practice in the financial management of the firm.^{[3] }

b)

Demonstrate an understanding of the interconnectedness of the ethics of good business practice between all of the functional areas of the firm.

^{[2] }c)

Recommend an ethical framework for the development of a firm’s financial policies and a system for the assessment of their ethical impact upon the financial management of the firm.

^{[3] }

B

ADVANCED INVESTMENT APPRAISAL

1.

Discounted cash flow techniques and the use of free cash flows

a)

Evaluate the potential value added to a firm arising from a specified capital investment project or portfolio using the net present value model.

^{[3] }Project modelling should include explicit treatment of:i)

Inflation and specific price variation

ii)

Taxation and the assessment of fiscal risk

iii)

Multi-period capital rationing to include the formulation of programming methods and the interpretation of their output.

b)

Establish the potential economic return (using internal rate of return and modified internal rate of return) and advise on a project’s return margin and its vulnerability to competitive action.

^{[3] }

c)

Forecast a firm’s free cash flow and its free cash flow to equity (pre and post capital reinvestment).

^{[2] }d)

Advise, in the context of a specified capital investment programme, on a firm’s current and projected dividend capacity.

^{[3] }

e)

Advise on the value of a firm using its free cash flow and free cash flow to equity under alternative horizon and growth assumptions.

^{[3] }2.

Impact of financing on investment decisions and adjusted present values

a)

Assess the impact of financing upon investment decisions of:^{[3] }

i)

Pecking order theory

ii)

Static trade-off theory

iii)

Agency effects and capital structure

b)

Apply the adjusted present value technique to the appraisal of investment decisions that entail significant alterations in the financial structure of the firm, including their fiscal and transactions cost implications.

^{[3] }

c)

Outline the application of Monte Carlo simulation to investment appraisal.

^{[2] }Candidates will not be expected to undertake simulations in an examination context but will be expected to demonstrate an understanding of:i)

Simple model design

ii)

The different types of distribution controlling the key variables within the simulation.

iii)

The significance of the simulation output and the assessment of the likelihood of project success.

iv)

The measurement and interpretation of project value at risk.

3.

Application of option pricing theory in investment decisions

a)

Demonstrate an understanding of option pricing theory:

^{[2] }i)

Determine, using published data, the five principal drivers of option value (value of the underlying, exercise price, time to expiry, volatility and the risk-free rate).

ii)

Discuss the underlying assumptions, structure, application and limitations of the Black-Scholes model.

b)

Evaluate embedded real options within a project, classifying them into one of the real option archetypes.

^{[3] }

c)

Assess and advise on the value of options to delay, expand, redeploy and withdraw using the Black Scholes model.

^{[3] }4.

International investment and financing decisions

a)

Assess the impact upon the value of a project of alternative exchange rate assumptions^{[3]}.

157