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ACCA P4 - exam preparation for Dec 2014
- 1. ACCA (Paper P4) Exam Preparation for Dec 2014 By Ricky MA All rights reserved @cert-easy 2014- 08
- 2. Summary OWhat are the objectives of “Paper P4”? OWhat is the exam paper format? OWhat are the hot topics? OA quick review of Jun 2014 exam OWhat should you do before Dec 2014? All rights reserved @cert-easy 2
- 3. Objectives of P4 OAn advancement of Paper F9 OAssumed to be a senior financial executive or financial advisor OTo demonstrate an integrated knowledge of the subject and relate them to specific issue OEmphasize on knowledge application but not simply reproduction OTo present the answers in a formal way All rights reserved @cert-easy 3
- 4. P4 Exam Format Oa 3-hour paper (with 15 minutes reading time) divided into two sections OSection A – 1 compulsory question (50 marks including 4 professional marks) OSection B – 3 questions (select 2 out of 3 with 25 marks each) All rights reserved @cert-easy 4
- 5. Hot Exam Topics OAnalysis of past 5 exam papers (on marks allocation) All rights reserved @cert-easy 5
- 6. P4 Exam Review (Jun 2014) OQuestion 1 (50 marks) O Risk management / agency issues O Risk hedging using derivatives O Modified Duration (Macaulay Duration) OWrite a memo to discuss: OHedging or not? OHow to manage agency issues? All rights reserved @cert-easy 6
- 7. P4 Exam Review (Jun 2014) (Cont’d) OQuestion 2 (25 marks) O Adjusted Present Value (APV) O Base NPV + Tax benefits from debt financing O To correct the NPV estimate with a number of errors inside O Calculate the APV and comment on the errors All rights reserved @cert-easy 7
- 8. P4 Exam Review (Jun 2014) (Cont’d) OQuestion 3 (25 marks) O Acquisitions (M&A) O Corporate reconstruction (sell-off/spin-off) O Organic growth vs. Acquisitions O Process of acquisition (risk reduction) O Valuation (the maximum premium to be paid) All rights reserved @cert-easy 8
- 9. P4 Exam Review (Jun 2014) (Cont’d) OQuestion 4 (25 marks) O Option pricing O Real options / Equity value by options O Option to change your decision O Relationship between shareholders and debt-holders on equity value O BSOP Model – one of the Greeks (Vega) All rights reserved @cert-easy 9
- 10. Preparing for the Exam OStudy the syllabus with good understanding OStrengthen your exam skills by doing more exercises OBalance your efforts on both computational and discursive questions OAlways keep good time management OWork hard, familiar with the exam, be confident, and don’t think of re-try All rights reserved @cert-easy 10
- 11. The End All rights reserved @cert-easy 11
Notes de l'éditeur
- Hi, this is Ricky Ma. I’m a lecturer on financial management subjects in Hong Kong and China. Now, let’s share how to prepare for the P4 exam in Dec 2014.
- What shall we discuss about P4? If you are new to P4, please make sure you fully understand the objectives of this paper. What is the exam format of P4? Do you want to know the hot topics within the syllabus? We will study the past exam papers to highlight the most important areas. To prepare for the Dec exam, it may be useful to have a quick review of the last exam in June. Finally, what should you do before the exam in December?
- What does the P4 examiner expect from you? From the syllabus, we are told that it’s an advancement of F9. That means you are assumed to have all basic knowledge of F9, even though some of you may have been exempted to take this paper. No matter what, please study the syllabus of F9 again. For P4, you are assumed to be a senior financial executive or financial advisor. You can imagine the much higher job requirements. You are required to demonstrate an integrated knowledge of the subject. The questions in P4 will not only relate to one topic but always a combination of various issues. In particular, you are not told what you should do. Instead, you should analyse the question by yourself and consider the most appropriate solution. P4 emphasizes on knowledge application but not just a knowledge reproduction. The questions are more dynamic, and less straight-forward. Studying P4, in my opinion, understanding is more important than memorizing. Another very important issue is, you’ll be required to present the answers in a formal way, e.g. a report, a memorandum, etc. You’ll get 4 professional marks accordingly.
- What is the exam format of P4? This is a 3-hour paper divided into 2 sections. There is only one compulsory question in Section A with 50 marks, including 4 professional marks for your presentation. Normally, it covers more than one technical topics within the core areas of the syllabus under a hypothetical case. You are required to analyse the case in detail, identify the problem issues, and recommend the most appropriate action. Your answer should be supported by adequate financial analysis. It’s very time-consuming indeed. So, watch the clock and make sure not running out of time. In Section B, you have a choice. 2 out of 3 shorter questions, each of 25 marks. Usually they cover a single topic, both computation and discussion. If you find it confident to do any one of the Section B questions, do it first. It will build up your confidence and may be helpful for the remaining part of the exam.
- The hot exam topics. For any exam, there must be some topics which are more important than the others within the syllabus. Let’s look at the most recent 5 exam papers and pay particular attention to their marks allocation. They may be able to provide you with some hints. From this columnar table, the first thing drawing your attention may be the total mark which is not 100. Why? Because there is one question of 25 marks in Section B will not be answered by you. Before June 2013, the short questions in Section B are 20 marks each only. In this analysis, you will find that nearly all topics in the syllabus were covered in the exam. But, in terms of marks, the core areas in red colour shared large proportion of the total mark every time. These are investment appraisal, M&A, corporate reconstruction, and risk management. Other than the core topics, there was a short question of about 10 marks from Section A or Section B of the syllabus. So, you should know how to allocate your time and efforts in your study.
