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The examination paper followed the same format as in previous sittings. Section A contained twenty 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 examination paper. The general standard achieved for these parts was satisfactory, with some candidates scoring very high marks.

General comments

The paper contained an equal number of computational and discussion questions. However, the discussion questions proved to be more popular than the computational questions. This may indicate a lack of confidence among many candidates in tackling numerical problems. It has been mentioned in previous reports that practice in undertaking numerical problems is essential in preparing for the examination. There is a skill to answering such questions which can only be acquired through practice. Nevertheless, those who attempted the computational questions often managed to score good marks. When answering discussion questions, it is important to read the requirements carefully and to address the points that are being raised. Too often, candidates provided answers that were tangential to the question requirements. As a result they failed to gain high marks.

The general standards of presentation were satisfactory, although the writing of a few candidates was not always legible. It is difficult for markers to award marks unless points are set out in a clear manner.

Question reports

Question 1 concerned an investment proposal. Candidates were required to evaluate three mutually-exclusive investment options available to a company using the net present value method and to state which option should be selected.

On the whole, this question was well answered with a significant number of candidates scoring full marks. The options available to the company were fairly straight forward, however, some candidates saw complications in the question that did not exist. As a result, computations became unnecessarily complex. For example, adjustments for opportunity costs were often made to each option that were not required. Option 2 appeared to provide the biggest challenge to candidates. Problems were often encountered in deriving the correct cash receipts and the correct timing and amount of cash payments. In many cases, a careful reading of the question would have helped candidates gain higher marks.

Question 2 concerned a company 'spin-off'. Candidates were required to explain why this form of demerger may occur and what possible disadvantages might accrue. The effect of a 'spin-off' on the wealth of a shareholder in a particular company also had to be calculated and the results assessed.

This question was also answered well. Most candidates managed to identify the main reasons for a 'spin-off', although they often found it more difficult to identify the possible disadvantages that may accrue. Many of the disadvantages arise from the company, which undertakes the 'spin-off', becoming smaller and thereby losing the benefits of size. The calculations made in relation to the effect of a 'spin-off' on shareholder wealth were generally well done and many managed to score high marks for this part.

Question 3 concerned the efficiency of stock markets. Candidates were required to explain stock market efficiency, to outline the role that financial analysts play in creating an efficient stock market and to discuss the evidence supporting the view that opportunities exist to buy shares cheaply.

This proved to be quite a popular question, although the answers provided were rarely of a high standard. Most candidates managed to make a reasonable attempt at the first part of the question which involved an explanation of the term 'efficiency' in the context of stock markets and the various levels of efficiency that can exist. However, many of the explanations given for the different levels of efficiency were either sparse or a little 'off beam' and so few gained very high marks. Most candidates recognised that analysts had a role in disseminating information but seemed unaware of their role in searching for inefficiently-priced shares. This latter role is very important as it helps to eliminate price inefficiencies and contributes towards the creation of an efficient market. Few candidates managed to identify possible evidence of stock market inefficiencies and marks awarded for this part were generally low.

Question 4 required candidates to identify and discuss the factors to take into account when implementing risk management processes within a company and to explain how these processes may help to increase shareholder value.

This question proved to be fairly popular with some candidates, scoring high marks. However, a significant number of candidates failed to score high marks because they did not appear to read the question carefully. Answers should have focused on the ways in which risk management processes should be introduced into a company rather than the nature of the risk management processes to be introduced. Too often, however, candidates focused on the latter rather than the former issue and so failed to gain high marks. Most candidates managed to gain reasonable marks by identifying the reasons why risk management processes should contribute to shareholder value, which often helped to boost significantly the overall marks awarded for this question.

Question 5 required candidates to demonstrate their understanding of the views of Modigliani and Miller (including taxation) through calculation and through a discussion of their underlying assumptions.

This was not a popular question with candidates. Few attempted the question and even fewer managed to gain high marks. The first part required candidates to calculate an equilibrium price for a company and to demonstrate the effect of a proposed change in capital structure on the market value of ordinary shares. This required them to know the Modigliani and Miller (with taxation) view that the value of a geared company is equal to the value of an ungeared company plus the value of any tax shield on debt. Whilst this general principle was usually understood, difficulties were often encountered in applying the principle in the context of a computational problem. However, most managed to identify the key assumptions underpinning the Modigliani and Miller (including taxation) position and this helped to boost overall marks.

Question 6 required candidates to identify the key tasks of the board of directors and to identify the particular contribution made by non-executive directors in carrying out these tasks.

This proved to be a very popular question and most candidates managed to score reasonable marks for their efforts, with a few scoring very high marks. The key tasks of the board of directors are based around the development of strategy, controlling the activities of the company and promoting the interests of the company through external relationships. Most candidates managed to identify at least some of these tasks and marks awarded for this part of the question were generally high. In some cases, candidates took a more legalistic view of the board's tasks (preparing annual financial statements, holding annual general meetings etc.) for which credit was given. The second part of the question concerning the particular role of the non-executive directors was often less well answered and some candidates struggled to gain reasonable marks. Too often, the answers provided gave too much emphasis to the positions that non-executive directors hold on the various board committees, such as the audit committee and remuneration committee. Whilst it was valid to discuss these roles, it was important to link the committees to the key tasks of the board and to link the roles occupied by non- executives on these committees to their wider role in carrying out the key tasks of the board.

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