ACCA P4 Advance Financial
Management Revision Notes (March/June
2017)
, [P4 Revision Notes]
ACCA P4
Advance Financial Management
Revision Notes
(March/June 2017)
Page 1 of 138
, [P4 Revision Notes]
Contents
Topic Page No
Advanced Investment Appraisal
– Investment Appraisal 03
– Modified Internal Rate of Return 09
– Project Duration 11
– Weighted Average Cost of Capital 13
– Risk Adjusted WACC 34
– Adjusted Present Value 40
– International Investment and Financing Decision 47
Acquisition and Merger
– M & A Theoretical aspects 53
– Valuation Techniques 64
– Reverse Take Over’s 74
Corporate reconstruction and Reorganization
– Types of Reconstruction 78
– Business Re-Organization 80
Risk Management
– Foreign Currency Risk Management 84
– Interest Risk Management 93
– Option Pricing Theory 102
Other Topics
– Value at Risk 104
– Greeks 105
– Bond duration 106
– Securitization and Trenching 108
– Delta Hedging 108
– Dark Pool Trading 110
– Credit default Swaps 110
– Real Option 113
– Multinational Enterprise 119
– Behavioral Finance 129
– Islamic Finance 131
Page 2 of 138
, [P4 Revision Notes]
Investment Appraisal
Decision making
Short term Long term
(Single period effect) (Having multi period effects)
Investment Appraisal:-
A detailed evaluation of projects/investments to assess the viability, its effects on shareholders wealth is
called investment appraisal,
What is Appraisal:-
Any expenditure in the expectation of future benefits. There are two types of investment:
Capital expenditure:
Capital expenditure is expenditure which results in the acquisition of non-current assets or an improvement
in their earning capacity. It is not charged as an expense in the income statement; the expenditure appears
as a non-current asset in the balance sheet.
Revenue expenditure:
Charged to the income statement and is expenditure which is incurred.
(i) For the purpose of the trade of the business this includes expenditure classified as selling and
distribution, administration expenses and finance charges.
(ii) To maintain the existing earning capacity of non-current asset.
Relevant Cash flows in Investment Appraisal
Relevant cash flows are those cash flows which are:
• Directly related with the project.
• Incremental
• Future cash flows
Any cash flows or cost incurred in the past, or any committed cost which will be incurred regardless of
whether the investment is undertaken or not is a non-relevant cash flows e.g. sunk cost,Allocated/General
fixed overheads etc.
The other cash flows, which should be considered as Relevant Cash flows are as follow:
• Opportunity Cost:
• Tax:
• Residual value:
• Infra-structure Costs:
• Marketing Costs:
Page 3 of 138
Management Revision Notes (March/June
2017)
, [P4 Revision Notes]
ACCA P4
Advance Financial Management
Revision Notes
(March/June 2017)
Page 1 of 138
, [P4 Revision Notes]
Contents
Topic Page No
Advanced Investment Appraisal
– Investment Appraisal 03
– Modified Internal Rate of Return 09
– Project Duration 11
– Weighted Average Cost of Capital 13
– Risk Adjusted WACC 34
– Adjusted Present Value 40
– International Investment and Financing Decision 47
Acquisition and Merger
– M & A Theoretical aspects 53
– Valuation Techniques 64
– Reverse Take Over’s 74
Corporate reconstruction and Reorganization
– Types of Reconstruction 78
– Business Re-Organization 80
Risk Management
– Foreign Currency Risk Management 84
– Interest Risk Management 93
– Option Pricing Theory 102
Other Topics
– Value at Risk 104
– Greeks 105
– Bond duration 106
– Securitization and Trenching 108
– Delta Hedging 108
– Dark Pool Trading 110
– Credit default Swaps 110
– Real Option 113
– Multinational Enterprise 119
– Behavioral Finance 129
– Islamic Finance 131
Page 2 of 138
, [P4 Revision Notes]
Investment Appraisal
Decision making
Short term Long term
(Single period effect) (Having multi period effects)
Investment Appraisal:-
A detailed evaluation of projects/investments to assess the viability, its effects on shareholders wealth is
called investment appraisal,
What is Appraisal:-
Any expenditure in the expectation of future benefits. There are two types of investment:
Capital expenditure:
Capital expenditure is expenditure which results in the acquisition of non-current assets or an improvement
in their earning capacity. It is not charged as an expense in the income statement; the expenditure appears
as a non-current asset in the balance sheet.
Revenue expenditure:
Charged to the income statement and is expenditure which is incurred.
(i) For the purpose of the trade of the business this includes expenditure classified as selling and
distribution, administration expenses and finance charges.
(ii) To maintain the existing earning capacity of non-current asset.
Relevant Cash flows in Investment Appraisal
Relevant cash flows are those cash flows which are:
• Directly related with the project.
• Incremental
• Future cash flows
Any cash flows or cost incurred in the past, or any committed cost which will be incurred regardless of
whether the investment is undertaken or not is a non-relevant cash flows e.g. sunk cost,Allocated/General
fixed overheads etc.
The other cash flows, which should be considered as Relevant Cash flows are as follow:
• Opportunity Cost:
• Tax:
• Residual value:
• Infra-structure Costs:
• Marketing Costs:
Page 3 of 138
