Examiner’s report

Advanced Financial Management (AFM)

March/June 2024

Advanced Financial
Management (AFM)
September /
December 2024
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments .............................................................. 2
Format of the exam .............................................................. 2
Question 1 - Northney Co .................................................... 2
Requirement (i) – 6 marks ................................................ 4
Requirement (ii) – 7 marks ............................................... 5
Requirement (iii) – 5 marks .............................................. 5
Requirement (iv) – 8 marks .............................................. 5
Requirement (v) – 4 marks ............................................... 6
Requirement (vi) – 10 marks ............................................ 6
Question 2 - Mortexa Co ...................................................... 9
Requirement (a)(i) – 5 marks ......................................... 10
Requirement (a)(ii) – 5 marks ........................................ 11
Requirement (a)(iii) – 3 marks........................................ 12
Requirement (b) – 7 marks ............................................ 12
Professional skills – 5 marks .......................................... 12
Question 3 – Zulla Co ........................................................ 14
Requirement (a) – 10 marks .......................................... 15
Requirement (b) – 5 marks ............................................ 16
Examiner’s report – AFM September/December 2024
Requirement (c) – 5 marks ............................................. 16
Professional skills – 5 marks .......................................... 17
General comments

This examiner’s report should be used in conjunction with the published

September/December 2024 sample exam which can be found on the ACCA Practice
Platform.

In this report, the examining team provide constructive guidance on how to answer the
questions whilst sharing their observations from the marking process, highlighting the
strengths and weaknesses of candidates who attempted these questions. Future
candidates can use this examiner’s report as part of their exam preparation, attempting
question practice on the ACCA Practice Platform and reviewing the published answers
alongside this report.

Format of the exam

The examination comprised two sections, A and B. Section A consisted of one

compulsory question for 50 marks in total. Section B consisted of two compulsory
questions for 25 marks each. 10 professional skills marks were available within
Section A for communication, analysis and evaluation (A&E), scepticism and
commercial acumen. In Section B there are 5 professional skills (P) marks in each
question from at least two of analysis and evaluation, scepticism and commercial
acumen.

Section A

Question 1 - Northney Co

Format of the question

Northney Co was drawn from the treasury and advanced risk management techniques
section of the syllabus (section E) and covers the three areas itemised in the syllabus:
the role of the treasury function, the use of financial derivatives to hedge against forex

Examiner’s report – AFM September/December 2024 2

risk and the use of financial derivatives to hedge against interest rate risk. This
scenario is broadly similar in complexity to previous questions from this syllabus area
that have been examined in the past on. The six requirements of this question tested
the ability of candidates to undertake several detailed calculations and to discuss
associated issues relevant to the scenario of the question.

Exam technique and time management

Northney Co is worth 50 marks which translates into 90 minutes for candidates to

spend on this question. Candidates should read the question thoroughly to become
familiar with the scenario and then plan their time carefully in order to address the
specific issues in the question and gain maximum marks for each requirement.
Candidates must then plan their answer to enable them to have the opportunity to gain
maximum marks for each section. Candidates should ensure they address the
requirement in the time allotted and avoid unnecessary detail such as copying the
facts from the scenario. Marks are not allocated for information which is repeated from
the scenario without any analysis or evaluation.

Scenario and requirements

The scenario for this question relates to the treasury activities of Northney, a company
which is based in the USA but has expanded over the years into Europe, setting up a
number of subsidiary companies. As much of Northney’s treasury activity is currently
taking place in Europe, the group finance director has made a proposal to relocate the
group treasury function from the USA to Europe; although some treasury activity will
be maintained in the USA and a decision concerning the European location has not
yet been taken. Details about the treasury function and activities are given in exhibit
one and the first requirement asks candidates to discuss the relocation of the group
treasury function and the impact this will have on the existing treasury activities.
Financial details relating to various treasury hedging activities are provided in exhibits
two, three and four and these exhibits relate to the calculations in requirements (ii),
(iii) and (iv), including intragroup settlement of currency amounts owed to and by the
subsidiaries, a foreign exchange hedge using futures and an interest rate hedge using
a collar. Requirement (v) is an explanation relating to why the treasury function
decided to use both methods for hedging in requirements (iii) and (iv).

