P4 AFM ACCA exam 2023 with complete and correcct answers

A1 (Ch1) Role of Sen Fin Advisor What do investors care about 1. Future 2. Dividend 3. Financing Plans 4. Risk Management A1 (Ch1) Role of Sen Fin Advisor Shareholder wealth equation Total Shareholder Return (Dividend yield + capital gain) A1 (Ch1) Role of Sen Fin Advisor Financing decision issues 1. Life Cycle 2. Operating Gearing 3. Stability of Revenue 4. Security A1 (Ch1) Role of Sen Fin Advisor Dividend Decision Interrelation between and reflection of: - Investment Decision (How much to spend on investments) - Finance Decision (External financing) A1 (Ch1) Role of Sen Fin Advisor Investment Decision - Opportunity cost to use money for investments rather pay out - Difficult if company is growing A1 (Ch1) Role of Sen Fin Advisor Financing Decision - Can borrow to finance dividend (there are legal constraints to do this; only legal if company has accumulated realised profits) A1 (Ch1) Role of Sen Fin Advisor Dividend Capacity The annual cash available for payment to shareholders (also called free cash flow to equity) Profits after tax and preference dividends less Debt repayment, investment in assets less Depreciation, any capital raised from new share issues or debt A1 (Ch1) Role of Sen Fin Advisor Types of dividend policies 1. Constant Payout Ratio 2. Stable Growth 3. Residual Policy A1 (Ch1) Role of Sen Fin Advisor Constant Payout Ratio Logical, but can create volatile dividend movements A1 (Ch1) Role of Sen Fin Advisor Stable Growth Set at a level that signals the growth prospects of the company A1 (Ch1) Role of Sen Fin Advisor Residual Policy Only pay a dividend after all positive NPV projects have been funded A1 (Ch1) Role of Sen Fin Advisor Scrip Dividends -> Extra shares Allows shareholders the choice of building equity stake or taking cash, and can allow the companys cash flows to benefit from cash saved A1 (Ch1) Role of Sen Fin Advisor Enhanced Scrip Dividend -> Offers choice between cash and share Normally attractive offer for shares so that this is more likely taken A1 (Ch1) Role of Sen Fin Advisor Share buy back Returns significant amounts of cash to shareholders More attractive than a share buyback if shares are perceived to be UNDERVALUED A1 (Ch1) Role of Sen