Advanced Financial

Management (AFM)
March/June 2023
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments .............................................................. 2
Format of exam ................................................................... 2
Question 1 – Joshua Co ...................................................... 2
Requirement (a) – 5 marks .............................................. 3
Requirement (bi) – 5 marks ............................................. 4
Requirement (bii) – 11 marks .......................................... 4
Requirement (biii) – 6 marks ........................................... 5
Requirement (biv) – 8 marks ........................................... 6
Requirement (bv) – 5 marks ............................................ 6
Professional skills – 10 marks ......................................... 6
Summary ......................................................................... 7
Question 2 – Oxwick Co ...................................................... 8
Requirement (a) – 5 marks .............................................. 9
Requirement (b) – 10 marks ............................................ 9
Requirement (c) – 5 marks ............................................ 11
Professional skills – 5 marks ......................................... 11
Summary ....................................................................... 12
Question 3 – Blackbosca Co ............................................. 13
Examiner’s
Part report........................................................
(a) – 13 marks – AFM March/June 2023 14 1

Part (b) – 7 marks .......................................................... 15

Professional skills – 5 marks ......................................... 16
General comments
This examiner’s report should be used in conjunction with the published March/June
2023 sample exam which can be found on the ACCA Practice Platform.

In this report, the examining team provide constructive guidance on how to answer
these questions whilst sharing their observations from the marking process,
highlighting the strengths and weaknesses of candidates who attempted them. Future
candidates can use this examiner’s report as part of their exam preparation, attempting
question practice on the ACCA Practice Platform and reviewing the published answers
alongside this report.

Format of exam
The examination comprised two sections, A and B. Section A consisted of one
compulsory question for 50 marks in total. Section B consisted of two compulsory
questions for 25 marks each. Out of this total of 100 marks across sections A and B,
20 marks were available for professional skills related to communication, commercial
acumen, analysis and evaluation. 80 technical marks were available for applying
appropriate technical knowledge in response to the requirements.

Section A

Question 1 – Joshua Co

Exam technique and time management

Joshua Co is a 50-mark question which translates into 90 minutes to spend on this

question. It is very important candidates thoroughly read the question to become
familiar with the scenario as important facts and figures can easily be missed. You
must then plan your answer to enable you to have the opportunity to gain the maximum
marks for each section. These steps must be built into your time management for each
requirement of the question. Identify the areas where you feel you can gain marks the
most easily and ensure you have the time to complete each requirement. Candidates
should ensure they answer the requirement in the time allotted and avoid unnecessary
detail such as repeating the facts from the scenario rather than spending their time
making sure they address the requirement.

Question scenario

Joshua Co primarily relates to Section C of the syllabus: acquisitions and mergers.

This question is broadly similar in complexity to previous questions that have been
examined on the same syllabus area. The requirements test the ability of candidates
to undertake a number of detailed calculations relating to an acquisition valuation and
to discuss associated issues relevant to those calculations.
The scenario for this question is a proposed acquisition of another company put
forward as a defence against a takeover. Joshua Co has been struggling in its market
and the directors believe that it could soon be the target of a takeover bid. As a result,
they discuss the benefits of becoming a bigger company as a defence strategy

Examiner’s report – AFM March/June 2023 2

claiming it would be more difficult to take over a larger company. In addition, they
highlight any diversification benefits for their operations that a takeover would bring.
Joshua Co put forward a proposal to take over Fraser Co even though they had put in
a cash bid for Fraser Co last year that was turned down by Fraser Co’s shareholders.

A key requirement of last year’s bid was a 35% share premium that was required by
Fraser Co’s shareholders. Financial details are given for Joshua Co and Fraser Co in
addition to other information about the proposed offer including cash flow projections
and dividend information.
Additional information is also given about using a share buyback as an alternative
defence strategy.

There are several requirements relating to this scenario focusing on the additional
value the acquisition could bring, its’ effect on shareholder value and dividends, and
the concerns shareholders may have. Candidates are also asked to discuss agency
issues relating to the proposed acquisition and the credibility of a share buyback as
an alternative takeover defence tactic.

