Straight from the horse’s mouth

August 2020

Have you read the March examiner reports? We have for PM and
FM, and this is what the examiner wants from you…

Performance Management (March pass rate 35%)

The examiner says that PM has a large syllabus that can be daunting, so it is essential you have broad knowledge. They explain: “If a section B OT case covering variances comes up and a candidate hasn’t covered this in their studies, the 10 marks available are left to chance.” You must also be able to apply the logic of a concept or theory to a problem.

That means understanding the method and why you are doing the calculations. Don’t just focus on how to do the calculations.

The range of topics covered in the March 2020 exam in section B was:

• Target costing.

• Pricing.

• Life-cycle costing.

• Budgeting. Variances.

• Risk and uncertainty.

For section C candidates were presented with questions drawn mainly from planning with limited factors; relevant costing; performance measurement; and variance analysis.

Financial Management (March pass rate 44%)

The examiner reminds candidates that if you are asked to select two correct statements in section B, then marks can only be awarded if two statements have been selected.

There is no partial marking, so an answer which only selects one statement will be awarded no marks. A candidate who selects three statements will also receive no marks.

When answering number entry questions, you must also ensure you are entering the answer in the right format, as stated in the requirement.

If the number is being asked for in millions there will be an ‘m’ after the number entry box. And if you put in a full answer of say 13,000,000 in the box rather than 13, this will be marked as incorrect. Seems a bit harsh, but there you are.

Turning to the March exam itself, the examiner was concerned about the number of candidates who were unable to correctly calculate the cost effects of introducing accounts receivable factoring, or offering an early settlement discount (working capital).

In another question many candidates wrongly believed that offering an early settlement discount would increase the length of the cash operating cycle.

Errors on a question about the dilution of earnings per share following the expansion financed by a rights issue were a common problem – candidates either used the wrong increase in earnings or didn’t use the revised number of shares.

The requirement to calculate an asset-based valuation on a replacement cost basis caused difficulties, too.

The examiner is worried that candidates are not familiar with the method of how to perform these calculations. Another question highlighted problems with understanding what earnings yield actually represents and how it is calculated.

You also need to be able to identify how practical considerations impact on the valuation of shares.

Then the examiner turns to risk management, and asked: why are candidates not strong on derivative questions?

Among the problem here were:

• Using forward contracts on both income and expenses in different currencies – candidates need to use different ends of the forward contract spreads provided.

• Lack understanding of a forward rate agreement.

• Confusion between forward exchange contracts and forward rate agreements.

• Unable to compare lead payments against a forward contract.

• Cannot correctly apportion their money market hedging calculations.

In section C candidates were presented with questions mainly drawn from working capital management, investment appraisal, and business finance.

The examiner says that when discussing the effects of a business expansion on working capital investment and financing policy candidates need to beef up their replies – “they are often much briefer than needed for the marks on offer”. There also appears to be confusion about the two policy areas.

When it comes to treasury management markers wanted to see the use of key terms such as ‘cash pooling’, ‘foreign currency risk’ and ‘liquidity management’.

As in previous exams candidates scored well (relatively) on questions requiring an NPV calculation. One area where sitters often make errors, however, is the treatment of inflation in NPV calculations.

The examiner also asks candidates to carefully check the timing of cash flows. “Working capital has initial investment, incremental investment and recovery and all of these cash flows need to be timed as required by the question scenario.”

With all calculations in FM it is essential that all workings are shown in your answer. If they aren’t there then markers cannot give credit for application of the correct method following an arithmetical error.

A need for deeper study comes through as students struggle discussing the relative merits of investment appraisal techniques, for example NPV and IRR, and ROCE and IRR.

The examiner also doesn’t want to see simple answers about risk and uncertainty. He knows by now that risk is quantifiable and uncertainty is not, and doesn’t want to be offered a few bullet points, especially when the answer is required to be linked to the scenario.

When it comes to business finance the examiner cannot understand why candidates use book values for equity and debt when asked to calculate the weighted average cost of capital using market values.

The examiner also wants candidates to take more care with their calculations here too.

Finally, the examiner stresses that sitters need to use the resources available to help them.