Finance (IFIN)

Syllabus overview

This is an introduction to financial management. It builds on the Foundation units of Economics for Business, Business Mathematics and Financial Accounting Fundamentals.

This syllabus deals with the evaluation of short- and long-term financing, and requires an appreciation of the relevant theories underpinning this together with an understanding of working capital management.

The Finance paper underpins the Financial Strategy paper at Final Level.

This syllabus aims to test the student’s ability to:

• explain the role and purpose of financial management;

• identify and evaluate sources of finance;

• calculate cost of capital;
  analyse the overall management of working capital;

• evaluate debtor and creditor management policies.

There will be a written paper of three hours. The paper will comprise two sections.

Section A: 40% objective testing. All questions are compulsory.

Section B: Three questions will be answered out of a choice of five.

All learning outcomes may be tested in either section.

Formulae will be given as required.

On completion of their studies students should be able to:

• explain the interrelationships between decisions concerning investment, financing and dividends;
• describe and explain the operation of the securities markets;
• describe and explain the role and management of the treasury function;
• compare and contrast the services provided by financial institutions and recommend appropriate providers in different scenarios.

• The financial objectives of different organisations, e.g. value for money, maximising shareholder wealth, providing a surplus.
• The three key decisions of financial management (by which we mean investment, financing, dividend) and their links.
• The operation of securities markets (stock exchanges), by which we mean how share prices are determined and what causes share prices to rise or fall. (No detailed knowledge of any specific country’s stock exchange will be tested.) Financial institutions: for example, stockbrokers, institutional investors, merchant banks, venture capitalists, money brokers.
• The efficient market hypothesis (EMH).
• The role of the treasury function in terms of setting corporate objectives, liquidity management, funding management, currency management.
• The benefits and shortcomings of establishing treasury departments as profit centres or cost centres.
• The control of treasury departments when established as cost centres or profit centres.

On completion of their studies students should be able to:

• recommend the sources of capital most appropriate for an organisation;
• evaluate the most appropriate method of funding an asset;
• calculate investor ratios and demonstrate the impact of changing capital
• structures on these ratios;
• calculate the cost of capital and demonstrate the impact of changing capital
• structures;
• explain the impact of interest rate changes on the cost of capital.

• Types of share capital, by which we mean ordinary, preference, deferred, warrants.

• Equity issues; new and rights issues.

• Long-term debt finance (by which we mean secured, unsecured, redeemable, irredeemable, convertibles and debt with warrants).
• Methods of issuing securities: for example, rights, placing, offer for sale.
• Fraud related to sources of finance (for example, advance fee fraud and pyramid schemes).
• Operating and finance leases (one-year lagged tax savings will be tested with leases and comparisons of the cost of a lease with the cost of buying).
• The calculation of the cost of equity using the capital asset pricing model (CAPM) and the dividend growth model (knowledge of methods of calculating and estimating dividend growth will be expected).
• An introduction to the relationship between risk, uncertainty and reward: for example, use of CAPM (beta, R_m and R_f will be given and a simple understanding of the CAPM is all that will be tested. Gearing and ungearing betas will not be tested).
• The ideas of diversifiable risk (unsystematic risk) and systematic risk (use of the two-asset portfolio formula will not be tested).
• The cost of redeemable and irredeemable debt, including the tax shield on debt (numerical questions on the cost of convertible debt will not be tested).
• The weighted average cost of capital (Modigliani and Miller will not be tested).
• Investor ratios, by which we mean EPS, price/earnings (P/E) ratio, dividend cover, dividend yield, interest yield, earnings yield, redemption yield.
• Gearing ratios (market and book values) and interest cover.

On completion of their studies students should be able to:

• identify alternatives for investment of short-term cash surpluses;
• identify sources of short-term funding;
• calculate and explain rates of interest;
• explain the yield curve and its practical use;
• analyse an organisation’s credit-worthiness from a lender’s viewpoint;
• identify appropriate methods of finance for trading internationally.

Syllabus content

• Interest rate arithmetic (compound, simple, annual, quarterly, monthly).

• The yield curve and theories concerning normal and inverse yield curves.
• The principles of investing short term, by which we mean maturity, return, security, liquidity and diversification.
• Types of investments: for example, interest-bearing bank accounts, negotiable instruments (including certificates of deposit, short-term treasury bills), securities.
• The difference between the coupon on debt and the yield to maturity.
• Types of borrowing: for example, overdrafts, short-term loans, invoice discounting.
• The effect of short-term debt on the measurement of gearing.
• Use and abuse of trade creditors as a source of finance.
• The lender’s assessment of creditworthiness.
• Export finance, by which we mean documentary credits, bills of exchange, export factoring, forfaiting.

Learning outcomes

On completion of their studies students should be able to:

• calculate and interpret working capital ratios for business sectors;
• prepare and analyse cash-flow forecasts over a twelve-month period;
• identify measures to improve a cash forecast situation;
• compare and contrast the use and limitations of cash management models and identify when each model is most appropriate;
• state and illustrate the main issues in group cash-flow management;
• identify appropriate bank services to assist in cash management;
• identify debtor management policies and procedures for an organisation;
• interpret the creditworthiness of a customer;
• analyse trade debtor information;
• evaluate debtor and creditor policies;
• evaluate appropriate methods of stock management.

Syllabus content

• Working capital ratios, by which we mean debtor days, stock days, creditor days, current ratio, quick ratio, and the working capital cycle.

• The working capital characteristics of different businesses (for example, supermarkets being heavily funded by creditors) and the importance of industry comparisons.
• Cash-flow forecasts, use of spreadsheets to assist in this in terms of changing variables (for example, interest rates or inflation) and in consolidating forecasts.
• Which variables are most easily changed, delayed or brought forward in a forecast.
• The link between cash, profit and the balance sheet.
• The Baumol and Miller–Orr cash management models.
• Group cash-flow management, for example, netting.
• Bank services available to organisations in order to help them manage cash: for example, investing overnight, Bankers’ Automated Clearing Services (BACS), automated matching, minimising service charges.
• Bank services and facilities and their impact on organisational activities and costs.
• The credit cycle from receipt of customer order to cash receipt.
• Payment terms.
• Assessing a customer’s creditworthiness: for example, sources of credit status information (for example, bank references, trade references, internal credit rating information).
• Evaluating settlement discounts.
• Methods of payment: for example, cash, BACS, cheque, banker’s draft, standing order, direct debit, credit card, debit card.
• Present and interpret an age analysis of debtors.
• The stages in debt collection: for example, reminder, statement, telephone call, personal visit, legal action, debt collection agency, interest on overdue debts.
• Establishing collection targets on an appropriate basis: for example, motivational issues in managing credit control.
• Factoring and invoice discounting.
• Remedies for bad debts: for example, credit insurance, debt collection agencies, specialist solicitors, guidance in taking legal action, negotiated settlements, an outline of the differences between bankruptcy and insolvency (no legal aspects to be examined).
• The payment cycle from agreeing the order to making payment.
• Payment terms as part of the order.
• Centralised versus decentralised purchasing.
• Present and interpret an age analysis of creditors.
• The link between purchasing and the budget for cost centres.
• The relationship between purchasing and stock control.

• The economic order quantity (EOQ) model (by which we mean reorder levels, reorder quantities, safety stocks and evaluating whether bulk order discounts should be accepted).