General comments

Candidates sometimes tend to struggle with questions relating to mergers and

acquisitions.
A question of this type requires a logical step by step approach to the calculations
particularly in terms of the additional value created. It is difficult to adopt the same
approach for all questions and it is therefore essential that question practice is part of
a candidate’s preparation. The value created for each company’s shareholders is
required as a % in b(iii). This calculation is not too complicated and yet this part of the
question was not answered at all well. However as discussed below the first two
calculations were answered very well.

The detailed review below focuses on each of the requirements, highlights the
approach taken by candidates and any issues that need to be addressed when using
this question as a study aid.

Requirement (a) – 5 marks

Part (a) requires candidates to discuss the agency problems created by Joshua Co’s
proposed takeover of Fraser Co and how these could be mitigated specifically in the
context of a defence and risk diversification strategy.

There were a few good answers to this requirement but on the whole candidates
generally struggled to answer this part well. A significant number of candidates
discussed diversification as a takeover strategy and failed to focus their answers on
agency issues. It was not clear whether they had misread the requirement or that they
were unprepared to discuss agency issues. Those candidates that were able to give

Examiner’s report – AFM March/June 2023 3

a brief general explanation of the meaning of agency were rewarded but the main
focus of the response should be the agency issues between shareholders and
managers in the light of the managers’ rationale for the takeover. Candidates who did
not focus on agency were rewarded for discussing diversification as a strategy relating
it to institutional shareholders already being diversified. The mitigation suggestion
mainly relates to communication with shareholders about the rationale for the takeover
but if a candidate’s focus was not on the shareholders in the first part the marks
available for the mitigation were rarely awarded.
It was disappointing to see that quite a few candidates made no attempt at this part
emphasising the need for thorough preparation.

Requirement (bi) – 5 marks

This part of the question requires candidates to undertake a WACC calculation to be

used as the discount rate in the valuation in part b(ii). The calculations were mainly
well done. The calculations required an equity beta to be calculated from an asset beta
and those candidates that were not awarded the full marks tended to make an error in
this calculation. In addition there were a number of candidates who did not adjust the
cost of debt for tax in the WACC calculation.

Requirement (bii) – 11 marks

This requirement requires candidates to estimate the additional value created from
Joshua Co’s acquisition proposal. Exhibit 2 provides a range of financial information
relating to both companies and from this, candidates are required to identify the
relevant information and undertake the calculation based on a PV approach. Well
prepared candidates were able to score extremely well on this requirement of the
question and it was not unusual to see very good marks.
Many candidates correctly calculated the projected total corporate value using a PV
approach with a perpetuity terminal value. Common errors included calculating the

Examiner’s report – AFM March/June 2023 4

starting PBIT for year 1 incorrectly, calculating the incremental asset investment
incorrectly and/or including it before tax, and incorrectly calculating the perpetuity.
Candidates need to read the question carefully as in this scenario the asset investment
was clearly stated to be after tax and the starting point of the PBIT was also clearly
stated. It soon became apparent that many candidates were not treating the present
value of synergies separately. Markers were made aware that the synergies could be
included in the cash flows and as long as they were included after the tax calculation
and included in the discounted cash flow calculation candidates could be awarded the
same marks as a separate calculation. This approach also meant that an alternative
overall value was arrived at as synergies are then included in the perpetuity
calculation. Full credit was given for this calculation.

Having calculated the overall expected corporate value candidates were then required
to calculate the expected equity value by adjusting this figure by the value of debt
(given in the question as 30%). The expected additional value of the proposal can then
be calculated by deducting the initial market value of the shares of Joshua Co and
Fraser Co from the expected equity value. Many candidates failed to adjust the total
corporate value for the value of debt but then went on to calculate a figure for the
expected additional value and were rewarded for this calculation.

Requirement (biii) – 6 marks

This requirement asks candidates to compare shareholder wealth of both companies

in terms of the % change in expected equity value and the expected % change in next
year’s dividend income. This required candidates to split the expected additional value
between Joshua Co and Fraser Co based on the proportion of shares held and
compare it to the initial market value of the two companies that was given in the
scenario information.
A similar calculation is also required to calculate the increase in dividend % but
candidates needed to take account of a covenant limiting the amount available for this.

