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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

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