Business Finance

General overview

This exam covers the understanding of business finance and treasury function including the fundamental concepts of capital, investment, funding and risk assessment and management. It also covers the analysis and management of an entity’s financial position, portfolio management, and short and long term financial management.

Topics

1. Capital budgeting: payback, IRR, NPV
1.1 Explain the term financial mathematics
1.2 Calculate and interpret the future and present values of a series of single cash flows and of annuities
1.3 Explain the characteristics of major and long-term investments where a ‘capital budgeting’ approach might be required
1.4 Identify and apply the different quantitative methods used in project evaluation
1.5 Explain why investment decisions should be analysed using the NPV method
1.6 Apply the NPV method to investment project scenarios
1.7 Compare and contrast the NPV method with the IRR method of project evaluation
1.8 Calculate the weighted average cost of capital and apply it in capital budgeting
1.9 List the advantages and disadvantages of IRR, payback and NPV methods of investment appraisal
1.10 Undertake a sensitivity analysis of diverse projects using appropriate tools

2. Capital markets
2.1 Explain the structure of the capital market
2.2 Explain the economies of scale attached to financial intermediaries
2.3 Distinguish between official and unofficial money markets
2.4 In the context of capital markets distinguish between operating efficiency, allocative efficiency and pricing efficiency
2.5 Explain the role of the government in regulating the capital markets
2.6 Explain the meaning of the term corporate securities
2.7 Distinguish between secondary and primary securities
2.8 Describe typical guidelines related to the operation of securities markets
2.9 Explain the term rights issue
2.10 Explain the benefits of a rights issue to equity holders
2.11 Explain the meaning of cum rights and ex-rights
2.12 Explain how the trading of options, futures and warrants work
2.13 Explain the benefits and costs associated with options, futures and warrants
2.14 Explain the advantages and disadvantages of different hedging strategies
2.15 Distinguish between American and European options

3. The Capital Asset Pricing Model
3.1 Demonstrate the relationship between systematic risk and expected return of individual securities and portfolios using the CAPM and the security market line relationship

4. Cost of funds
4.1 Analyse capital rationing and draw appropriate conclusions
4.2 Analyse the various sources of short term finance
4.3 Explain the cost of short and medium term finance
4.4 Calculate and interpret the cost of various sources of finance
4.5 Describe sources of international finance and their merits or otherwise
4.6 Explain the different sources of long term finance
4.7 Calculate and interpret the cost of capital associated with leases; and debt and equity
4.8 Demonstrate the link between working capital management and corporate cash flow
4.9 Describe the operating cycle in working capital management to explain inventory management, debtor management and cash management

5. Efficient market hypothesis
5.1 Distinguish between the weak form test, the semi strong form test and the strong form test of the Efficient Market Hypothesis (EMH)
5.2 Explain the implications of market efficiency for both investors and companies

6. Long term financing, investment appraisal and dividend policy
6.1 Calculate and interpret measures of expected return and risk using the probability distribution approach
6.2 Explain the factors which influence the dividend policy decision

7. Portfolio management
7.1 Calculate and interpret rates of return on financial investments
7.2 Calculate and interpret measures of expected return and risk for two-security portfolios
7.3 Explain the impact of portfolio leveraging and short selling on the risk and expected return of two-security portfolios
7.4 Analyse and assess portfolio risk

8. Short term financial management
8.1 Prepare short term finance plans and strategies

9. Valuation of corporate securities
9.1 Calculate and interpret effective interest rates; and apply the concepts of financial mathematics to valuing home mortgages and debt and equity securities
9.2 Calculate and interpret share price in both perfect and imperfect markets

10. Risk management and risk assessment
10.1 Define the term risk
10.2 Explain the different types of risk in international trade
10.3 Explain the different methods of risk assessment in international trade