top stories

General comments

The examination paper followed the same format as in previous sittings. Section A contained 20 multiple-choice questions, which covered both the Financial Strategy and Risk Management syllabuses. Section B, which contained three questions, was devoted to the Financial Strategy syllabus and Section C, which also contained three questions, was devoted to the Risk Management syllabus.

The general standard achieved was satisfactory. However, a significant number of candidates would have gained higher marks through better examination technique and better presentation. Although it has been mentioned in previous reports that key workings should be shown clearly, this still remains a problem. It is often difficult for markers to award marks unless they can see how certain figures were derived. Candidates should also answer the question set. In the discussion questions there was a tendency for candidates to digress.

The question reports set out below considers candidates' performance in the six questions in Sections B and C of the examination paper.

Question 1

Question 1 concerned a demerger/share valuation problem. Candidates were required to discuss possible reasons for a demerger, to value the shares of a soon-to-be demerged company and to discuss the valuation methods used. On the whole, this question was well-answered with some candidates managing to score very high marks. It seemed that candidates were well-prepared for such a question.

Most candidates were able to outline possible reasons for a demerger and this part of the question seemed to pose few problems. Many candidates also made a reasonable attempt at calculating possible share values for the demerged company. However, arithmetical mistakes and the transposition of figures into valuation formulae often undermined attempts to gain full marks. Such mistakes are avoidable and can usually be overcome by double-checking calculations, which need not take long. In some cases, candidates were unable to remember key valuation formulae correctly and so failed to gain full marks. The final part of the question requiring a discussion of the various share valuation methods was usually attempted satisfactorily.

Question 2

Question 2 concerned the financial evaluation of a marketing campaign. Candidates were required to assess the impact of a proposed marketing campaign on the profitability of a company and to comment on the results. A discussion of the ways in which credit customers could be encouraged to pay on time was also required.

Although this was a fairly popular question, many candidates struggled with the calculations required. There were particular problems in deriving the additional bad debts and financing costs that would result from the expected increase in sales. In addition, some candidates failed to focus on the incremental change arising from the campaign and instead, focused on the total amount of profit that would be generated if the campaign was undertaken. Identifying the steps needed to encourage credit customers to pay on time was usually answered reasonably well and this helped to raise the overall mark for some candidates significantly.

Question 3

Question 3 concerned the nature of a stock exchange and the advantages and disadvantages of a stock exchange listing. This was a fairly straightforward question and marks awarded were usually satisfactory. However, few candidates managed to score high marks.

The first part of the question required candidates to identify the role of the stock exchange as a primary market and a secondary market. Relatively few managed to identify both roles, and too often there was discussion of irrelevant matters, such as the various forms of stock market efficiency. The second part of the question was usually answered satisfactorily, although few managed to identify all the main advantages and disadvantages. While, for example, most managed to identify a raised company profile as one of the key benefits of a listing, few mentioned the positive impact on the cost of capital, the efficient pricing of shares and the opportunity to use paper to acquire other companies.

Question 4

Question 4 concerned the cost of capital. The first part of the question required candidates to explain the cost of capital and to state why it must be calculated carefully. This part was not usually answered well, although most candidates managed to gain some marks for their efforts. Candidates often failed to gain high marks because they failed to recognise the importance of the cost of capital in project appraisal. Where the cost of capital has been calculated incorrectly, there is a risk that either profitable projects will be rejected or that unprofitable projects will be accepted.

The second part of the question required the calculation of the cost of equity of a company using the Gordon dividend growth model and the capital asset pricing model (CAPM). Many candidates struggled with the calculations required and relatively few managed to gain high marks. The main problems experienced were failing to apply the correct formula for the dividend growth model and failing to correctly ungear the beta of a similar company when using CAPM.

The final part required a brief explanation as to why differences may arise between the two methods. Although many candidates demonstrated a vague idea of the reasons, few managed to score high marks for this part.

Question 5
Question 5 concerned currency hedging. Candidates were required to evaluate three mutually-exclusive options that a company was considering: to take out a currency option, to take out a forward contract or to do nothing. In the past, questions based on the use of hedging instruments have not proved to be popular with candidates and so it came as no surprise to find that this question was not very popular. For those who attempted the question, marks awarded tended to be either very high or very low. Well-prepared candidates found the calculations and discussion elements straightforward and some of the answers were of a very high standard. Poorly-prepared candidates, on the other hand, found it difficult to gain any marks.

Question 6

Question 6 concerned the policy and frameworks that should be adopted by a public listed company to ensure that directors' pay and conditions are fair and transparent. Overall, the standard achieved was satisfactory. Most answers mentioned the need for a remuneration committee, and discussed the reporting of directors' remuneration to shareholders. However, few answers managed to gain high marks. Part of the problem was that too many answers did not stick to a consideration of the issues posed. Too often, discussions wandered off into other aspects of corporate governance that did not directly relate to directors' pay and conditions.

Back to top