ACCA Strategic Professional · Advanced Financial Management

Strategic business and financial planning for multinational organisations: formula sheet

Full chapter guide

Key formulas

Shareholder value test: Accept if NPV > 0 (or APV > 0); Value is created only if the present value of future cash flows exceeds the cost, discounted at a rate that reflects the risk.
Net present value: NPV = Σ [Cash flow t ÷ (1 + r)^t] − Initial investment; Use relevant, incremental cash flows after tax. Ignore sunk costs and financing flows when using a risk-adjusted rate.
Adjusted present value: APV = Base case NPV (ungeared) + PV of financing side effects; Useful when financing changes materially, such as subsidised loans or tax shield on debt.
Report structure for advice: Issue → Analysis → Risks → Recommendation; Not a formula, but the pattern that earns professional skills marks.
Total shareholder return (TSR): TSR = (P1 − P0 + D1) ÷ P0; P0 is opening share price, P1 is closing price, D1 is dividend received in the period. Use the same currency throughout.
Earnings per share (EPS): EPS = Profit after tax and preference dividends ÷ Number of ordinary shares; A profit measure. It ignores risk and cash timing.
Return on capital employed (ROCE): ROCE = Operating profit (PBIT) ÷ Capital employed; Capital employed is usually equity plus long-term debt. Define it clearly in the answer.
Dividend yield: Dividend yield = Dividend per share ÷ Share price; Only the income part of shareholder return.
Capital gain yield: Capital gain = (P1 − P0) ÷ P0; Adds to dividend yield to give TSR.
Economic value added (EVA): EVA = NOPAT − (Capital employed × WACC); NOPAT is net operating profit after tax. Positive EVA suggests value is created.
Market value added (MVA): MVA = Market value of the firm − Capital invested; Capital invested is the capital supplied by investors. Applies to the whole company.
Value of the firm: Market value of equity = Number of shares × Share price; Changes in this value plus dividends show wealth created.
Agency relationship: Principal (shareholders) → delegates decisions → Agent (managers); Agency cost arises when agents' goals differ from principals' goals. Monitoring, bonding and residual loss are the usual cost categories.
Goal congruence: Manager's reward = f(shareholder wealth); The aim of remuneration design. Pay should rise when shareholder value rises, not just when accounting profit rises.
Shareholder return: Total shareholder return = (P1 − P0 + D) ÷ P0; P0 is opening share price, P1 is closing share price and D is dividend. Useful as a long-term bonus measure.
Share option value to manager: Gain per option = market price − exercise price (if positive, else 0); Options have no downside for the holder, which can encourage excess risk taking. Mention this.
Economic value added (EVA): EVA = NOPAT − (capital employed × WACC); Links reward to profit after charging for capital. Use it when the question asks about value-based performance measures.
Agency problem: Principal (shareholders) ≠ Agent (managers) in objectives and information; Governance and incentive schemes aim to align the two. Costs of doing so are agency costs, such as monitoring and bonding costs.
Governance and ethics distinction: Governance = structure and control; Ethics = behaviour and judgement; Use this to answer 'difference between governance and ethics' questions directly.
Rules-based vs principles-based: Rules-based: comply or be penalised; Principles-based: comply or explain; State which applies if the scenario names a jurisdiction. Do not assume one regime applies everywhere.
Ethical decision filter: Legal? → Consistent with professional code? → Fair to stakeholders? → Acceptable if made public?; A practical checklist. A decision can be legal and still fail the later tests.
ACCA fundamental ethical principles: Integrity, Objectivity, Professional competence and due care, Confidentiality, Professional behaviour; Use these as the framework when the requirement asks about the ethical position of an accountant.
Value effect of ESG: Better ESG → lower perceived risk → possibly lower cost of capital → possibly higher value; This is a likely effect, not a guaranteed one. Qualify it in your answer.
Expected inflation and interest (Fisher effect): (1 + money rate) = (1 + real rate) × (1 + inflation rate); Use it to explain how inflation feeds into nominal interest rates and discount rates.
Purchasing power parity (PPP): S1 = S0 × (1 + hf) ÷ (1 + hc); S is quoted as units of foreign currency per one unit of home currency. hf is the foreign inflation rate and hc is the home inflation rate. Higher foreign inflation means the foreign currency is expected to weaken, so S1 rises. Check the quote direction before using it.
Interest rate parity (IRP): F0 = S0 × (1 + i foreign) ÷ (1 + i home); S0 is quoted as units of foreign currency per one unit of home currency. i foreign is the foreign interest rate and i home is the home interest rate. The interest rate of the currency in the numerator of the quote goes in the numerator. Here the quote is foreign per home, so i foreign goes on top, which matches the formula. Use it to explain how interest rate gaps move forward rates.
After-tax cash flow from overseas project: Cash flow after tax = pre-tax cash flow − tax paid (at the rate in the question); Higher local tax rates or withholding taxes reduce the amount available to the parent.
Profitability index (single-period rationing, divisible projects): PI = NPV ÷ initial investment; Rank projects by PI and fund in order until the limit is used. The last project is part-funded. Valid only if projects are divisible and not mutually exclusive.
Dividend cover: Dividend cover = profit after tax available to ordinary shareholders ÷ ordinary dividends; Shows how safely a dividend is paid from earnings. Check the dividend against free cash flow too.
Dividend payout ratio: Payout ratio = dividends ÷ earnings = 1 ÷ dividend cover; Retention ratio = 1 − payout ratio.
Growth from retention (Gordon): g = b × r; b is the proportion of earnings retained and r is the return on reinvested funds. It assumes r stays constant.
Gearing measure: Debt ÷ equity or debt ÷ (debt + equity); State which version you use and whether you use book or market values.
Divisible versus indivisible projects: Divisible: rank by PI. Indivisible: test combinations of whole projects and pick the highest total NPV.; If funds are limited in more than one period, use linear programming.
EVA: EVA = NOPAT − (WACC × capital employed at start of period); NOPAT is net operating profit after tax, adjusted as the question tells you (for example, adding back R&D that is capitalised). Use opening capital employed unless told otherwise. Capital employed must include the same adjustments.
Return on capital employed (ROCE): ROCE = Operating profit ÷ (Total assets − Current liabilities) × 100; Compare with the cost of capital. State the definition you use, as definitions vary.
Operating profit margin: Operating profit margin = Operating profit ÷ Revenue × 100; Pair with asset turnover to explain changes in ROCE.
Asset turnover: Asset turnover = Revenue ÷ Capital employed; ROCE = operating margin × asset turnover.
Interest cover: Interest cover = Operating profit ÷ Finance costs; Shows how easily interest is paid from profit.
Gearing: Gearing = Debt ÷ Equity, or Debt ÷ (Debt + Equity); Say which version you use and stay consistent.
Value for money (three Es): Economy = cost of inputs; Efficiency = output ÷ input; Effectiveness = outcomes achieved against objectives; Use these as a framework for any not-for-profit performance question.

