P4 Advanced Financial Management syllabus

Much of the initial material in Financial Management is covered in Paper F9. P4 covers the more advanced components of the syllabus and contains topics which reflect the changing nature of financial markets and the developing needs of companies.

What is the main focus of P4?

P4 is set at Masters level. As such, the main focus is not just on carrying out complex calculations but also on their relevance to the real world. Some of the materials in P4 require real expertise such as knowledge of how financial prices are quoted in the press or on the internet.

Will specific topical issues be included within the option sections of the paper?

It will mainly depend on the topical issue. More general ones are likely to be included in section A while specific ones may be included in section B.

How does dividend capacity relate to free cash flows?

There is the trite point that dividends are paid out of cash rather than profit and it is usually the availability of the former which constrains what can be distributed.

However, the logic of the free cash flow to equity model and the use of free cash flow after net reinvestment as a proxy for the distributable element of return to investors, is based upon the original concept of income first proposed by Hicks that what is distributable is what can be taken out and leave the value of the business unimpaired.

Value in this sense is taken to be the present value of the future cash flows of the business so what can be distributed is the change in the present value of future cash flows.

The free cash flow to equity model in valuation works on the same principle as the dividend valuation model in that we seek to determine the free cash flow, after net reinvestment sufficient to maintain the operating capacity of the business, which could be available for distribution to the equity investors.