Up to this point many candidates had done very well with the calculations. However,
this requirement was not well answered. Most candidates did calculate some absolute
figures for the change in value rather than %’s which did earn them some marks. A
common mistake amongst candidates who attempted a % change was to calculate it
on a single share basis. This does not work in this situation as the expected share
price is much lower than Fraser Co’s original share price but shareholders would now
hold 3 shares in the company compared to the one they previously held (meaning a
sizeable increase in value). The share for share effect was seldom picked up by
candidates leading to very different conclusions.
There were some marks available for discussion and these were awarded based on
OFR but few candidates offered any comparison or comments at all.
It was disappointing to see that there were quite a few candidates who didn’t answer
this part at all.

Examiner’s report – AFM March/June 2023 5

Requirement (biv) – 8 marks

This requirement focusses on two areas that require discussion - the assumptions
relating to the valuation and shareholder concerns about the proposal. Assumptions
were on the whole discussed well but some candidates just listed them without any
discussion, limiting the marks awarded to them. Candidates need to be aware that
cutting and pasting information directly from the scenario and including it as an answer
or part of an answer without adding any discussion will not be rewarded.
Shareholder concerns were addressed quite well but there was information in the case
that should have been used to contribute to a candidate’s discussion. For example,
how would shareholders react to a new bid when one failed last year or questioning
the terms of the offer and the 35% premium.

However this requirement was answered very well on the whole.

Requirement (bv) – 5 marks

Requirement b(v) expects candidates to discuss the suggestion of a share buyback

as a defence tactic.

Generally candidates were clear that Joshua had no cash to finance the buyback and
commented on the issue of the covenant if extra debt was taken on to finance it. There
were however a significant number of candidates who seemed unsure about the
impact of a buyback and why it would be useful. There was a lot of misunderstanding
demonstrated by candidates with quite a few believing it would increase the issued
share capital and lead to dilution of EPS. Quite a wide range of marks were awarded
but it was disappointing to see so many responses which appeared to indicate a lack
of preparation and revision on this area.

Professional skills – 10 marks

Candidates were generally good at demonstrating skills in communication and

analysis and evaluation but not so good at demonstrating scepticism and commercial
acumen.

Communication

The communication skills mark relates to part (b) and requires a report format with
appropriate structure. Candidates that did not achieve full marks were either not
following the report structure or not awarded the full marks for the style, language and
clarity of their response. There are still a surprising number of candidates who forget
a conclusion or who do not present their answer in any form of a report meaning they
lose valuable marks that are relatively easy to achieve.

Analysis and Evaluation

The majority of candidates were able to appropriately use the data to determine
suitable calculations. On the whole, marks for this skill were good. Candidates that
achieved fewer marks for this skill often failed to base their discussions on previous

Examiner’s report – AFM March/June 2023 6

analysis and/or did not submit a balanced appraisal to support their recommendations
or decisions.

Scepticism

The scepticism marks in this question are awarded for effective challenge of
information, such as for b(iv) where there is the opportunity to question the rationale
for the acquisition and the board’s motivation for the offer. In addition marks could be
gained for demonstrating the ability to probe into the reasons for issues, such as
questioning the impact of the variables in the calculation of the additional value.

Commercial Acumen

Few candidates were able to demonstrate commercial acumen skills by relating their
discussion and information in the scenario to the real world. In this scenario candidates
could have enhanced their discussion of risk diversification by relating it to institutional
shareholders like pension funds who diversify across a wide range of markets

Summary

Overall, this is a good mergers and acquisitions question. Well prepared candidates
were able to do very well. Thorough reading of the scenario, planning and a
structured approach benefitted many candidates and ensured time was not wasted
on needless calculations and discussion, but directed at the key areas. The ability to
apply knowledge to a given scenario is a skill required throughout this stage of the
qualification and reinforces the need to practice past questions under exam
conditions

Examiner’s report – AFM March/June 2023 7

Section B

Question 2 – Oxwick Co

Format of the Question

Oxwick Co is a 25 mark section B question which relates primarily to section C of the

syllabus focusing on shareholder value through acquisitions. The requirements are
similar to requirements that have previously been examined in this syllabus area.
Candidates were tested on their ability to undertake a calculation relating to a valuation
of a possible takeover target and to discuss related issues.