Exhibit five provides information about a proposal to set up another subsidiary

company which would be located outside Europe and the USA. Requirement six
expects candidates to assess the political and operational risks which may affect the
new subsidiary under consideration. All requirements are to be set out in report format
with relevant sections and appendices. Additionally, there are a total of 10 professional
skills marks covering communication, analysis and evaluation, scepticism and
commercial acumen.

General comments

Overall, performance was acceptable. Some of the calculations required are

technically demanding but these are balanced with calculations that are more
approachable. Candidates performed well on the intragroup settlements and quite well
on the futures hedge but many struggled with the interest rate collar. Candidates who

Examiner’s report – AFM September/December 2024 3

thoroughly read and analyse the scenario are more likely to do well in the discussion
elements and in this case some candidates who were not familiar with the specific
scenario answered a different question to the one set out in the requirement.

Professional marks generally reflected performance in the technical elements and

most candidates scored well on the skills of communication and analysis and
evaluation. The demonstration of skills in commercial acumen is generally improving
and those candidates who take the time to understand the scenario are more likely to
earn these professional skills marks by relating discussion to the case or the real world.
The skill of scepticism is not demonstrated very well by the majority of candidates.
Candidates are advised to read the relevant study aids on professional skills and to
practice past questions.

Time pressure could have been an issue for some candidates as there is a lot of
content required for this question. Candidates are strongly advised to plan their time
accordingly and not deviate from their plan.

The detailed review below focuses on each of the requirements, highlights the
approach taken by candidates and any issues that need to be addressed when using
this question as a study aid.

Requirement (i) – 6 marks

Discuss the issues affecting the establishment of the group treasury function in
Europe and the impact upon treasury activities relating to the European
subsidiaries and the American parent company.

Overall, there were some very good answers but there were also some candidates
that did not attempt this requirement. Responses varied considerably but many
candidates did not answer the question according to the facts provided in the scenario
in exhibit one.

The first part of the requirement expected candidates to discuss the issues affecting
the establishment of a new group treasury function and not a discussion on the
advantages and benefits of centralising treasury functions. Many candidates focused
their answer on the costs of centralisation and the advantages of using different
hedging techniques and valid points were rewarded but relevant issues such as
location and control were rarely discussed. Candidates who performed to an
acceptable level generally did better on this first part but they could have improved
their performance by structuring their answers on both areas set out in the
requirement.

Many candidates failed to consider the second part of the requirement concerning the
impact of the new group function on the existing treasury function. Responses could
have been improved by including a discussion on how roles and responsibilities within
the existing subsidiaries treasury functions would change because of the new group
function and further discussion on the relationship of the new group treasury function
with the head office treasury in the USA and how this might change.

Examiner’s report – AFM September/December 2024 4

Requirement (ii) – 7 marks

Calculate the impact of undertaking intergroup settlement between Northney Co

and the three subsidiaries’ companies and the intra group settlement cash flow
for the 4 group companies.

It was pleasing to see that the majority of candidates did very well on this requirement
with many candidates gaining full or nearly full marks. There were some poor
responses which were likely to have been because of a lack of exam preparation and
a few candidates made no attempt to answer this requirement. Responses tended to
fall into being very good where a clear table was produced showing all the correct
detail of amounts owed to and owed by the subsidiaries or quite poor where there was
no attempt at a table showing the relevant transactions. However, many candidates
who completed most of the calculations correctly then failed to calculate the final
settlement of the cash flows causing them to lose unnecessary marks.

Requirement (iii) – 5 marks

Demonstrate how the transaction with the Japanese customer would be hedged,
based on the information supplied, and what the result of the hedge would be.

This requirement was a standard futures hedge and was answered very well by a
significant number of candidates. Many responses included common errors such as
not stating whether futures are bought or sold, not calculating the number of contracts
correctly and/or calculating basis incorrectly. However. some candidates missed out
on gaining full marks by not stating whether they were buying or selling futures or by
not calculating the number of contracts. Even if this information is not required to
calculate the expected receipt or payment candidates should be advised that they can
lose marks by not including these calculations in their answer. When candidates are
asked to demonstrate how the transaction would be hedged, they are expected to
provide a full set of instructions to the board and this includes the number of contracts
and whether the contracts should be bought or sold.

Requirement (iv) – 8 marks

Demonstrate how the short-term investment would be hedged, on the basis of

the information supplied, and what the result of the hedge would be if interest
rates rose or fell by 0.5%.

