Association of Corporate Treasurers (ACT) Qualifications Corporate Finance and Capital Structure Syllabus

Corporate Finance and Capital Structure syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Corporate Finance and Capital Structure in Association of Corporate Treasurers (ACT) Qualifications, not a summary of it.

1. 1

   Time Value of Money and Valuation

   4 topics

   • Discounting and compounding
     • Present and future value of single sums and annuities
     • Effective vs. nominal interest rates
   • Bond pricing and yields
     • Clean vs. dirty price and accrued interest
     • Yield to maturity and current yield
     • Duration and convexity as price sensitivity measures
   • Equity valuation fundamentals
     • Dividend discount and free cash flow models
     • Relative valuation multiples
   • Business and enterprise valuation
     • Enterprise vs. equity value bridge
     • DCF methodology and terminal value
2. 2

   Cost of Capital

   4 topics

   • Cost of debt
     • Pre-tax and post-tax cost of debt
     • Credit spread and benchmark rate components
   • Cost of equity
     • Capital Asset Pricing Model and beta
     • Risk-free rate and equity risk premium
   • Weighted average cost of capital (WACC)
     • Market vs. book value weights
     • WACC as hurdle rate and its limitations
   • Hurdle rates and value creation
3. 3

   Capital Structure and Financing Strategy

   4 topics

   • Capital structure theory
     • Modigliani-Miller propositions with and without tax
     • Trade-off theory and financial distress costs
     • Pecking order and signalling theory
   • Optimal gearing and leverage
     • Financial vs. operating leverage
     • Target leverage and debt capacity
   • Financial flexibility and credit ratings
     • Rating agency methodologies and key ratios
     • Maintaining rating headroom and the cost of downgrade
   • Dividend and distribution policy
     • Dividends vs. share buybacks
     • Distribution constraints and capital allocation
4. 4

   Investment Appraisal and Capital Allocation

   4 topics

   • Project appraisal techniques
     • Net present value and internal rate of return
     • Payback, discounted payback and profitability index
   • Relevant cash flows and tax effects
     • Incremental cash flows and sunk costs
     • Capital allowances and tax shields
   • Risk in appraisal
     • Sensitivity, scenario and Monte Carlo analysis
     • Adjusting discount rates for project risk
   • Capital rationing and project selection
5. 5

   Mergers, Acquisitions and Restructuring

   4 topics

   • M&A rationale and synergies
     • Strategic, financial and operational synergies
     • Value creation and the winner's curse
   • Deal structuring and financing
     • Cash, share and mixed consideration
     • Acquisition financing and bridge facilities
   • Treasury role in M&A integration
     • Cash and banking integration
     • Refinancing acquired debt and change-of-control clauses
   • Corporate restructuring and disposals

Corporate Finance and Capital Structure flashcards for Association of Corporate Treasurers (ACT) Qualifications

20 of 52 cards from the Corporate Finance and Capital Structure deck — real questions with worked answers.

1. What is the difference between compounding and discounting?

   Compounding moves a cash flow forward in time to find a future value: $FV = PV(1+r)^{n}$. Discounting moves a future cash flow back to today to find present value: $PV = \frac{FV}{(1+r)^{n}}$. They are inverse operations using the same rate $r$.

2. State the formula for the present value of a single future cash flow.

   $$PV = \frac{CF_{n}}{(1+r)^{n}}$$ where $CF_{n}$ is the cash flow at period $n$ and $r$ is the periodic discount rate.

3. What is the present value of an ordinary (level) annuity paying $C$ per period for $n$ periods?

   $$PV = C\left[\frac{1-(1+r)^{-n}}{r}\right]$$ The bracketed term is the annuity factor.

4. What is the present value of a perpetuity, and of a growing perpetuity?

   Level perpetuity: $PV = \frac{C}{r}$. Growing perpetuity (Gordon form): $PV = \frac{C_{1}}{r-g}$, valid only when $r > g$.

5. How do you convert a nominal annual rate compounded $m$ times per year into an effective annual rate (EAR)?

   $$EAR = \left(1+\frac{r_{nom}}{m}\right)^{m} - 1$$ With continuous compounding, $EAR = e^{r_{nom}} - 1$.

