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Examiner tips for FM

06 February 2019

In December candidates did well in areas that feature regularly such as performing the discounted cash flow in relation to an investment project, but were less able to deal with specific investment decisions and finance for SMEs.

The examiner said in section B a number of candidates made errors relating to the effect on a company’s profitability and liquidity from changing its working capital funding policy. Some had difficulty identifying which action would result in a company reducing its cash operating cycle.

There were also a couple of misconceptions about equity finance, including the idea that equity reserves represent cash that is available for a company to invest.

Price earnings ratios caused some difficulties and a number struggled with identifying which forms of market efficiency were consistent with statement made by a number of directors.

Candidates also continue to be weak on derivatives. A further confusion was forecasting spot rates in 3 months’ time.

The examiner explained the section C questions were drawn mainly from the areas of:

*The nature, elements and importance of working capital.

*Management of inventories, accounts receivable, accounts payable and cash.

*Determining working capital needs and funding strategies.

*Investment appraisal techniques.

*Allowing for inflation and taxation in DCF.

*Adjusting for risk and uncertainty in investment appraisal.

*Specific investment decisions.

*Sources of and raising business finance.

*Sources of finance and their relative costs.

*Finance for SMEs.

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