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by Peter Atrill 18 Oct 2006 Diploma in Financial Management Relevant to Module B

The aim of this article is to help you understand the approach that will be used in the Financial Strategy and Risk Management examination paper and project.

Scope of the assessments
It is vitally important for you to be aware of the scope and structure of both the examination and the project. For this, you need to look at:

• the Syllabus
• the Study Guide
• the pilot examination paper and pilot project.

You can find this information on ACCA’s website if you do not already have copies. The Syllabus only really provides an outline of the topics that will be assessed, however, this has been supplemented by a Study Guide that provides a detailed breakdown of these topics. You should not rely on the syllabus alone to try to identify the scope of the examination paper and project.

Key areas
The two subject areas of Financial Strategy and Risk Management form Module B of the Diploma in Financial Management examination and the key areas within each subject are identified below.

The key areas of the Financial Strategy syllabus are as follows:

• investment appraisal
• raising finance
• capital markets
• working capital management
• mergers and acquisitions
• share valuation.

These areas are likely to appear in the examination papers and projects time and time again. Indeed some areas, such as investment appraisal, could appear in every examination paper, or nearly every examination paper, in one form or another. It is therefore, essential that you have a good grasp of these key areas.

The Risk Management syllabus consists of three distinct, but overlapping, areas of study – risk management, corporate governance and financial management. (The last two areas are, of course, also concerned with managing risk even though this term is not specifically mentioned in their titles.) The key areas of the Risk Management syllabus are as follows:

• risk management frameworks and processes
• the nature and management of operating risk
• the nature of financial risk and the various techniques that may be used to manage this form of risk
• the framework of corporate governance regulations
• the role of the board of directors and its members, including key issues affecting the functioning of the board
• the cost of capital and the capital structure decision
• dividend policy and its determinants.

You are provided with separate textbooks for Financial Strategy and for Risk Management but you should also read around each of the subjects. A list of suitable books is included in the relevant Study Guide and, additionally, you should read finance matters and the financial pages of serious newspapers. It is always dangerous to rely on a single source of knowledge for examination success.

The examination
You are probably already aware that the Module B examination paper covers both Financial Strategy and Risk Management and is divided into three parts. Part A of the examination paper contains 20 multiple-choice questions (MCQs), of which 10 are based on the Financial Strategy syllabus and 10 are based on the Risk Management syllabus. This part of the examination paper accounts for 40% of the total marks available. There will usually be a mix of computational and narrative questions for each element. However, these will not necessarily be in equal number and in most examinations there are likely to be more of the former than the latter. The nature of the subject areas makes computational questions a highly appropriate means of testing both knowledge and understanding. The style of MCQ requires candidates to select one answer from a choice of four possible answers. Providing these questions are properly designed, the distracters (that is, the incorrect answers) will seem attractive. It is, therefore, vitally important that you read each question carefully before answering.

Sections B and C of the paper contains six questions in all, with three questions falling within each part. Candidates are required to attempt one question from Section B, one question from Section C and one further question from either Section B or Section C. Each question is given equal weighting and the three questions to be attempted account for 60% of the total marks available.

Section B of the Module B examination paper contains three questions from the Financial Strategy area. Often these questions will be broken into two or three sections and there may well be both computational and discursive sections. The discursive sections are usually related in some way to the computational sections. For example, candidates may be asked to calculate the internal rate of return of a proposed project in one section and in a following section they may be asked to decide, giving their reasons, whether or not the project is worthwhile. In some cases, a question may be asked that does not involve any computation. Thus, candidates may be asked to critically discuss some issue, such as the advantages and disadvantages of a company obtaining a stock exchange listing. However, this type of question may not appear in every examination paper and, when it does, there will usually be only one such question.

Section B of the pilot examination paper gives a flavour of what candidates might expect in the Financial Strategy area. It provides an indication of the style and approach that will be adopted. However, if you are looking for a little more help, past examination papers provides further examples of the style that is likely to be adopted.

Section C of the examination paper is devoted to risk management. It is likely that this section will contain a question from each of the three main study areas – risk management, corporate governance and financial management. Questions on corporate governance will normally be discursive and will often address particular problems, tensions or conflicts that may arise in governing a business. How should directors be rewarded? What are the problems associated with the various forms of incentives for directors that are used? What conflicts arise between executive and non-executive directors and how can they be resolved? What is the role of the chairman of the board of directors and what makes a good chairman? Although an understanding of the key rules and general framework of rules is required, the main focus will often be on an analysis of issues associated with these rules. Why should the roles of chairman and chief executive be separated and what problems occur when this happens? Should the rules of corporate governance be voluntary or should they be compulsory?

Questions on risk management may be discursive or computational. Certain areas, such as those dealing with the management of operational risks, usually involve discussion. Other areas, however, such as the various techniques of financial risk management often require computational analysis. Nevertheless, this latter type of question will also usually have a discursive element, perhaps designed to test an understanding of the principles being applied or the advantages and disadvantages of the particular technique.

Questions on financial management that fall within the Risk Management syllabus may also be discursive or computational. Once again, those questions that require computational analysis will usually require some discussion of the results or of the principles employed. The Risk Management syllabus has undergone substantial revision and so the pilot examination paper and examination papers before December 2005 do not provide a reliable guide to the form and content of Section C. Candidates should therefore rely on more recent examination papers to guide them.

Examination technique
A recurring problem in the examination is that some candidates find it difficult to manage their time effectively. It is important to adopt a disciplined approach during the examination and to move on when the time allocated to a particular question has run out. Working through past examination papers under examination conditions can help overcome this problem. A further recurring problem is that many candidates struggle with the computational elements of the examination paper. Computational skills can only be gained through practice and so it is important to work through the textbooks carefully and attempt all the activities provided. Relevant past examination questions also provide a good source of practice.

The project
The project will take the form of a case study. The case study will usually be between four and eight pages in length and will present candidates with a problem that must be solved. The problem will be open-ended and so there will be more than one way of tackling the problem and, therefore, more than one feasible solution. You should not think that the examiner is looking for a single ‘correct’ solution. This is not the case: a variety of solutions may be acceptable. The process adopted in solving the case study problem is what is really important and so marks will be awarded for the quality of both the analysis and reasoning employed in arriving at the solution.

The pilot project that has been published is based around a financing problem. You should study the general approach adopted carefully. Note that answering this problem involves a combination of computational analysis and discussion. The problem reflects the real world, in as much that not all the information that you might like to have in order to conduct a more thorough analysis is available. This lack of information may make it necessary to be tentative in any conclusions that are made.

In some cases, a lack of information may force you to employ assumptions in order to arrive at a solution. Where this is done, the assumptions should be clearly identified and should also be reasonable. You cannot simply ‘assume away’ any problems that have been mentioned.

Remember that there are certain basic rules that apply to all projects. Some of the more important are:

• Where your answer involves calculations being carried out, any formulae used or key workings should be included as part of your answer. The markers must be able to trace the main steps that you have taken towards a solution.
• Where recommendations are being made, they should be linked clearly to your analysis of the case problem. You should avoid producing recommendations at the end of a project that cannot be supported by earlier analysis and discussion.
• Ensure that your answer to the project is logically structured: it should have a beginning, a middle, and an end.
• Avoid broad generalisations where the question requires a specific issue to be addressed relating to the company described in the case study. Answers should be tailored to the needs and characteristics of the particular company, and should draw on information contained within the case study.

Although these rules may seem fairly obvious, they are often forgotten. Good luck and every success in your studies.

Peter Atrill is examiner for Module B

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