- No matter whether it’s your first attempt to P4, or you have already tried it several times, it’s good for you to have a quick review of the last exam in June to know the recent development. Now, let’s go through all the questions one by one. The question 1, a very long question of 50 marks, including complicated calculations as well as analytical discussions. To make it short, it covers 2 main areas, risk management and agency issues. Certainly risk management is the major part. It occupies over 80% of the marks. It was considering the use of financial derivatives to hedge against exchange risk and interest rate risk. All types of derivative including forward, futures, option, and swap were covered. You are required to calculate the financial result of various derivatives and recommend the most appropriate one. To prepare for the calculations, you should know how to select the futures contract. On the other hand, regarding options, you have to decide either buy or sell an option, whether call or put. All these are essential before the commencement of calculations. For swap contract, determine comparative advantage between the two parties and their share of the net benefit. Technically speaking, I don’t think this question is difficult but it requires your in-depth understanding of all kinds of financial derivative in particular on their calculations. Another technical term on risk management in this question is duration. You are asked to calculate the modified duration of a loan. Do you remember Macaulay duration? The second part of the question requires you to write a memo to discuss two issues. Don’t forget the memo format. You’ll get 4 marks on the presentation. The first issue is, is it necessary to manage the risks? Shall we hedge? In fact, you should compare the advantages and disadvantages of hedging, its costs and benefits, etc. In addition, you may also introduce the diversification theory, systematic risk and unsystematic risk. Another issue is agency problem in respect of the local management in overseas branches. It’s rather straight-forward. You should talk about stakeholders’ interests, cultural differences, and possible solutions like reasonable staff compensations, communications, etc.
- Question 2 is a question of investment appraisal. To be more specific, it requires the use of Adjusted Present Value to evaluate an investment project. Do you remember APV? First of all, we should calculate the base NPV assuming that the project is all-equity financed. And then add up the tax benefits relating to debt finance, such as tax relief on interests, govt. subsidy, etc. In this question, you are not simply calculating the NPV by yourself. Instead, an NPV estimate is provided and it has committed a number of errors. You are required to correct all of them before proceeding further. It’ll be rather difficult than being asked to do your own. Do you agree? At last, you should calculate the APV and also comment on your correction of different errors.
- Question 3 is about another technical topic. Mergers and acquisitions, M&A. This question also touched some basic concepts on corporate reconstruction. After the acquisition, the acquirer decided to sell off one of the business divisions and also to spin off another division by forming a new company. Regarding M&A, we always compare it with organic growth. In this question, you are required to discuss the pros and cons of these two different forms of growth. M&A is not successful all the time. You are asked how we can minimize the risk of failure. It’s about the acquisition process, including sufficient due diligence, reasonable valuation, proper system integration, etc. Finally, you are required to calculate the maximum premium to be paid for the acquisition. The first step is to ascertain the total value of the combined business including any potential synergies. And then take out the value of the acquirer standing alone without acquisition. The net balance represents the value to be generated from the acquisition project. If we assume that the acquirer does not share any benefit of the synergies, this is the maximum amount to be paid to the shareholders of the target company.
- The last question is not easy at all, in my opinion. It’s fully discursive on a technical concept. This question is about option pricing theory. You should have a very clear understanding of the basic principles. Otherwise, don’t select this question. Two different aspects. One is real options for investment project. The other is its application on equity value. Regarding investment appraisal, a project will have a higher value if we have an option to change our decision when necessary. Why? It is because the option will make us become more flexible and be able to minimize our risk. On equity value, if traditional valuation methods are not applicable, option pricing is an alternative. We should define the relationship between equity holders and debt-holders in the position of either an option buyer or option seller. The last part of this question relates to BSOP Model. You should briefly discuss the basic principles of BSOP. Do you remember the 5 variables? They are underlying asset value, exercise price, risk-free rate, volatility, and time to expiry. In addition, you are required to explain one of the risk factors, vega. To sum up, the P4 Jun exam, overall speaking, is not very difficult in the sense of the hypothetical cases. Many students did not know how to answer the questions, not because they didn’t have the required technical knowledge, but because they could not fully understand the cases. Although I may not say that the cases are simple, I would find them not difficult to understand by the students. In general, I feel that the P4 questions have been placing more emphasis on the technical side recently. So, make sure that you are conversant with all technical calculations and their theories behind.
- What should we do before the exam in December? First of all, study the whole syllabus with good understanding. Don’t skip anyone, if possible, because they are all inter-related. Secondly, sharpen your exam skills. Doing more exercises under exam condition, always keep the time. It does help. In the Jun exam, you could have found that there are plenty of calculations required. It’s not enough for you just to know how to do it, but you have to do it quickly. People always say that financial management is a computational subject. You may not be wrong. However, although computations are essential, interpretation of the financial results should be more important. Therefore, you should balance your efforts on both computational and discursive questions. That means studying the technical theories as well as calculations. Good time management in exam is always true. To be more scientific, every mark you earn should spend you about 1.5 minutes and not more. Finally, work hard. Practice makes perfect. Also make yourself familiar with the exam by doing more past exam papers. Be confident as well. Don’t look back or think of a retry. Just go for it now.
- That’s the end of my presentation. Good luck to you all in the coming exam. Good-Bye!