6. How is the price of a coupon-paying bond determined?

   It is the present value of all coupons plus the redemption value, discounted at the yield: $$P = \sum_{t=1}^{n}\frac{C}{(1+y)^{t}} + \frac{F}{(1+y)^{n}}$$ where $C$ is the coupon, $F$ is face value and $y$ is the yield per period.

7. What is the relationship between a bond's coupon rate, its yield to maturity, and whether it trades at par, premium or discount?

   If coupon rate $=$ YTM the bond trades at par. If coupon $>$ YTM it trades at a premium (price above par). If coupon $<$ YTM it trades at a discount (price below par). Bond prices move inversely to yields.

8. Define yield to maturity (YTM) of a bond.

   The single discount rate that equates the present value of a bond's future coupons and redemption payment to its current market price; it is the bond's internal rate of return assuming it is held to maturity and all coupons are reinvested at that same rate.

9. What is the current yield of a bond and how does it differ from YTM?

   Current yield $= \frac{\text{annual coupon}}{\text{market price}}$. Unlike YTM it ignores capital gain/loss to redemption and the time value of money, so it is only an approximate income measure.

10. Define Macaulay duration and what it measures.

    Macaulay duration is the present-value-weighted average time to receipt of a bond's cash flows: $$D = \frac{\sum_{t=1}^{n} t \cdot \frac{CF_{t}}{(1+y)^{t}}}{P}$$ It measures interest-rate sensitivity and the bond's effective average life.

11. How is modified duration used to estimate the price change of a bond for a small yield change?

    $Modified\ Duration = \frac{Macaulay\ Duration}{1+y}$, and the price change is approximated by $$\frac{\Delta P}{P} \approx -ModDuration \times \Delta y$$

12. State the dividend discount (Gordon growth) model for the value of a share.

    $$P_{0} = \frac{D_{1}}{k_{e} - g}$$ where $D_{1}$ is next year's dividend, $k_{e}$ is the cost of equity and $g$ is the constant dividend growth rate (requires $k_{e} > g$).

13. In the dividend growth model, how can the growth rate $g$ be estimated from fundamentals?

    $g = b \times r$, the product of the retention ratio $b$ (proportion of earnings retained) and the return on reinvested equity $r$. This is the 'Gordon' sustainable-growth relationship.

14. What is the difference between equity value and enterprise value?

    Enterprise value (EV) is the value of the whole operating business available to all capital providers. Equity value is the portion attributable to shareholders: $$Equity\ Value = EV - Net\ Debt - Minority\ Interests - Preferred + Associates$$

15. How do you move from enterprise value to equity value (bridge)?

    Start with EV, subtract net debt (debt minus cash), subtract preferred stock and minority interests, and add the value of non-operating assets/associates. The result is equity value, which divided by shares gives value per share.

16. What are the three broad approaches to business valuation?

    (1) Income/DCF approach – present value of future cash flows; (2) Market/relative approach – multiples of comparable companies or transactions; (3) Asset-based approach – net realisable or replacement value of assets less liabilities.

17. What is the EV/EBITDA multiple and why is it commonly used in valuation?

    $EV/EBITDA = \frac{Enterprise\ Value}{EBITDA}$. It is capital-structure-neutral and excludes depreciation/amortisation and tax differences, allowing comparison of companies with different gearing and asset bases.

18. How is the cost of debt (before tax) of traded debt estimated?

    It is the yield to maturity (redemption yield) on the company's existing debt of similar seniority and maturity, i.e. the market rate the firm would currently pay to borrow, not the historic coupon rate.

19. Why is the cost of debt adjusted for tax, and what is the after-tax formula?

    Because interest is tax-deductible, the effective cost to the firm is reduced by the 'tax shield': $$k_{d}^{after-tax} = k_{d}(1 - T)$$ where $T$ is the marginal corporate tax rate.

20. State the Capital Asset Pricing Model (CAPM) used to find the cost of equity.

    $$k_{e} = r_{f} + \beta(r_{m} - r_{f})$$ where $r_{f}$ is the risk-free rate, $\beta$ is the systematic risk of the share, and $(r_{m}-r_{f})$ is the equity market risk premium.

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