In contrast to requirements (ii) and (iii) candidates responded struggled with this part
of the question. Candidates were required to calculate the financial impact of Northney
Co taking out a collar to protect a deposit they were due to make. Very few candidates
were able to successfully complete this calculation even though similar calculations
have been included in previous exam questions. Well prepared candidates could earn
the full 8 marks, but many candidates didn’t get more than halfway through the
analysis. Candidates needed to demonstrate the purchase of a call option and the
selling of a put option. Those candidates who started with the wrong collar could still
gain good marks if their follow-on workings were correct.

Examiner’s report – AFM September/December 2024 5

Candidates who followed a step-by-step approach by firstly determining the options
needed then working out the number of contracts and the net premium started to gain
good marks but at this point it was not unusual for candidates to finish their
calculations. The next step is to calculate basis and use this to work out the expected
futures price so that candidates could advise whether the options would be exercised
under each of the interest rate scenarios. The final calculation involved working out
the effect of the collar on the net receipts. Very few candidates were able to get to this
stage of the calculation but those who got to the halfway stage, even if their collar was
incorrect, were generally able to earn further marks for the exercise decision. Although
collar calculations are complex, using past questions as a revision aid would greatly
help candidates understand the step-by-step approach that is needed to successfully
complete a collar calculation.

Requirement (v) – 4 marks

Explain why the treasury function might have decided to use currency futures
and an interest rate collar as the hedging methods in (iii) and (iv).

Responses to this requirement were generally good and many candidates were able
to achieve average to good marks. Many responses focussed their discussion on the
advantages and disadvantages of the two hedging techniques and these points were
rewarded where relevant. However, it is worth advising candidates to study the
wording of requirements as in this case it asks why futures and collars were chosen
by the treasury function. This implies that the treasury personnel would have
compared futures and collars with other methods that they could have used, and the
level of receipts would have been a factor in this decision. Many responses covered
the point that both methods are based on derivatives which are tradeable but the fact
that both were chosen despite required margin payments and basis was often
overlooked. Basis risk and margin requirements can have a significant effect on
hedging decisions in practice and this gives candidates an opportunity to challenge
this information and if fully discussed, earn scepticism marks.

Requirement (vi) – 10 marks

Assess the political and operational risks which may affect the new subsidiary
currently under consideration.

Most candidates answered this requirement to an acceptable standard and there were
some very good responses. Candidates who did well used the information from exhibit
five about the country where Northney Co was considering locating the subsidiary and
applied their own knowledge to discuss a good range of both risks. The information
provided in exhibit five also gave candidates the opportunity to earn skills marks in
commercial acumen and scepticism: for example, there was information about the
government of the country having low tax rates and high borrowing. This is a political
risk and candidates could have widened their discussion to include comments about
whether it would be the right country to invest in if the government changes and higher
tax rates are introduced. Responses that were structured around the areas of political
and operational risk earned higher marks than responses which listed a wide range of

Examiner’s report – AFM September/December 2024 6

general issues that weren’t specifically related to either of the two risks. Candidates
who took this approach were rewarded where valid points were made but bullet points
with little or no explanation did not achieve much credit. In order to gain the maximum
marks candidates needed to discuss a range of both political and operational risks.

Professional skills – 10 marks

On the whole candidates were awarded a higher than average mark for professional
skills. Candidates were generally good at demonstrating skills in communication and
analysis and evaluation. It was also pleasing to note that candidates seem to be
generally performing better at demonstrating commercial acumen skills which can be
gained by thoroughly reading the scenario and applying points from this and from the
real world to their discussions. Scepticism, however, is still a skill that candidates
struggle to demonstrate.

Communication
Most responses gained good or very good marks for demonstrating communication
skills. The majority of candidates gain good marks by producing their answer in a
report format in a clear and logical manner. However, there is still a significant number
of candidates who totally ignore the report format required and who submit their word
document answers simply relating to the numbered requirements of the question and,
as a result, lose valuable marks. Whilst many candidates’ performance is improving
and most reports presented have an opening rubric and a brief introduction, there are
still quite a few candidates who could improve by making sure that they structure their
report with suitable sub-headings and finish their report with a brief conclusion which
is very often missing.

