Finance and Financial Reporting CT2

2009 assignment deadlines CTs.pdf......Page 0
T......Page 1
The effect of tax......Page 469
Effect of other assumptions......Page 470
Conclusion......Page 471
Formula......Page 472
Choice of the historical period......Page 473
Typical results......Page 474
Systematic risk.......Page 477
Implications for the cost of equity......Page 481
Adjusting beta for gearing......Page 482
Using an industry beta......Page 485
Interest and asset cover......Page 487
Tax......Page 488
The calculation of WACC......Page 489
Uses of WACC......Page 490
Pros and cons of limited companies......Page 495
CAPM......Page 491
Risk......Page 492
Bills of exchange......Page 493
Medium- and short-term company finance......Page 500
Credit sale......Page 497
Introduction......Page 498
Tax rates......Page 499
Dividend policy......Page 530
The need for change......Page 505
The cost of debt and equity......Page 510
Other forms of finance......Page 506
Uses of options......Page 507
Theoretical background to the gearing decision......Page 508
Taxation......Page 515
Control of the business......Page 511
A high-growth company that is highly geared......Page 512
Conclusion......Page 514
Introduction......Page 520
Impact on share price......Page 518
The procedure......Page 525
Stock markets......Page 521
Growth opportunities......Page 522
Introduction......Page 523
Effect on the company......Page 524
Effects on the shareholders......Page 526
The market and dividends......Page 527
Tangible Assets......Page 535
Equity......Page 531
Contingent Liabilities......Page 532
Distribution costs and administrative expenses......Page 533
Earnings per share......Page 534
Cash is important......Page 540
The structure of a cashflow statement......Page 536
Financing activities......Page 537
Preparing the statement of changes in equity......Page 545
Introduction......Page 541
Associated companies......Page 542
Definition of a capital project......Page 543
Initial appraisal......Page 544
Definition......Page 550
Evaluation of cashflows......Page 547
Net present value (NPV)......Page 548
Calculation of income cover for Cover-up Ltd......Page 549
Payback period......Page 555
Hurdle rates......Page 560
Nominal returns......Page 556
Strategic fit......Page 557
Variations......Page 558
Opportunity cost......Page 559
Purpose......Page 565
Receipts/costs ratio......Page 561
Sensitivity analysis......Page 562
Scenario testing......Page 563
Results of the evaluation......Page 570
A note about tax......Page 566
Risk and volatility......Page 567
Inflation......Page 568
Methods of project evaluation......Page 569
Theoretical background to the gearing decision......Page 575
CAPM......Page 571
Initial appraisal......Page 579
Financial risk......Page 580
Introduction......Page 585
Syllabus objectives......Page 581
Other factors to consider......Page 590
Allowing for systematic risk......Page 586
CAPM-based approach......Page 587
Adjusting the discount rate......Page 595
Identification of risks......Page 593
Financial consequences of risks......Page 600
Analysis of risks......Page 599
Assignments......Page 605
Introduction......Page 601
Open ended investment company (OEIC)......Page 602
Return on capital employed (ROCE)......Page 603
Scenario analysis......Page 604
Bid price......Page 630
Taxation......Page 576
Stock markets......Page 578
Probability trees......Page 609
Introduction......Page 637
Zero-coupon yield curve......Page 647
Assignments......Page 650
Introduction......Page 501
Beta as a measure of systematic risk......Page 479
O......Page 480
The Subject CT2 course structure......Page 4
Course notes......Page 5
Assignments......Page 6
ActEd Solutions with Exam Technique (ASET)......Page 7
Sound Revision......Page 8
Marking......Page 9
Submission dates and deadlines......Page 11
Taught Courses......Page 12
Queries and feedback......Page 13
The ActEd website......Page 15
Past exam papers......Page 16
Website......Page 17
Further reading......Page 18
Calculators......Page 19
The CT Subject exams......Page 21
Study sessions......Page 22
Order of study......Page 23
Active study......Page 24
Frequently asked questions......Page 25
Syllabus......Page 27
Structure of the course......Page 35
Subject......Page 36
File tabs......Page 39
C......Page 41
D......Page 42
G......Page 43
L......Page 44
O......Page 45
R......Page 46
T......Page 47
W......Page 48
Introduction......Page 49
Finance and the real resources of an organisation......Page 51
Finance and the organisation’s objectives......Page 52
Responsibilities for financial decisions......Page 53
Financial analysis......Page 54
Shareholders......Page 56
Shareholders and managers......Page 57
Providers of finance......Page 58
Agency theory......Page 59
The role of information......Page 60
The role of agreements......Page 61
Business objectives: a re-statement......Page 62
The goal of the financial manager......Page 63
The opportunity cost of capital......Page 64
The capital markets......Page 66
Agency theory......Page 69
Capital markets......Page 70
Syllabus objectives......Page 77
Introduction......Page 78
Legal and accounting documentation......Page 79
Liability......Page 80
Description......Page 81
Legal and accounting documentation......Page 82
Legal and accounting documentation......Page 83
Listed companies......Page 85
Less common types of company......Page 86
Advantages of limited companies......Page 87
To the shareholders......Page 88
