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Incorporating subject areas:
- Financial Strategy
- Risk Management.

The exam 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 question report set out below considers the candidates’ performance in the six questions contained within Sections B and C of the exam paper.

GENERAL COMMENTS
Overall, the standard of scripts was satisfactory. The exam paper had a more computational bias than in recent papers, and, as a result, candidates could not avoid computational questions in Sections B and C. Although candidates have too often shown a preference for narrative questions in the past, the computational questions were answered reasonably well with some candidates scoring very high marks.
Again, there was some evidence that candidates did not read the questions carefully before preparing their answers. This is a fairly basic error that has occurred in the past and has been mentioned in previous reports.

QUESTION REPORT
Question 1 concerned an investment appraisal problem. Part (a) required candidates to calculate the minimum selling price for a new device. On the whole, this part was answered satisfactorily, although some candidates struggled with the relevant cost calculations. A common mistake was the failure to correctly identify the opportunity cost relating to materials required for the device. A minimum selling price required that the initial outlay plus the annual operating costs be covered. As the operating costs over time were constant, the calculations required were fairly straightforward. However, a significant number of candidates failed to identify the correct approach to the problem.
Part (b) required candidates to discuss the effect on the minimum selling price of financing the proposed investment entirely by equity. Many failed to recognise that the way in which an investment is financed is often not relevant to its financial appraisal. Where, however, the proposed investment is more risky than other investments undertaken by the business, it is acceptable to add a risk premium to the normal discount rate.

Question 2 concerned the evaluation of alternative financing methods.
Part (a) required candidates to prepare projected income statements and to calculate projected earnings per share and gearing levels. Many candidates made a reasonable attempt at this part with some scoring full marks. The main weaknesses in the answers provided were the failure to recognise that the share premium was not the total share price and that the calculation of gearing levels must take account of the retained earnings for the period.
Part (b) required candidates to calculate the indifference point at which the two financing methods produced the same earnings per share. This type of problem has been set in the past and has generally produced weak results; this occasion was no exception. Indeed, some candidates did not even attempt this part.
Part (c) required an evaluation of the two financing schemes and the general standard of discussion provided was satisfactory.

Question 3 concerned the preparation and evaluation of a forecast cash flow statement. This proved to be a popular question and the general standard of answers was high.
Part (a) required candidate to discuss the benefits of preparing a cash flow statement. This was a straightforward topic and most candidates dealt with it well.
Part (b) required candidates to prepare a cash flow statement from data provided. Again the standard of answers was generally high. Common errors, however, included the failure to deal with the timing of particular cash flows correctly and the treatment of the mortgage repayment as an inflow. There was evidence that some candidates did not read the question properly. Although the question specifically required candidates to work to the nearest $000, a surprising number did not do this.
Part (c) asked candidates to suggest how they might deal with the problems revealed by the cash flow statements. On the whole, this part was also done well, although some candidates needed to inject a little more realism into their suggestions. 

Question 4 was based around the net operating income approach proposed by Modigliani and Miller. Few candidates attempted this question and even fewer managed to gain a pass mark for their efforts.
Parts (a) and (b) together accounted for the majority of marks and required candidates to undertake calculations relating to the cost of equity and market value per share and to demonstrate the effect of a share purchase on these items. Too often, candidates became entangled in irrelevant calculations or attempted to answer these parts by narrative discussion alone.
Parts (c) and (d) were entirely discursive and here the quality of answers was better. However, as these parts accounted for a relatively small percentage of the marks available, they did not offer the opportunity to redeem weaker answers to the first two parts.

Question 5 concerned loans and interest rate swaps. Although not a very popular question, those that attempted it often scored reasonably high marks.
Part (a) required candidates to discuss the key issues and risks surrounding the management of a loan portfolio. This was a fairly straightforward topic and should have posed few difficulties for those that had worked diligently through the manual. However, it was rarely answered well and the marks awarded tended to be low. Part (b) required candidates to show how an interest rate swap could benefit a business. Generally, this part was answered well, with many candidates managing to score full marks.
Part (c) required a discussion of the advantages and disadvantages of interest rate swaps. Again, this part was often answered well and candidates seemed well prepared for this topic.

Question 6 required candidates to set out a framework for the evaluation of a board of directors. This proved to be a very popular question and most who attempted it gained reasonably good marks. A common problem, however, was the failure to answer the question posed. Candidates were specifically asked to identify broad areas of performance to be evaluated and then to set out the key points within each area. Often, however, broad areas were not identified and, instead, a checklist of points was provided. As a result, the general standard of answers was not very high: only a few managed to gain very good marks for their efforts.