Analysis and Evaluation

Analysis and evaluation marks are given for clear, efficient and effective numerical
analysis. Generally, candidates who are technically proficient are better able to earn
these marks. Many candidates were able to gain good marks in this question by
providing well-structured numerical analysis for their calculations.

Scepticism
Scepticism marks are awarded for challenging information relating to the assumptions,
directors’ views, decisions and/ or techniques and providing reasons for such
challenges. Marks were not easily attained in this question with very few candidates
being awarded marks for this skill. There were opportunities to challenge the treasury
function decision in (a) to challenge the assumptions when using futures in b(v) and
to challenge the information provided relating to the location of the new subsidiary in
b(vi).

Commercial acumen
Many candidates, who had thoroughly read the scenario, were able to demonstrate
good commercial acumen skills by relating their discussion to information in the
scenario or the real world. In this question commercial acumen could be demonstrated
in requirements (i) and (vi) where candidates could relate the establishment of a new
treasury function to the case or the real world and where the discussion on risks
offered opportunities to do the same.

Examiner’s report – AFM September/December 2024 7

Summary
Overall, this is a good treasury management question which covers a range of areas
that have frequently been examined in a similar format. Well prepared candidates were
able to do very well. A thorough reading of the scenario and a structured approach
benefitted many candidates and ensured time was not wasted on needless
calculations and discussion but directed at the key areas. The ability to apply
knowledge to a given scenario within a specified time limit is a skill required throughout
this stage of the qualification and reinforces the need to practice past questions under
exam conditions and study model answers.

Examiner’s report – AFM September/December 2024 8

Section B

Question 2 - Mortexa Co

Format of the question

Mortexa Co is a 25 mark section B question which focusses on shareholder value

gains in acquisitions from section C of the Advanced Financial Management (AFM)
syllabus. The requirements are similar to those in previous exam questions that have
covered this syllabus area and should have been in line with candidates’ expectations.
Candidates were required to undertake calculations of the gains to shareholders
arising after an acquisition, to discuss the shareholders’ likely reactions to the
acquisition, and to discuss practical issues relating to competition regulations.

To maximise their chances of scoring high marks, candidates should read the question
thoroughly to become familiar with the scenario and then plan their time carefully in
order to address the specific issues in the question.

The key to success is to spend the limited amount of time available addressing the
specific requirements. It is important to answer the requirements in the time allotted,
and to avoid unnecessary detail. For example, marks are not awarded for information
which is repeated from the scenario without any analysis or evaluation.

Scenario and requirements

Exhibit one presents information about a large supermarket company, Mortexa Co,
which is suffering a decline in profitability in this extremely competitive industry. It
explains that the directors of Mortexa Co are proposing to acquire a smaller
supermarket company called Yekkon Co. Exhibit two then presents some details about
the two companies and the likely synergies arising from the acquisition by a share for
share exchange. The financial information in this exhibit will enable candidates to
calculate the current values of both companies before the acquisition, and the
expected value of the combined company after the acquisition. Exhibit three explains
the objectives of the competition authorities in the country where Mortexa Co and
Yekkon Co are based. The proposed combination of these two companies is forecast

Examiner’s report – AFM September/December 2024 9

to narrowly exceed the 25% market share threshold that will trigger an investigation
by the authorities.

In common with many AFM exam questions, the technical marks in Mortexa Co are
split fairly evenly between calculations and discussion. The calculations are to value
the individual companies and calculate the total value gain from the acquisition,
before estimating how much of that total gain will accrue to each company’s
shareholders. The discussion parts then require candidates to advise whether both
companies’ shareholders will approve the acquisition, and to explain what factors the
competition authorities will consider in an investigation.

In addition to the technical marks that are available in this question, candidates are
also expected to demonstrate professional skills throughout. The professional skills
examined in Mortexa Co are analysis and evaluation, scepticism and commercial
acumen.

General comments

The requirements in this question are technically demanding, but they are very
similar to many previous gains to shareholders / acquisitions questions. Candidates
who were well prepared were able to score good marks, especially on the numerical
sections. Overall, many candidates coped very well with the valuation calculations in
the first requirement, but then less well with the calculations of gains to shareholders
and earnings per share in the second requirement. Responses to the discussion
parts of the question were often a little disappointing. In particular, a significant
number of candidates simply repeated information from the question in requirement
(b), with little attempt to develop their points further to add value.

