Managerial Financial Accounting Online Platform

Everything for your exam in one place, online and at your own pace: the Weekly Meetings recorded in short clips, a summary of every topic, exam-like questions to practise and past exam questions — each one explained, with a link to the summary you need to study.

• Clips: Short clips from the Weekly Meetings.
• Summaries: The key points of every topic.
• Practice Questions: Exam-like questions to practise.
• Past Exam Questions: Questions from previous exams, sorted by topic.
• Explanations: Every answer explained, with a link to the summary of its topic.

Finished the content of the week with Weekly Meetings or self-study? This training makes you take an exam with exam style questions of this week and previous weeks and then go through the results.

• Running from week 2 to week 7.
• Write a real exam-style exam: Written by your tutor.
• Step-by-step solutions: We guide you through answers in a clear, intuitive way.
• Exam hacks & pitfalls: Learn to avoid classic mistakes.
• Slides included: All content saved in your Success Formula account.

• 💳 Slides available in your Success Formula account
• ✅ Covered by our “satisfied or reimbursed” policy

• Leverage and the value of the firm
  • Framing: how much debt should a firm take?
  • Unlevered firm: the two-outcome example
  • Expected return = the unlevered cost of equity
  • Introducing 50/50 debt; the debt cash flows
  • Levered equity returns in both states
  • Seniority: why debt makes equity riskier
  • Implications: more risk, more required return
  • Types of securities used to raise capital; defining leverage
• Modigliani-Miller in perfect markets
  • Conditions 1 and 2: fair pricing, no taxes or transaction costs
  • Condition 3, and MM Proposition I
  • The pre-tax WACC in a perfect market
  • Why the WACC stays constant when leverage changes
  • Zero-sum conclusion
  • Exam Q: assumption vs proposition
  • MM Proposition II stated
  • Proposition II: the formula
  • Numerical check against the example
  • Graph: rE, rD and the WACC against D/(D+E)
  • Homemade leverage and the Law of One Price
  • Why perfect markets neither create nor destroy value
• Working with capital-structure ratios
  • Why ratios: the exam gives ratios, not values
  • From a debt-to-capital ratio to E and D
  • From a debt-to-equity ratio to the debt-to-capital ratio
  • Exam Q: back out rU from the pre-tax WACC, then the new rE
  • Net debt (debt minus cash)
• