The Financial Management formulae sheet and tables
ACCA's study guide says FM candidates are given a formulae sheet and tables of discount and annuity factors. Knowing what is on them, and what is not, saves time in the exam.
(1 + r) to the power of minus n, 1% to 20%, 1 to 15 periods
Annuity table
(1 - (1 + r) to the power of minus n) / r, same grid
Decimal places
Every factor to three places
On the sheet
The economic order quantity and the Miller-Orr model's spread and return point.
The capital asset pricing model and the asset beta formula, for a project-specific cost of capital.
The growth model in both directions (the share price and the cost of equity) and Gordon's growth approximation, g = b x re.
The weighted average cost of capital, the Fisher formula, purchasing power parity and interest rate parity.
Not on the sheet
The sheet has no formula for the cost of redeemable debt, the equivalent annual cost, the profitability index, the theoretical ex-rights price, the Baumol model or the payback and accounting rate of return methods. Learn these, and know how to interpolate an internal rate of return.
Using the tables
Use the factors as printed. A question's answer is set with the three-decimal factors, so working from exact powers can move the last digit of a large present value. For a rate or period outside the tables, the question gives the factor or you work it out.
Try 3 questions
Question 1 · Section A · Syllabus C22 marks
Managing inventory
Selkirk Co uses 120,000 units a year of a component. It orders 12,000 units at a time at $250 an order and keeps a buffer of 2,000 units; holding one unit for a year costs $5. Under a just-in-time contract, the supplier would make 120 deliveries a year at $60 each, average inventory would fall to 500 units and the price would rise by $0.20 a unit. The holding cost per unit would not change.
By how much would just-in-time purchasing cut Selkirk Co's annual costs? Enter a rise as a negative figure. (2 marks)
$
Question 2 · Section A · Syllabus C22 marks
Managing cash
Eskdale Co's sales are below. 20% of sales are for cash, with a 2% discount; 60% are paid for in the month after sale and 18% in the second month after sale; the remaining 2% are bad debts. Each month's purchases equal 60% of the next month's sales and are paid for in the month after purchase. Wages of $15,000 and overheads of $20,000 a month, which include depreciation of $4,000, are paid in the month incurred. Loan interest of $3,000 is paid in April. Eskdale Co will have an overdraft of $5,000 at the start of March.
January
February
March
April
Sales ($)
100,000
120,000
150,000
160,000
What will Eskdale Co's cash balance be at the end of April? Enter an overdraft as a negative figure. (2 marks)
$
Question 3 · Section A · Syllabus E42 marks
Capital structure
Under the traditional view of capital structure, how does the WACC change as gearing rises from zero? (2 marks)