Conclusion......Page 89
Hire purchase......Page 90
Credit sale......Page 91
Leasing......Page 92
Finance leases......Page 93
Loan “facilities”......Page 94
Other variations......Page 95
Bank overdrafts......Page 96
Factoring......Page 97
Recourse factoring......Page 98
Bills of exchange......Page 99
Commercial paper......Page 101
Pros and cons of limited companies......Page 105
Medium- and short-term company finance......Page 106
Event of default 
 Under a hire purchase agreement the owner can reclaim the asset.  Under a credit sale, the recipient of the payments must sue to reclaim the outstanding amounts.......Page 110
Operating lease......Page 111
Credit sale......Page 112
Non-recourse factoring......Page 113
Bills of exchange......Page 114
Introduction......Page 115
Personal taxation......Page 117
Taxing once......Page 118
Tax-free expenditure......Page 119
Allowances......Page 120
Tax rates......Page 121
Taxable profit......Page 122
Uses of the corporation tax system......Page 123
Basic definition......Page 125
Capital losses......Page 126
The rates of tax......Page 127
Other taxes......Page 129
Double taxation relief......Page 130
Personal taxation......Page 131
Chapter 3 Solutions......Page 133
Introduction......Page 138
Features of loan capital......Page 139
Variations......Page 140
Description......Page 141
Return......Page 143
Description......Page 144
Conclusion......Page 145
Description......Page 146
Return......Page 148
Floating-rate notes......Page 149
Description......Page 151
Variations......Page 153
Return......Page 155
Description......Page 156
Variations......Page 157
Return......Page 158
Conclusion......Page 160
Description......Page 162
Variable dates and variable terms......Page 163
Risk......Page 164
Warrants......Page 165
Options issued by companies......Page 166
Winding up a company......Page 167
Long-term finance......Page 171
Marketability......Page 172
Introduction......Page 181
Categories......Page 182
Margins......Page 183
Bond futures......Page 184
Stock index futures......Page 185
When it has a fixed-rate loan......Page 186
During a takeover......Page 187
To fix the value of receipts......Page 188
Types of options......Page 190
Uses of options......Page 191
Credit risk......Page 192
Currency swaps......Page 193
Risk management......Page 194
Reducing the cost of debt......Page 195
Uses of derivatives......Page 197
Introduction......Page 204
To raise capital for the company......Page 205
To make the shares more marketable and easy to value......Page 206
Description......Page 207
About one year before the offer......Page 208
Applications......Page 209
Description......Page 210
Offer for subscription......Page 211
Introductions......Page 212
The role of underwriting......Page 213
Existing shareholders wanting to sell a large block of shares......Page 216
Introduction......Page 217
Timetable for a rights issue......Page 218
Ignoring expenses and ignoring the market’s reaction......Page 219
Allowing for expenses and market reactions......Page 220
Impact on balance sheet......Page 221
Terminology recap......Page 222
Is underwriting needed?......Page 225
Introduction......Page 226
Past profitability......Page 228
The downside......Page 229
Impact on share price......Page 230
What is a scrip dividend?......Page 231
Reminder......Page 233
Obtaining a stock exchange quotation......Page 235
Introduction......Page 241
Users......Page 242
Sources of regulation......Page 245
Statutory requirements......Page 246
The role of the IASB......Page 248
The case for and against international standards......Page 249
Typical contents of an annual report......Page 250
The contents of an auditors’ report......Page 252
Disclaimer of opinion......Page 255
The regulation of auditors......Page 256
Accounting concepts......Page 258
The cost concept......Page 259
The money measurement concept......Page 260
The accruals concept......Page 261
Materiality......Page 262
The going concern concept......Page 263
Consistency......Page 264
Bringing the concepts together......Page 265
Introduction......Page 273
The balance sheet......Page 274
Tangible Assets......Page 276
Trade marks and brand names.......Page 277
Inventories (Stocks)......Page 278
Equity......Page 279
Current portion of long-term borrowings......Page 280
Long-term provisions......Page 281
Contingent Liabilities......Page 282
Revenue......Page 284
Distribution costs and administrative expenses......Page 285
Tax expense......Page 286
Once the dividends are approved at the AGM, an approved set of accounts can be drawn up.  If dividends are approved and paid immediately they may appear as a note to the income statement and will be deducted from the cash balance and from the Retained Ea......Page 287
Earnings per share......Page 288
Revaluation of assets/liabilities......Page 289
Cash is important......Page 291
Profit is not the same as cash......Page 292
Less subjective nature of cashflow statement......Page 293
The structure of a cashflow statement......Page 294
Net cash generated from operations......Page 296
Financing activities......Page 297
Statement of changes in equity......Page 299
Notes to the accounts......Page 301
The income statement......Page 303
Statement of changes in equity......Page 304
Introduction......Page 315
What is the purpose of depreciation?......Page 316
The straight line basis......Page 317
The reducing balance method......Page 318
Share capital and share premium......Page 322
