candidates used 365 days when 360 days was specified.

 Where a definition is provided in an exam question, candidates must use it.

To gain marks, candidates must meet the question requirement.

‘aggressive’ refers to a lower level of investment in current assets than a comparable company, while in working capital funding policy, ‘aggressive’ means preferring short-term

purchasing power parity Theory （PPPT）--the law of one price， In equilibrium, identical goods must cost the same, regardless of the currency in which they are sold.

 money market instruments.

working capital funding strategy.

dividend valuation model

Operational gearing = Contribution / PBIT

Interest cover=PBIT/interest payable

Traditional capital structure theory--states that there will be a point at which the weighted average cost of capital is minimised and also that the cost of equity will be higher when there is a high proportion of debt capital

Modigliani and Miller’s theory with-tax model--- stated that the optimal capital structure is made up almost entirely of debt. Under this model companies should have high financial gearing.

Modigliani and Miller’s theory without-tax model---The weighted average cost of capital remains constant with increased gearing,the cost of equity would remain constant

two ways of calculating the cost of equity: dividend growth model and the CAPM

equivalent annual costs EAC formula = sum of the present value of costs/annuity factor

calculation of NPV

working capital investment as well as risk and return

rights issues is an offer to existing shareholders enabling them to buy more shares in proportion to the number of shares already held, usually at a price lower than the current

 interest rate hedging

A conservative working capital investment policy refers to a higher amount invested in working capital.

Smoothing is holding a balanced mix of both fixed and floating rate debt.

matching-Financing fixed cash flow investments with fixed rate debt is a matching

option

 forward contract--receiving the dollar equivalent of the MS receipt in three months' time,

money market hedge--will provide Marigold Co with dollar receipts today

Discounted cash flow (DCF) based methods of investment appraisal include NPV, IRR and discounted payback.They all share the same two advantages.First, they allow for the time value of money and recognise that a $ received today is worth more than a $ received in one year’s time.The two commonly used non-discounted cash flow methods of investment appraisal, accounting rate of return and payback,do not consider the time value of money.

Second, DCF methods are cash flow (rather than accounting profit) based. Cash is the lifeblood of a business and is used to pay the claims of stakeholders. Profit is an accounting concept. The amount of profit earned in a period is sometimes quite a  subjective matter and depends upon the accounting policies followed. The amount of cash received in a period is a far more objective  measure.

Accounting rate of return is based upon accounting profit and ignores cash flow. Both NPV and IRR have clear cut decision rules which should lead to the maximisation of shareholder wealth. Under NPV, any projects with positive NPVs should be adopted and the size of the NPV is directly related to the increase in shareholder wealth from adopting the project. Under IRR, projects with IRRs bigger than the company’s cost of capital should be adopted, and if they are, shareholder wealth will increase.
Accounting rate of return and payback have arbitrarily set targets based upon internal corporate targets. NPV and IRR both consider returns earned throughout a project’s life. Payback only considers returns up to the payback point, and as a result ignores later returns.

Rationale behind equivalent annual cost (EAC) based decisions
In simple situations, choosing between one-off projects of different length lives is quite straight forward; the NPV technique is used to evaluate the costs and benefits of a project over its life and the project with the largest NPV is selected in order to maximise shareholder wealth.

ARP-- Average annual operating profit expressed as a percentage of average investment. 

efficiency--

 dividend growth model--

risk and uncertainty-Uncertainty can be said to increase with project life, while risk increases with the variability of returns

 interest-sensitive assets and liabilities --is a description of gap exposure. A significant number of candidates chose other options to this question, suggesting that this topic is not well understood by many candidates.