investment monitoring involves reviewing the implementation of an
investment project to ensure it progresses according to the original investment

This involves assessing the associated with the implementation phase and
identifying from the investment plan so that can be taken
where necessary. Controls should be established to ensure effective delivery of the
project.
Effective investment monitoring may have

An effective monitoring system would ensure that any changes to the cost estimates
would be justified and authorised.

Post-completion audit
A post-completion audit is an objective, the fact, appraisal of all phases of the
capital investment process regarding a specific project. It examines the rationale
behind the initial investment decision and the efficiency and effectiveness of the
outcome.
The key objective is to improve the appraisal and implementation of future capital
investment projects by learning from past mistakes and successes.
An effective post-completion audit may have identified the reasons behind the
failure of the Co’s project.
By comparing the actual project outcome with the original projections, an audit will
examine whether the benefits claimed prior to approval ever materialise.

版权声明：讲义由蹇老师独家制作请尊重版权 微博：ACCA 蹇老师 CFA-CPA

购买视频文字资料请微信联系唯一正规渠道： “蹇老师的小助理” 微信号：mikexiaozhuli