Exam technique and time management

Oxwick Co is worth 25 marks which translates into 45 minutes for candidates to spend
on this question. Candidates should read the question thoroughly to become familiar
with the scenario and then plan their time carefully in order to address the specific
issues in the question and gain maximum marks for each requirement. Candidates
must then plan their answer to have the opportunity to gain the maximum marks for
each section. Candidates should ensure they answer the requirement in the time
allotted and avoid unnecessary detail such as repeating the facts from the scenario
rather than spending their time making sure they address the requirement. Marks are
not allocated for information which is repeated from the scenario without any analysis
or evaluation.

Question scenario

Exhibit one presented information about Oxwick Co, a soft drinks manufacturer looking
to expand. Ludham Co is an unlisted company producing a premium brand of soft
drinks. This exhibit introduces the views of a non-executive director who believes
shareholders only want acquisitions which reduce risk and therefore increase
company value and that acquiring Ludham Co would not reduce risk.

Exhibit 2 provides financial information relating to both Oxwick Co and Ludham Co

that will enable a financial evaluation to be carried out.
The initial requirement asked candidates to discuss the non-executive’s views in
relation to Oxwick Co’s acquisition strategy and to the acquisition of Ludham Co
specifically.

Candidates were then required to estimate the equity value of the combined company
and the percentage gain that would accrue to Oxwick Co’s shareholders. The final
requirement was a discussion on the assumptions made in the calculations of the
values in part (b)

Examiner’s report – AFM March/June 2023 8

General comments

This question was, generally, answered quite well. In the valuation calculation many
candidates were able to produce a well-structured answer demonstrating their ability
to apply valuations using the price earnings method and the discounted cash flow
method.
The discussion requirements were answered less well. Many candidates did not
challenge the non-executive’s view but were more confident in discussing the
advantages of a related acquisition. When discussing assumptions used in the
calculations there are still too many candidates simply stating the assumptions as they
are given in the scenario or providing a short list. Candidates that really understand
the scenario and are able to relate to relevant issues will always be rewarded and are
more likely to earn the professional skills marks.
Time pressure did not seem to be an issue and those responses that were short or
incomplete were more likely to have been caused by lack of preparation.
The detailed review below focuses on each of the requirements, highlights the
approach taken by candidates and any issues which need to be addressed when using
this question as a study aid.

Requirement (a) – 5 marks

(a) Discuss the non-executive director’s views in relation to Oxwick Co’s

acquisition strategy and the acquisition of Ludham Co.

There were some good answers to this requirement where candidates addressed both
of the areas very well. However, candidates on the whole do need to be more confident
in challenging statements given in the question rather than assuming the non-
executive director’s views are correct. Many candidates did recognise that
shareholders could diversify their own portfolios but often did not relate this fact to the
non-executive’s views as to whether Oxwick Co should diversify into new areas to
reduce risk. The non-executive also suggested that Oxwick Co should look to acquire
one or more of its suppliers to reduce risk. This point was only discussed by better
candidates and demonstrates the need to read the question thoroughly and discuss
all the information given in the scenario. A few candidates did just state the non-
executive’s view as given in the question with no discussion as to whether it is a
feasible strategy for Oxwick Co and therefore earned no marks for doing this.
The majority of candidates did discuss the acquisition of Ludham Co and were able to
give good reasons why the acquisition could create value citing synergy benefits,
economies of scale, competitive position or better distribution channels.

Requirement (b) – 10 marks

Estimate, using the data available:

• the equity value of the combination of Oxwick Co and Ludham Co; and
• the % gain in value which would be gained by Oxwick Co’s shareholders
from the acquisition, concluding whether it will fulfil the expected
shareholder requirement of a 15% gain in value.