Regarding professional skills, candidates generally scored well on analysis and

evaluation, particularly in their numerical analysis, but many did not demonstrate the
skills of scepticism and commercial acumen. Although analysis and evaluation are
important in AFM, the skills of scepticism and commercial acumen are also highly
important and need to be developed to give increased chances of exam success.
The review below focuses on the key problems that were identified in each
requirement.

Requirement (a)(i) – 5 marks

Calculate the pre-acquisition value of equity for both Mortexa Co and Yekkon
Co and estimate the additional value that would be created by the proposed
acquisition.

This part of the question was generally well done. The majority of candidates were
able to calculate the values of the individual companies and then the value of the
combined company using the combined earnings and the price earnings ratio.
However, there were a number of common errors made by some candidates as
detailed below:

• incorrect calculation of the combined earnings figure, in particular omitting the

value of the annual synergistic gains.

Examiner’s report – AFM September/December 2024 10

• incorrect treatment of the synergistic gains – a sizable minority of candidates
assumed that the $27 million was a single gain rather than an annual cost
saving.
• calculating the values of the individual companies and the combined company
but not finishing off the question by netting these off to give the additional value
created.

Requirement (a)(ii) – 5 marks

Estimate the impact of the acquisition on the wealth of both companies’

shareholders, including the impact on earnings per share for Yekkon Co’s
majority shareholder.

This next part of the question caused problems for some candidates, who did not
progress far beyond the values calculated in part (a)(i) above. There was some
evidence that candidates who struggled in the early part of the question seemed to
get disheartened and give up, rather than trying to work through to the end even if
their initial workings were incorrect. It is worth reminding candidates at this point that
any mistake is only penalised once, so an incorrect valuation at the start can still
result in a correct method being well rewarded.

An important starting point to part (a)(ii) was to calculate the number of shares (300
million) that would be issued to Yekkon Co’s shareholders as a result of the share for
share exchange detailed in exhibit two. Candidates who correctly calculated this
number were then able to use it along with the 800 million shares already owned by
the Mortexa Co shareholders to split the value of the combined entity in the correct
proportion and hence calculate the gain to each group of shareholders. The
requirement asked for an estimate of the “impact of the acquisition on the wealth” but
it did not specify whether a monetary value or a percentage was required. This
allowed candidates to present their answers in a variety of ways. As long as gains
were calculated in monetary terms or percentage terms (or often both), markers
rewarded any sensible approaches.

A large number of candidates did not present a calculation showing the impact on
earnings per share (EPS). It is important to always read the requirements carefully
and to answer all parts. Common errors in this part of the requirement were:

• incorrect calculation of the number of shares issued in the share for share
exchange – Yekkon Co had 450 million $1 shares in issue before the
acquisition, so “exchange three Yekkon Co shares for two Mortexa Co shares”
means that 300 million new shares (being (2/3) x 450 million) will be issued.
• incorrectly assuming that the gain to Yekkon Co’s shareholders had to be 20%,
rather than using the 20% as a benchmark for comparison in the later
discussion.
• omitting the EPS calculation completely or trying to work out a post-acquisition
EPS specific to Yekkon Co rather than realising that the combined entity would
have a combined EPS.

Examiner’s report – AFM September/December 2024 11

Requirement (a)(iii) – 3 marks

Advise Mortexa Co’s board whether or not the acquisition is likely to be

approved by both companies’ shareholders.

Most candidates were able to present a reasonable answer to this part of the
question based on the calculations that they had prepared in parts (a)(i) and (a)(ii).
Any sensible comments that related to the candidates’ own answers were awarded
credit. This again shows how important it is to keep going in a question. Even if
calculations are incorrect, markers will reward sensible advice drawn from an
analysis of those calculations.

The most common error here was that many candidates only commented on the
potential reaction of Yekkon Co’s shareholders, whereas the requirement did ask for
an analysis of the likelihood of approval by both companies’ shareholders.

Requirement (b) – 7 marks

Exhibit three explained the role of the Competition Authority, and candidates were
asked in part (b) to apply this information to the case of Mortexa Co and Yekkon Co.
Many candidates presented good, detailed answers, by using the general
information given in exhibit three and considering which parts would be particularly
pertinent in the circumstances presented in the question. However, a sizable
minority of candidates presented answers that were generic and did little more than
simply restate the information given in exhibit three.

