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Summary ICAEW ACA Strategic Business Management Open Book Notes
Structured, simple and complete notes for the advanced level ACA SBM exam. Very useful for open book exam if some time is spent to understand the content.
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1 Formats..................................................................................................................................................................62 Finance...................................................................................................................................................................8
2.1 Exam focus (inc finance checklist).....................................................................................................................8
2.2 Financing options for small and medium sized enterprises (SMEs)...................................................................9
2.3 Alternative Investment Market........................................................................................................................9
2.4 Procedures for obtaining listing on an international stock exchange................................................................9
2.5 Financial reconstruction.................................................................................................................................10
2.6 Financial distress............................................................................................................................................14
2.7 International Financial Management..............................................................................................................15
2.7.1 Risks of international trading..............................................................................................................................................15
2.7.2 Financing overseas investments.........................................................................................................................................16
2.7.3 Remittance restrictions.......................................................................................................................................................17
2.7.4 Dividend management........................................................................................................................................................18
2.7.5 Transfer pricing for multinationals.....................................................................................................................................18
2.8 Equity Financing Options................................................................................................................................19
2.8.1 Dividend policy....................................................................................................................................................................19
2.9 Debt Financing Options...................................................................................................................................20
2.9.1 Bonds...................................................................................................................................................................................20
2.9.2 Bank loans...........................................................................................................................................................................22
2.9.3 Bonds / Bank loans comparison..........................................................................................................................................23
2.9.4 Convertible bonds...............................................................................................................................................................23
2.9.5 Auditors/ Bank Enquirers about new finance request.......................................................................................................23
2.11 Cost of Capital...............................................................................................................................................25
2.12 Capital Structure (MM theory vs Traditional)................................................................................................26
2.13 Dividend Policy.............................................................................................................................................26
2.14 Treasury Management..................................................................................................................................27
2.15 Working Capital Management (inc EOQ Model)...........................................................................................29
3 Finance risk management.....................................................................................................................................30
3.1 Introduction....................................................................................................................................................30
3.1.1 Type of financial risk...........................................................................................................................................................30
3.1.2 Whether to hedge...............................................................................................................................................................30
avaHedge efficiency & Basis Risk (futures and traded options)..................................................................................................31
3.1.3 Key products and definitions..............................................................................................................................................32
3.1.4 CR implications for each hedge type..................................................................................................................................33
3.2 Interest rate risk.............................................................................................................................................33
3.2.1 Interest rate futures (IRFs)..................................................................................................................................................33
3.2.2 Forward rate agreements (FRAs)........................................................................................................................................34
3.2.3 Interest rate options...........................................................................................................................................................35
3.2.3.1 OTC Options..................................................................................................................................................................35
3.2.3.2 Traded options.............................................................................................................................................................35
3.2.3.3 Caps, collars and floors (Interest & FX)........................................................................................................................36
3.2.4 Interest rate swaps (coupon swaps)...................................................................................................................................38
3.3 Foreign exchange rate risk..............................................................................................................................39
3.3.1 Forecasting exchange rates................................................................................................................................................39
3.3.2 Currency forward contracts................................................................................................................................................40
, 3.3.3 Currency futures.................................................................................................................................................................40
3.3.4 Foreign currency options....................................................................................................................................................41
3.3.4.1 OTC Currency options...................................................................................................................................................41
3.3.4.2 Traded currency options..............................................................................................................................................41
3.3.5 FX swaps..............................................................................................................................................................................42
3.3.6 Currency Swap....................................................................................................................................................................42
3.3.7 Money market hedge..........................................................................................................................................................43
3.4 Options Valuation...........................................................................................................................................44
3.5 Hedging – Audit Points...................................................................................................................................44
4 Business Valuation................................................................................................................................................45
4.1 General principles...........................................................................................................................................45
4.2 Valuations - EXAM TEMPLATE ANSWER..........................................................................................................46
4.3 Valuations – theory, assumptions/issues and use...........................................................................................47
4.4 Asset based methods......................................................................................................................................50
4.4.1 NAV.....................................................................................................................................................................................50
4.5 Income and earnings based methods..............................................................................................................51
4.5.1 DVM....................................................................................................................................................................................51
4.5.2 Discounted Earnings...........................................................................................................................................................52
4.5.3 P/E Multiple........................................................................................................................................................................53
4.5.4 EV/EBITDA Multiple............................................................................................................................................................54
4.5.5 FCF and FCFE.......................................................................................................................................................................56
4.5.6 APV......................................................................................................................................................................................57
4.5.7 EVA and MVA......................................................................................................................................................................60
4.5.8 SVA......................................................................................................................................................................................62
4.6 Valuations – specific scenarios........................................................................................................................63
4.6.1 Valuation – High Growth Start-up......................................................................................................................................63
4.6.2 Valuation – Loss Making Businesses...................................................................................................................................63
4.6.3 Valuation – Administration.................................................................................................................................................64
4.7 CAPM..............................................................................................................................................................64
4.8 Valuation of debt............................................................................................................................................65
4.9 Brand Valuation..............................................................................................................................................67
4.10 Additional Information for all valuations......................................................................................................68
5 Investment appraisal............................................................................................................................................69
5.1 All methods (inc. positives and negatives)......................................................................................................69
5.1.1 Bond yield calculation (alternative to IRR).........................................................................................................................70
5.1.2 Annualised rate of return....................................................................................................................................................70