Alternatively, as mentioned in Chapters 7 and 8, the move towards “fair value” accounting, has led to the recognising of revaluations in the income statement, and this has proved controversial.......Page 323
Retained earnings......Page 325
Share capital and reserves......Page 327
Introduction......Page 335
Description of the trial balance......Page 336
Retained earnings......Page 339
Dividends......Page 340
Preparing the income statement and the balance sheet......Page 341
Preparing the statement of changes in equity......Page 346
Reminder......Page 349
Introduction......Page 357
Consolidated balance sheets......Page 358
Defining goodwill......Page 361
Goodwill as a non-current asset......Page 362
Variations in the treatment of goodwill......Page 363
Defining minority interest......Page 364
Accounting for minority interest......Page 365
Associated companies......Page 367
Interpretation of consolidated financial statements......Page 368
Introduction......Page 370
Estimation of liabilities and timing of profit......Page 371
Technical accounts......Page 372
Balance sheet......Page 373
Liabilities......Page 374
Shareholders’ Fund......Page 375
An investment......Page 377
Insurance companies......Page 378
Introduction......Page 383
Corporation tax......Page 384
Income statement for Cover-up Ltd for the year 2007......Page 385
Balance sheet for Cover-up Ltd as at 31 December 2007......Page 386
Loan capital......Page 387
Income cover......Page 388
Calculation of income cover for Cover-up Ltd......Page 389
Income priority percentages......Page 390
Calculation of income priority percentages for Cover-up Ltd......Page 391
Asset cover......Page 392
Calculation of asset cover figures for Cover-up Ltd......Page 393
Asset priority percentages......Page 394
Asset gearing......Page 395
Good year......Page 397
Income gearing......Page 400
Introduction......Page 407
Corporation tax......Page 408
Income statement for Cover-up Ltd for the year 2007......Page 409
Balance sheet for Cover-up Ltd as at 31st December 2007......Page 410
Diluted earnings per share......Page 411
Use of the price earnings ratio......Page 413
Use of gross dividend yield......Page 414
Use of dividend cover......Page 415
EBITDA......Page 416
Purpose......Page 418
Variations......Page 419
Introduction to other accounting ratios......Page 420
Definition......Page 422
Purpose......Page 423
Variations......Page 424
Purpose......Page 426
Purpose......Page 427
Purpose......Page 428
Variations......Page 429
Variations......Page 430
Comments on definition......Page 431
Purpose......Page 432
Purpose......Page 433
Comments on definition......Page 434
Profitability ratios......Page 435
Efficiency ratios......Page 436
Chapter 13 Solutions......Page 437
Introduction......Page 441
Interest payments......Page 442
Consistency over time......Page 443
Stock valuation......Page 444
Intangible assets......Page 445
End-year values......Page 446
Level of aggregation......Page 447
Creative accounting......Page 448
Forecasting......Page 449
Manipulation of reported figures......Page 450
Reminder......Page 452
Problems of interpreting company accounts......Page 455
Accuracy of figures......Page 456
Introduction......Page 459
Corporation tax......Page 460
Defining the weighted average cost of capital......Page 461
The cost of debt and the cost of equity......Page 462
Modigliani and Miller......Page 464
Risk and volatility......Page 475
Specific risk......Page 476
Inflation......Page 478
Historical returns......Page 484
Market derived real discount rate......Page 486
Corporation tax......Page 502
The aims of the financial manager......Page 503
Financial risk......Page 509
“People” businesses......Page 513
An illustration......Page 516
Capital structure......Page 529
Definition of project......Page 546
Problems......Page 551
Shareholder value approach......Page 552
Monte Carlo simulation......Page 564
Introduction......Page 582
Background......Page 583
Weighted average cost of capital......Page 584
Factors influencing beta in practice......Page 588
Practical experience......Page 589
Risk analysis – an overview......Page 591
Risk matrices......Page 594
Risks in the successive stages of the project......Page 596
Relative merits of the two approaches......Page 606
Unfavourable NPVs......Page 607
Certainty equivalents......Page 608
Ways of mitigating risk......Page 613
The financial consequences of risk mitigation......Page 614
The investment submission......Page 615
Adjusting the discount rate......Page 617
Other methods of dealing with risky projects......Page 618
Introduction......Page 629
Certificate of deposit......Page 631
Coupon......Page 632
Debenture......Page 633
European option......Page 634
Forward contract......Page 635
Immunisation......Page 636
Liquidity preference......Page 638
Matching......Page 639
Open ended investment company (OEIC)......Page 640
Par value......Page 641
Privatisation......Page 642
Return on capital employed (ROCE)......Page 643
Share split......Page 644
Swap......Page 645
Weighted average cost of capital......Page 646
Some concluding thoughts......Page 649
Introduction......Page 655
Multiple-choice questions......Page 656
Short questions......Page 664
Long question......Page 666
Income statement......Page 738
Profitability......Page 764
Toll revenues......Page 800
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Subjects......Page 893
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