The only common technical error in this section was that a significant number of
candidates did not have a good knowledge of the sort of issues that would interest
the Competition Authority. In particular, the Competition Authority would not want to
investigate whether the company valuations were fair, or whether the conduct of the
various parties in the acquisition complied with takeover regulations.

Professional skills – 5 marks

Analysis and evaluation

Many candidates demonstrated excellent analysis and evaluation skills in their
numerical analysis, presenting comprehensive and well-structured calculations in
their responses to part (a)(i) and (a)(ii). Those candidates who then moved on to part
(a)(iii) and presented advice to the board that was consistent with the calculations
produced were rewarded well for demonstrating further analysis and evaluation
skills.

Scepticism
To demonstrate the skill of scepticism, candidates were expected to adopt a
questioning approach in a way that would lead to effective challenges of the
information provided in the scenario. One way to do this would be to critique the
assumptions stated in the scenario in a meaningful way and then consider the
impact of alternative assumptions on the final recommendation. Overall, most
candidates struggled to demonstrate the requisite level of scepticism.

Examiner’s report – AFM September/December 2024 12

Commercial acumen
To demonstrate the skill of commercial acumen effectively, candidates can use the
information in the scenario to draw evidence that relates to the organisational context
or any other practical commercial considerations that could be taken into account.
An example of commercial acumen in this question would have involved a realisation
that the 25% threshold for the Competition Authority investigation was not a hard and
fast rule, but more a guide. Few candidates picked up on this. It is vitally important
that candidates practice bringing in commercial acumen points when attempting
questions and preparing for the exam.

Examiner’s report – AFM September/December 2024 13

Question 3 – Zulla Co

Format of the question

This 25-mark question is about an unlisted company (Zulla Co) which is involved in
the successful production of online games and experiences and has built an excellent
reputation in this area. The company has recently developed an innovative online
gaming platform and the executive officers of the company are of the opinion that they
will need extra funding in order to commercialise the gaming platform successfully.
Hence, they are looking to list Zulla Co through an initial public offering (IPO).

Scenario and requirements

There are three requirements in this question. The first requirement, which also had
the most number of marks available, expected candidates to estimate Zulla Co’s equity
value, based on dividends and on free cash flows, if it undertakes the IPO and
commercialises its gaming platform successfully. The second requirement expected
candidates to comment on the results and to discuss whether using free cash flows
will provide a better estimate of Zulla Co’s equity value, instead of using dividends.
The final requirement expected candidates to discuss whether Zulla Co would benefit
more from obtaining a listing through a reverse takeover instead of an IPO. Up to 5
professional marks are available in this question. Professional marks can be earned
in all the separate question requirements.

General comments

Performance in this question was mixed. Few candidates were really confident with
the calculations required in the first part of the question. Indeed, many candidates were
only able to make a rather limited attempt at the calculations and many seemed to
lose momentum such that they failed to pick up some easier marks which arose later
in the question part. Hence, a significant proportion of candidates struggled to achieve
a high mark in this question part. With regard to the discursive question parts, it was
the second requirement which was generally answered more satisfactorily and a good

Examiner’s report – AFM September/December 2024 14

proportion of candidates were able to earn a good mark here. Some candidates who
were unable to make a good attempt at the calculations in requirement (a) seemed to
lose heart and only provided very limited answers to the first discursive question part
which was linked to requirement (a). Candidates must try to remain positive as they
could have easily achieved a good mark in the first discursive question part even if
they had been unable to make that creditable an attempt at the calculations required
in requirement (a).

Requirement (a) – 10 marks

Based on the financial information provided, estimate Zulla Co’s equity value,
based on dividends and on free cash flows, if it undertakes the initial public
offering (IPO) and commercialises its gaming platform successfully.

This is worth 10 marks and, as indicated, requires candidates to estimate Zulla Co’s
equity value, based on dividends and on free cash flows. Performance in this question
part was often a little disappointing and few candidates were awarded really high
marks.

In calculating the dividend based value, candidates often failed to discount the
dividends at the cost of equity and workings provided by candidates sometimes
contained a mix of total and per share figures which inevitably caused problems. In
calculating the free cash flow to firm value candidates very often struggled to calculate
the free cash flows correctly. This question was a little challenging as instead of giving
the profit before interest and tax, which is generally used as the starting point for
calculating free cash flows, candidates were provided with the profit after tax.
Candidates must make sure they can confidently calculate both free cash flows to firm
and free cash flows to equity irrespective of how the necessary information is
presented to them. Too many candidates also struggled to estimate a growth rate for
the free cash flows using the information provided on the past sales. Calculating
growth rates from past data is a skill candidates learn in Financial Management and
candidates would do well to remember that such skills still remain important in
Advanced Financial Management.