5.1.3 MIRR Example.....................................................................................................................................................................70
5.1.4 Average Rate of Return.......................................................................................................................................................70
5.2 Narrative points and professional scepticism.................................................................................................71
5.3 Real options....................................................................................................................................................71
5.4 Sensitivity analysis..........................................................................................................................................71
5.5 Foreign currency NPV.....................................................................................................................................72
5.6 Breakeven Analysis.........................................................................................................................................74
6 Risk management.................................................................................................................................................76
, 6.1 Insurance........................................................................................................................................................76
6.2 Risk reviews - considerations..........................................................................................................................76
6.3 Examples of general risks................................................................................................................................77
7 Business plan........................................................................................................................................................78
8 Strategic choice....................................................................................................................................................79
8.1 Exam Focus (inc generic ideas)........................................................................................................................79
8.3 Growth options...............................................................................................................................................80
8.3.1 Organic growth...................................................................................................................................................................80
8.3.2 Acquisitions.........................................................................................................................................................................80
8.3.2.1 Benefits and risks.........................................................................................................................................................80
8.3.2.2 Financing an acquisition...............................................................................................................................................82
8.3.2.3 Financial statement impact..........................................................................................................................................84
8.3.2.4 Synergies......................................................................................................................................................................84
8.3.2.6 Assurance - Due Diligence............................................................................................................................................85
8.3.2.7 Specific scenarios.........................................................................................................................................................88
8.3.3 Joint development strategies.............................................................................................................................................89
8.3.4 Ansoff Matrix Ideas.............................................................................................................................................................91
8.4 Demergers and divestment.............................................................................................................................93
8.5 Overseas.........................................................................................................................................................96
8.5.1 Generic Overseas Expansion Risk Assessment...................................................................................................................96
8.5.2 Outsourcing.........................................................................................................................................................................97
8.5.3 Exporting Overseas.............................................................................................................................................................98
8.5.4 Overseas Operation............................................................................................................................................................99
8.5.6 Advantages and Disadvantages ways to expand overseas...............................................................................................101
8.6 Online sales strategy.....................................................................................................................................102
8.7 How to withdraw cash/ realise investment from the business.....................................................................102
8.8 Withdrawal from a Business - Director Considerations.................................................................................103
8.9 Problems associated with change of ownership...........................................................................................103
9 Strategic implementation...................................................................................................................................104
9.1 Business process reengineering (BPR)...........................................................................................................104
9.2 Operations Management..............................................................................................................................104
9.3 Customer relationship management (CRM)..................................................................................................104
9.4 Supply chain management............................................................................................................................105
9.4.1 Costs of Quality.................................................................................................................................................................105
9.5 Change management....................................................................................................................................106
9.6 Project Management....................................................................................................................................108
10 Information systems.........................................................................................................................................109
10.1 Exam focus..................................................................................................................................................109
10.2 Management Accounting Information........................................................................................................109
10.3 Integrated reporting...................................................................................................................................110
10.4 Big data.......................................................................................................................................................112
10.5 Information technology risks......................................................................................................................113
, 10.6 Outsourcing IT function..............................................................................................................................113
11 Human resource management (HRM)...............................................................................................................114
11.1 Generic HR issues and actions.....................................................................................................................115
11.2 HRM issues in an acquisition.......................................................................................................................115
11.3 Remuneration.............................................................................................................................................116
12 Data analysis....................................................................................................................................................119
12.1 Key Ratios...................................................................................................................................................120
13 Performance Measurement..............................................................................................................................124
13.1 BS and Beyond Budgeting Model................................................................................................................124
13.2 CSFs............................................................................................................................................................125
13.3 Benchmarking.............................................................................................................................................125
13.4 KPIs.............................................................................................................................................................125
14 Costing..............................................................................................................................................................127
14.1 Marginal costing.........................................................................................................................................127
14.2 Absorption costing......................................................................................................................................127
14.3 Activity based costing (ABC)........................................................................................................................128
15 Corporate Governance......................................................................................................................................131
15.1 The UK Corporate Governance Code...........................................................................................................131
15.2 Board Structures and Make up...................................................................................................................133
15.3 Shareholding Percentages - Narrative Comments.......................................................................................134
16 Assurance.........................................................................................................................................................135
16.1 Review Engagements (ISRE 2400)...............................................................................................................135
16.2 Assurance on Business Plans and Forecasts (ISAE 3400)..............................................................................136
16.3 Assurance on Service Providers (ISAE 3402)................................................................................................138
16.4 Assurance on Internal Controls (ISAE 3410)................................................................................................138
16.5 Agreed Upon Procedures (ISRS 4400)..........................................................................................................139
16.6 Compilation engagements (ISRS 4410)........................................................................................................139
16.7 Forensic auditing.........................................................................................................................................140
16.8 Internal audit..............................................................................................................................................142
18 Ethics................................................................................................................................................................144
18.1 Exam Focus.................................................................................................................................................144
18.2 Corporate Social Responsibility (CSR).........................................................................................................145
18.4 Sustainability..............................................................................................................................................146
18.5 CSR vs Sustainability...................................................................................................................................147
18.6 Independence - Advisory Manager joining a client.....................................................................................147
18.7 Social Audit.................................................................................................................................................147
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