Examiner’s report – AFM March/June 2023 9

This part of the question was generally well done. The majority of the candidates were
able to calculate the discounted cash flow of the combined company correctly. The
initial value of both companies also needed to be calculated and on the whole this was
also done correctly. However, there were a number of common errors made by some
candidates as detailed below:

- The discounted cash flow required additional investment to be calculated for

the first 4 years. This was given as $0.80 for every $1 increase in post-tax cash
flows. A few candidates calculated this incorrectly by not considering that it
should be based on the increase in post-tax cash flows rather than the absolute
value.
- The valuation required a perpetuity calculation from year 4 onwards. Many
candidates did this correctly, but some candidates forgot to discount the
perpetuity by the year 4 discount factor to bring it back to present value.
- The resulting value from the discounted cash flow calculation was the combined
company total value and this needed adjusting by the capital structure ratio
given in the question to calculate the combined equity value. A number of
candidates forgot to reduce the total value by the debt proportion.
- The value of Ludham Co required candidates to calculate Oxwick Co’s price
earnings ratio, adjust this for Ludham Co’s unlisted status and then apply it to
its’ post tax earnings. Many candidates did this correctly, but a few candidates
incorrectly used Ludham Co’s number of shares instead of the post-tax
earnings to calculate its’ initial value.

This next part of the question did cause a few problems for some candidates and there
were quite a number who did not progress beyond the values above.

Having calculated the equity value of the combined company and the two individual
values the next step was to calculate the overall gain in value and apportion it between
the two companies. Ludham Co required a 15% premium on their current value and
this amount should be calculated based on the price earnings valuation noted above.
The value of the acquisition to Oxwick Co’s shareholders is the difference between the
combined company equity value and the initial value of the two companies plus the
15% premium calculated for Ludham Co. Following on from this the requirement with
respect to the percentage gain to Oxwick Co’s shareholders and whether it achieves
the 15% required return can be addressed by expressing the value of the acquisition
to Oxwick Co as a percentage of Oxwick Co’s initial value.

The most common errors were to ignore the gain required by Ludham Co’s
shareholders of 15% and apportion all the gain to Oxwick Co and to calculate the
proportion of the overall gain that would go to Oxwick Co rather than the gain on the
initial value. However a good proportion of candidates were able to work through all
the calculations correctly and it is worth reminding candidates that a mistake only gets
penalised once so an incorrect valuation at the start can still result in a good answer
being well rewarded.

Examiner’s report – AFM March/June 2023 10

Requirement (c) – 5 marks

Discuss the assumptions made in the calculations in part (b).

A good number of candidates discussed the assumptions and highlighted their

importance. However there are still a fair proportion of candidates who are producing
short lists of assumptions making comments such as “it is assumed the cost of capital
is calculated correctly”. The requirement clearly asks for discussion and a list where
statements are made as in the example will not be rewarded.

Instead of saying an assumption is unrealistic, for maximum credit, candidates need

to develop this point by saying why it is unrealistic and giving examples of variables
that can make it change such as an economic recession impacting the market for soft
drinks. Very few candidates question the realism of the assumptions and the impact
that this could have on the overall valuation which can then affect the acquisition
decision.

There will be some assumptions not stated in the scenario such as how the cost of
capital is calculated. This can be discussed further as there is an implicit assumption
within the cost of capital calculation that the ratio of debt and equity will not change.
Funding in an acquisition decision could change the capital structure so candidates
could go on to the impact of this on the acquisition.

Candidates that do go on to discuss the wider implications of the assumptions and

their impact on the overall result of the valuation are rewarded well and often go on to
earn skills marks through valid skills comments.

Professional skills – 5 marks

On the whole candidates were awarded an average mark for professional skills.
Candidates were generally good at demonstrating skills of analysis and evaluation but
not so good at demonstrating scepticism and commercial acumen.

Analysis and Evaluation

Many candidates provided comprehensive and well-structured numerical analysis for

their calculations in their responses to requirement (b), with appropriate use of the
data to determine suitable calculations and support their discussions and draw
appropriate conclusions.
The better answers demonstrated the need for specific further information resulting
from their numerical analysis.

Scepticism

The scepticism marks in this question could be awarded for questioning the assertions
made by the non-executive director concerning the need to reduce risk by diversifying
into other unrelated areas and for questioning realism and possible bias in
assumptions. Candidates need to develop confidence in order to question statements

Examiner’s report – AFM March/June 2023 11

made in the scenario which demonstrates the scepticism skill. Similarly, questions
could be raised about bias and realism in assumptions. e.g how realistic is it in real
world economies to assume that inflation remains constant for 4 years,

Commercial Acumen

Few candidates were able to demonstrate commercial acumen skills where

candidates are expected to relate their discussion and information in the scenario to
the real world. In this scenario candidates could use real world evidence of acquisitions
to illustrate points in their discussion.