Sufficient information was available for candidates to calculate the free cash flows to
equity and discount these at the cost of equity. Candidates who did this were given
significant credit even though the question does ask for a free cash flow to firm
valuation. Just as with the dividend based value, a significant number of candidates
used the wrong discount rate. Candidates should be aware that the free cash flows to
the whole firm should be discounted at the discount rate relevant to the whole firm,
which is the weighted average cost of capital, and if this is done the total value of the
debt and equity of the firm is calculated. In order to calculate the total equity value, the
value of the debt needs to be adjusted for. In this question this is achieved by using
the capital structure of the company which indicates that 90% of the total value of the
company comprises equity. Too many candidates missed this simple adjustment for
which there was a mark.

A common problem in both valuation calculations was that candidates were not
confident using the perpetuity with growth or the delayed perpetuity with growth
calculation and hence too many errors arose. These calculations are very frequently

Examiner’s report – AFM September/December 2024 15

examined and candidates should make sure they can quickly and confidently carry out
the necessary calculations. Additionally, the question indicates that once the IPO has
taken place there will be a 30% increase in the company’s equity value. Too many
candidates failed to make this simple adjustment to the values they had calculated for
which a mark was available.

Candidates must make sure that they have practiced doing calculations, such as were
required here, using the spreadsheet provided. Candidates with good spreadsheet
skills are better able to quickly earn all the marks they deserve whereas candidates
whose skills are less well rehearsed can waste considerable time and still fail to
adequately demonstrate their knowledge.

Requirement (b) – 5 marks

Comment on the results obtained in part (a) and discuss whether using free
cash flows will provide a better estimate of Zulla Co’s equity value, instead of
using dividends.

This requirement is worth 5 marks and requires candidates to comment on the results
obtained in part a) and to discuss whether using free cash flows will provide a better
estimate of Zulla Co’s equity value, instead of using dividends.

The stronger candidates provided meaningful comment on the results they had
obtained and in particular used this question part as an opportunity to display
scepticism. Furthermore, these candidates then used their knowledge of valuation
methods to discuss whether or not a free cash flow value is likely to provide a better
valuation of a company than a value based on dividends.

Weaker candidates provided rather thin answers with little meaningful comment and
either failed to show any scepticism or were too vague. Whilst it is true that the values
calculated are based on many estimates, to earn credit for being sceptical candidates
need to demonstrate that they understand how and why the estimates could be wrong
and how this could impact on the values calculated. Additionally weaker candidates
simply stated that the valuation method which they had calculated produced the
highest value for Zulla Co, was the best valuation method. Unfortunately, this does not
answer the question posed.

Requirement (c) – 5 marks

Discuss whether Zulla Co would benefit more from obtaining a listing through
a reverse takeover instead of an IPO.

This question part is also worth 5 marks and requires candidates to discuss whether
Zulla Co would benefit more from obtaining a listing through a reverse takeover instead
of an IPO.

Most candidates were able to make a creditable attempt at this question part and many
answers displayed good knowledge of IPO’s and reverse takeovers and their relative
benefits. Only a minority of candidates were unable to provide any meaningful
discussion.

Examiner’s report – AFM September/December 2024 16

Professional skills – 5 marks

Analysis and evaluation

Analysis and evaluation marks are given for clear, efficient and effective numerical
analysis. Generally, candidates who are technically proficient are better able to earn
these marks. As candidates generally struggled with the calculative element in this
question few of them earned as many Analysis and Evaluation marks as they could
have done. Candidates who provide annotations to their calculations, which make it
clear what it is they are trying to calculate, will likely earn more of these marks.

Scepticism

Scepticism skills were most often demonstrated in requirement (b) but as previously
stated candidates’ attempts to be sceptical were often too vague to be creditable.

Commercial acumen

Commercial acumen skills were most commonly demonstrated by those candidates

who provided a fuller answer to requirement (c) and showed good commercial
knowledge of either or both of the listing methods being considered.

Examiner’s report – AFM September/December 2024 17