Quick revision

The adviser's core decisions are investment, financing and dividends, all aimed at the company's objectives.
The primary objective is shareholder wealth maximisation, driven by dividends and share price growth over time.
Profit maximisation is weaker because it ignores timing, risk and cash flow.
Agency problems arise because managers act for owners but may pursue their own interests.
Ways to align interests include pay linked to performance, share options, monitoring, and governance rules.
Share options can encourage short-term focus or excess risk, so state this limit.
Other stakeholders, such as lenders, employees and governments, may conflict with shareholder goals.
Governance relies on board structure, independent directors, committees and transparent disclosure.
Economic factors include interest rates, inflation, exchange rates, growth and government policy, and each affects strategy differently.
Policy choices must fit the scenario: link growth, financing mix and dividends to the company's stage and constraints.
Performance measures such as ROCE, EPS and economic value added each have limits, so use several.
Not-for-profit bodies often aim for value for money and service delivery, with constraints on funding.

Common mistakes

Giving a calculation with no recommendation. Fix: Always finish with a sentence that says accept, reject or change, and why.
Writing generic theory not tied to the scenario. Fix: Use the company's name, countries, currencies and figures in every point you make.
Treating profit maximisation as the same as shareholder wealth maximisation. Fix: Say that wealth depends on cash flows, timing and risk. Profit ignores all three and can be manipulated.
Calculating TSR without including the dividend, or using the wrong base price. Fix: Always use (P1 − P0 + D1) ÷ P0, with P0 as the opening price.
Listing textbook agency problems with no link to the scenario. Fix: Pick the problems the scenario shows and quote the facts, such as a bonus based on annual profit.
Recommending bonuses on profit or EPS as the solution. Fix: Explain that profit can be manipulated and ignores risk and capital cost. Prefer long-term measures such as TSR or EVA, with caveats.
Writing a generic list of governance best practice with no link to the scenario. Fix: Pick only the points the scenario supports. Quote the fact, name the weakness, then give the fix.
Treating governance and ethics as the same thing. Fix: Say governance is the structure of control and accountability, and ethics is the underlying judgement of right and wrong. Give an example of each.
Listing factors without saying what they do to the company. Fix: For every factor, write the chain: factor, effect, financial measure, action.
Giving generic answers that ignore the scenario. Fix: Quote the country, currency, tax rate or policy from the scenario and apply the point to it.

Exam tips

Read the requirement for the role and audience. Answers written as a report to the board score better than loose notes.
Use professional skills deliberately: structure, scepticism, commercial insight and clear conclusions.
Spend time on interpretation. After each calculation, write at least one sentence on what it means.
State your assumptions. The marker can give credit for a sensible assumption even if it differs from the model answer.
Keep the last few minutes for a clear recommendation on each part.
Link every point to the scenario. Generic theory earns few marks in AFM.
Show the formula and workings for TSR, EVA or ROCE, because method marks are available even if the final number is wrong.
When asked to discuss, give a balanced view: strengths and limits of each measure, then a conclusion.