F3 - Financial Strategy



F3 deals with key elements in designing and managing the organisation's financial strategy - in the context of contributing to achieving the organisation's objectives and within its external constraints.

The features and implications of the full range of major financing instruments are covered. A broad range of types of investment decision is also covered.

It is recognised throughout that such decisions need to take account of broader strategic issues as well the financial analysis.

Note: This paper forms part of the strategic level. However, material included in any of the papers within the operational or management levels may also be relevant for the purposes of assessment.

Learning outcomes - on completion of their studies students should be able to:

Lead:
1. discuss potential strategic financial objectives, and the relationships among and constraints on the elements of financial strategy.

Component:
a) discuss the potential strategic financial objectives of an organisation
(b) discuss the interrelationships between decisions concerning investment, financing and dividends
(c) discuss the impact of internal and external constraints on financial strategy, including the impact of regulation on business combinations

Indicative syllabus content:

• the financial and non-financial objectives of different organisations (eg value for money, maximising shareholder wealth, providing a surplus)
• the three key decisions of financial management (investment, financing and dividend) and their links
• benefits of matching characteristics of investment and financing in the longer term, (eg in cross-border investment) and in short-term hedging strategies
• considerations in the formulation of dividend policy and dividend decisions, including meeting the cash needs of the business
• external constraints on financial strategy (eg funding, regulatory bodies, investor relations, strategy, and economic factors)
• developing financial strategy in the context of regulatory requirements (eg price and service controls exercised by industry regulators) and international operations
• the implications of regulation for business combinations. (Note: Detailed knowledge of the City Code and EU competition rules will not be tested)

Lead:
2. evaluate the financial strategies and objectives of an organisation and the extent of their attainment.

Component:
(a) identify an organisation's objectives in financial terms
(b) evaluate the attainment of an organisation's financial objectives
(c) evaluate current and forecast performance taking account of potential variations in economic and business factors
(d) evaluate alternative financial strategies for an organisation taking account of external assessment of the organisation by financiers and other stakeholders, including likely changes to such assessment in the light of developments in reporting

Indicative syllabus content:

• the financial objectives of an organisation and economic forces affecting its financial plans (eg interest, inflation and exchange rates)
• assessing attainment of financial objectives
• use of financial analysis in the external assessment of a company (eg in assessing creditworthiness and compliance with financing covenants)
• modelling and forecasting cash flows and financial statements based on expected values for economic variables (eg interest rates) and business variables (eg volume and margins) over a number of years
• analysis of sensitivity to changes in expected values in the above models and forecasts
• assessing the implications for shareholder value of alternative financial strategies, including dividend policy. (Note: Modigliani and Miller's theory of dividend irrelevancy will be tested in broad terms. The mathematical proof of the model will not be required, but some understanding of the graphical method is expected)
• the lender's assessment of creditworthiness
• current and emerging issues in financial reporting (eg proposals to amend or introduce new accounting standards) and in other forms of external reporting (eg environmental accounting)

Learning outcomes - on completion of their studies students should be able to:

Lead:
1. evaluate the financing requirements of an organisation and strategies for meeting those requirements

Component:
(a) analyse the short and long-term financing requirements of an organisation
(b) evaluate alternative methods of meeting financing requirements, taking account of the implications for the organisation's financial statements, its tax position and financial stakeholders
(c) evaluate the weighted average cost of capital of an organisation
(d) recommend methods of funding specific investments, taking account of basic tax considerations and risk exposures (to interest and currency exchange rate fluctuations)
(e) recommend optimal strategies for the management of working capital and satisfaction of longer term financing requirements

Indicative syllabus content:

• identifying financing requirements (both in respect of domestic and international operations) and the impacts of different types of finance on models and forecasts of performance and
  position
• working capital management strategies. (Note: No detailed testing of cash and stock management models will be set since these are covered at a lower level within the syllabus)
• types and features of domestic and international long-term finance: share capital (ordinary and preference shares, warrants), long-term debt (bank borrowing and forms of securitised debt, eg convertibles) and finance leases, and methods of issuing securities
• the operation of stock exchanges (eg how share prices are determined, what causes share prices to rise or fall, and the efficient market hypothesis). (Note: No detailed knowledge of any specific country's stock exchange will be tested)
• the impact of changing capital structure on the market value of a company. (Note: An understanding of Modigliani and Miller's theory of gearing, with and without taxes, will be expected, but proof of their theory will not be examined)
• the capital asset pricing model (CAPM): calculation of the cost of equity using the dividend growth model (knowledge of methods of calculating and estimating dividend growth will be expected), the ability to gear and ungear betas and comparison to the arbitrage pricing model
• the ideas of diversifiable risk (unsystematic risk) and systematic risk. (Note: use of the two-asset portfolio formula will not be tested)
• the cost of redeemable and irredeemable debt, including the tax shield on debt
• the weighted average cost of capital (WACC): calculation, interpretation and uses
• the lease or buy decision (with both operating and finance leases)
• criteria for selecting sources of finance, including finance for international investments
• the effect of financing decisions on balance sheet structure and on ratios of interest to investors and other financiers (gearing, earnings per share, price-earnings ratio, dividend yield, dividend cover gearing, interest cover)

Lead:
2. discuss the treasury function.

Component:
a) discuss the role and management of the treasury function

Indicative syllabus content:

• the role of the treasury function in terms of setting corporate objectives, liquidity management, funding management, and currency management
• the advantages and disadvantages of establishing treasury departments as profit centres or cost centres, and their control