Finance and Financial Reporting CT2

Description

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 This page has been left blank in case you wish to submit your script by fax.......Page 836 Feedback from marker......Page 837 This page has been left blank in case you wish to submit your script by fax.......Page 838 This page has been left blank in case you wish to submit your script by fax.......Page 848 Feedback from marker......Page 849 This page has been left blank in case you wish to submit your script by fax.......Page 862 Feedback from marker......Page 863 This page has been left blank in case you wish to submit your script by fax.......Page 882 Feedback from marker......Page 883 This page has been left blank in case you wish to submit your script by fax.......Page 884 Subjects......Page 893 Subjects......Page 894