Summary

Overall, this is a good mergers and acquisitions question. Well prepared candidates
were able to do very well. Thorough reading of the scenario, planning and a structured
approach benefitted many candidates and ensured time was not wasted on needless
calculations and discussion but directed at the key areas. The ability to apply
knowledge to a given scenario is a skill required throughout this stage of the
qualification and reinforces the need to practice past questions under exam conditions
and study model answers.

Examiner’s report – AFM March/June 2023 12

Question 3 – Blackbosca Co

Format of the question

Blackbosca Co is mainly drawn from section B of the syllabus, focusing on

international investment appraisal. The individual question parts are broadly similar in
scope and complexity to requirements that have appeared in previous questions
drawn from the same syllabus areas and should not have been unexpected. The
requirements tested the ability of candidates to undertake a number of detailed
calculations involving an international investment proposal and to discuss issues
related to those calculations and other issues associated with the proposal.

Comment on time management

Blackbosca Co is worth 25 marks which translates into 45 minutes for candidates to

spend on this question. It is important that candidates thoroughly read the question to
become familiar with the scenario. Candidates must then plan their time to have the
opportunity to gain the maximum marks for each requirement.

Candidates should avoid the temptation to expand their answer to one requirement
beyond the time allotted, using time that should have been spent answering the
remaining requirements and the other questions in the exam. Markers cannot allocate
more marks to a requirement than the maximum available, even if the comments may
otherwise be worthy of additional credit.

Scenario background

Exhibit one presented background information about an online food delivery company,
Blackbosca Co. Due to rapid revenue growth in its home market, the company would
like to expand into other countries. The board is due to discuss a proposal to expand
into Üskistan, a developing country which has cultural links with Blackbosca Co’s
home market of Turkey. Exhibit two provided more detailed financial information
relating to the proposal, including inflation-adjusted estimates of the expected revenue
and fixed costs. The exhibit also provided information about the source of the revenue
estimates, which were modelled by a consultant based on an exponential
mathematical function. The exhibit indicated the company’s chief executive officer
(CEO) had some concerns about the integrity of the data and the validity of the
financial model. Exhibit three presented further information about the Üskistani
economy and its government.

The initial requirement expected candidates to evaluate the proposal by working

through each of the components of an international investment appraisal calculation
and then to discuss the CEO’s concerns about the consultant’s cash flow estimates.
Candidates were then asked to discuss the financial and business risks the company
would be exposed to if the expansion proposal were approved.

Examiner’s report – AFM March/June 2023 13

General comments

The requirements in this question are technically demanding. Overall, candidates

were well prepared to meet the technical challenges posed by this question, as
evidenced by the proficiency of the net present value calculations in requirement (a)
and satisfactory discussion sections in requirement (b). However, the impression is
left that many candidates did not in fact read or at least read fully the CEO’s
concerns regarding the consultant’s cash flow estimates. Candidates therefore
struggled to demonstrate professional scepticism and/or commercial acumen when
addressing these concerns, if this part of the requirement was attempted at all.

The best candidates were able to adopt a balanced approach to their answers and
address all aspects of the requirements. Future candidates are therefore reminded
about the importance of question practice as an essential part of their preparations
for this exam.

Part (a) – 13 marks

Requirement (a) asked candidates to evaluate the suitability of the investment

proposal in Üskistan, including in their analysis a discussion of the CEO’s concerns
about the cash flow estimates. The financial data presented to candidates included
a cash flow forecast, with the project’s pre-tax contribution and fixed costs. These
cash flows had already been adjusted for inflation. The expected exchange rates
throughout the four-year investment period were also made available to candidates.

Subject to the caveat highlighted previously about the failure of many candidates to
address the CEO’s concerns, the other parts of the requirement were well answered.
However, a small number of candidates wasted valuable exam time inflating the
revenue and fixed costs estimates when these had already been adjusted for
inflation in the scenario. Similarly, some candidates also duplicated the exchange
rate calculations. The inflation rates were included in the scenario to provide some
contextual macroeconomic data which might have been useful for their evaluation,
not so that candidates could waste time recalculating the exchange rates.

