ACCA Strategic Professional · Advanced Financial Management

The role and responsibility of senior financial executive/advisor: formula sheet

Full chapter guide

Key formulas

Shareholder wealth (principle): Increase in shareholder wealth = dividends received + change in share price; The usual primary objective. Judge each decision by its effect on this.
Project decision rule: Accept if NPV > 0 (at the appropriate discount rate); Subject to capital rationing and risk. The discount rate should reflect the project's risk.
Dividend capacity (simple): Cash available for dividends = operating cash flow − interest − tax − capital investment + net new borrowing; Check the cash is in a location from which it can be paid to the parent.
Gearing (debt to equity): Gearing = debt ÷ equity (or debt ÷ (debt + equity)), using market or book values as stated; State which definition you use. Compare with covenants and sector norms.
Total shareholder return (TSR): TSR = (P₁ − P₀ + D₁) ÷ P₀; P₀ is the opening share price, P₁ the closing price and D₁ the dividend received in the period. For several years, compare annualised returns using the compound rate.
Capital gain and dividend yield split: TSR = (P₁ − P₀) ÷ P₀ + D₁ ÷ P₀; Shows how much of the return is capital growth and how much is income.
Annualised TSR over n years: Annual TSR = (Total return factor)^(1/n) − 1; Total return factor = 1 + total TSR over the period. Use it when the total return includes dividends, for example by chaining the yearly TSRs (the geometric mean). State your assumption about whether dividends are reinvested.
Net present value: NPV = Σ [CFₜ ÷ (1 + r)ᵗ] − initial investment; A positive NPV at the risk-adjusted rate adds that amount to shareholder wealth.
Market value added (MVA): MVA = market value of the firm − capital invested; Market value of equity plus debt, less the capital invested in the firm. Use it as a measure of cumulative value created.
Value of a share (dividend valuation model, constant growth): P₀ = D₀(1 + g) ÷ (Ke − g); Valid when Ke > g and growth is constant. Shows that value depends on dividends, growth and risk.
Mendelow's power-interest grid: High power + high interest = key players; high power + low interest = keep satisfied; low power + high interest = keep informed; low power + low interest = minimal effort; Use it to decide how much attention each stakeholder deserves.
Value for money (not-for-profit): Value for money is achieved by balancing the three Es: economy, efficiency and effectiveness; Economy = low cost of inputs; efficiency = output per input; effectiveness = achieving objectives. Assess the three together, not as a sum.
Shareholder wealth: Shareholder return = (dividends + change in share price) ÷ opening share price; The main measure of the shareholder objective that other stakeholders may conflict with.
Agency costs (components): Total agency cost = monitoring costs + bonding costs + residual loss; Use this as a checklist. It is a classification, not a calculation.
Governance costs vs agency costs: Agency costs = cost of the conflict and of controlling it; governance costs = cost of running the board, committees, reporting and compliance; Governance spending is one way of reducing agency costs. The two overlap but are not the same.
Value test for a control or scheme: Adopt if reduction in agency loss > cost of the control; Use this as the decision rule when recommending a mechanism.
Good incentive scheme features: Aligned with shareholder wealth + measurable + controllable by managers + long-term + fair and transparent; Use these as criteria to evaluate any pay scheme in a scenario.
Fundamental ethical principles: Integrity, Objectivity, Professional competence and due care, Confidentiality, Professional behaviour; Name the principle breached and explain why. Do not just list all five.
Threats to compliance: Self-interest, Self-review, Advocacy, Familiarity, Intimidation; Link the threat to the facts, then give a safeguard.
Triple bottom line: Profit + People + Planet; Use it to widen a purely financial appraisal to social and environmental effects.
ESG factors: Environmental + Social + Governance; Useful structure for discussing sustainability risk and reporting.
Fisher effect (interest rates and inflation): (1 + i) = (1 + r) × (1 + h); i is the nominal rate, r the real rate and h the inflation rate. Use it to link expected inflation to interest rates.
Interest rate parity: F₀ = S₀ × (1 + i_c) ÷ (1 + i_b); S₀ and F₀ are the spot and forward rates in units of currency c per one unit of currency b. i_c and i_b are the interest rates of currency c and currency b. The currency with the higher interest rate trades at a forward discount. A change in a central bank's rate therefore changes the forward rate.
Purchasing power parity: S₁ = S₀ × (1 + h_c) ÷ (1 + h_b); S₁ is the expected future spot rate and S₀ is the current spot rate, both in units of currency c per one unit of currency b. h_c and h_b are the inflation rates of currency c and currency b. It is a guide based on the inflation difference, not a certainty.
Real versus money cash flows: Money cash flow = real cash flow × (1 + inflation rate)ⁿ; Discount money flows at the money rate and real flows at the real rate. Do not mix them.

Quick revision

The adviser's role covers investment, financing and dividend decisions and risk, with advice given to the board.
The main objective in theory is to maximise shareholder wealth, shown by share price growth plus dividends.
Other objectives include profit, growth, survival, market share and sustainability. They can conflict with wealth.
Stakeholders have different aims, so identify who has power and interest before recommending action.
Agency problems arise when managers act in their own interest rather than the owners'.
Remedies include performance-linked pay, monitoring, audit and strong governance, and each has costs and limits.
Governance relies on an effective board, independent non-executives and transparent reporting.
For ethics, name the issue, the principle, the options and your action. Do not just say it is wrong.
Fiscal policy is government spending and taxation. Monetary policy works through interest rates and money supply.
Always apply points to the scenario and give a clear recommendation, which earns professional skills marks.

Common mistakes

Giving a generic textbook list of the adviser's duties. Fix: Tie every point to a fact in the scenario, such as a named country, a covenant or a cash balance.
Treating investment, financing and dividend decisions as separate. Fix: State how one affects the others, for example a higher payout reduces funds for investment or increases borrowing.
Treating profit maximisation and wealth maximisation as the same thing. Fix: Name three differences: cash flow timing, risk and long-term view. Say profit is an accounting number, whereas wealth is based on discounted cash flows.
Leaving dividends out of TSR. Fix: Always write TSR = (P₁ − P₀ + D₁) ÷ P₀ before substituting. Check the dividend is included.
Listing stakeholders and their objectives without any application to the scenario. Fix: Use names, figures and facts from the case in every point.
Stating that conflicts exist but not saying how to manage them. Fix: Always pair each conflict with a tool such as covenants, incentives, dividend policy or engagement.
Writing a generic list of governance rules with no link to the scenario. Fix: Quote scenario facts and say which problem each measure solves.
Treating agency costs and governance costs as identical. Fix: Define agency costs as the whole cost of the conflict, including residual loss. Governance costs are the cost of the structures and reporting used to reduce it.
Listing the five fundamental principles without applying them. Fix: Choose the one or two principles that the facts breach and tie each to a specific action in the scenario.
Giving a one-sided view that profit is all that matters, or that ethics always overrides profit. Fix: Show both sides, then link ethical behaviour to long-term value, reputation and risk before you recommend.

Exam tips

Read the requirement for the audience and format, and write as the adviser, not as a student.
Use scenario facts in every paragraph; generic points earn little.
Always show how investment, financing and dividend decisions interact.
Finish with a clear recommendation, and mention risks and assumptions for the professional skills marks.
Where a calculation is asked, state assumptions and interpret the result for the board.
Always state the primary objective in your first sentence, then move on to the scenario. Markers reward application more than definitions.
In TSR questions, show the formula, the dividend and the benchmark comparison. Method marks are easy to collect.
When asked to compare profit and wealth maximisation, structure your answer around cash flow timing, risk, and the long term, and give a scenario example for each.