Both of these errors could have been avoided with a more careful understanding of
the information in the scenario. Candidates must therefore read the scenario
carefully in order to understand clearly the information that has been presented to
them and what is being asked of them before attempting the requirements. This is a
skill that can be developed with extensive question practice.

Most candidates made a reasonable attempt at the tax calculations although, as with
past exam questions, the carried forward loss adjustment was not always well
answered. There were also the usual errors associated with the working capital
calculation with some candidates ignoring the incremental aspect of working capital

Examiner’s report – AFM March/June 2023 14

cash flows and/or the requirement to recover working capital in full at the end of the
project. Some candidates failed to convert the dollar cash flows into Turkish lira and
many ignored the royalty payment in Turkish lira even when this had been included
as an expense in dollars. Each of these errors highlights a lack of technical
knowledge and/or application in the areas of the syllabus being tested but it is worth
emphasising that each can be addressed with additional question practice since they
are all standard features of many previous exam questions on the same topic.

As part of their evaluation, candidates were expected to provide a justified

recommendation at the end of the net present value calculation. The vast majority of
candidates were able to demonstrate the ability to make a clear recommendation.
However, there are still candidates who skip this final step in their evaluation,
missing out on an opportunity to score relatively easy marks.

As previously stated, many candidates ignored or failed to adequately address the

CEO’s concerns about the model used to predict the project’s cash flow estimates,
which was disappointing since scepticism is a key professional skill expected of
candidates in this exam. This should have been an opportunity for candidates to
critique the financial model and to consider ways in which the integrity of the data
might be assessed, for example, using the experience of Blackbosca’s home market.
It was disappointing to see so many candidates avoid this aspect of the requirement
and it is worth highlighting the importance of time management if candidates are to
be successful in this exam.

Part (b) – 7 marks

Requirement (b) expected candidates to discuss the financial and business risks
associated with the proposal in Üskistan. Candidates were expected to use the
information provided in the exhibits, particularly exhibit three, to assess Blackbosca
Co’s risk exposure as a result of the new project. This exhibit included background
information relevant to the project, including the tax treatment of the delivery riders,
the stability of Üskistan’s government and more general information about the
economy and the online food delivery market.

Overall, this requirement was well answered although it was disappointing to see
that there were a few candidates who did not attempt it at all. It is important to
attempt all requirements to gain maximum technical and professional skills marks.

Many candidates provided balanced answers covering both types of risk, raising
points which were contextualised to the scenario. The less well prepared candidates
referred back to the scenario, simply restating the risks without adding any
meaningful discussion or analysis. Other candidates wasted time on general points
which were not related to the scenario at all.

Examiner’s report – AFM March/June 2023 15

Professional skills – 5 marks

Overall, many candidates were capable at demonstrating skills in analysis and

evaluation but were often far less confident demonstrating scepticism and
commercial acumen.

Analysis and evaluation

Many candidates provided comprehensive and well-structured numerical analysis for

their calculations in their responses to requirement (a), with appropriate use of the
data to determine suitable calculations and support their discussions and draw
appropriate conclusions.

Scepticism

To demonstrate the skill of scepticism, candidates were expected to challenge

information provided such as recognising the implication of using inaccurate cash
flow estimates and to question the disparity between the increase in fixed costs and
revenue throughout the investment period since the former increases in a linear
manner whilst the latter seems to increase exponentially. Candidates still seem to
struggle demonstrating this particular skill and are advised to focus on providing
comprehensive answers to requirements as scepticism should naturally follow from
this.

Commercial acumen

Few candidates were able to adequately demonstrate skills in commercial acumen,

where candidates are expected to use the information in the scenario to draw on
evidence that relates to the organisational context or take any other practical
commercial considerations into account. An example of commercial acumen in this
scenario would have involved recognising the usefulness of Blackbosca Co’s
experience in its home market in order to verify the credibility of the cash flow
estimates although credit could also be gained for other relevant points raised by
candidates.

Examiner’s report – AFM March/June 2023 16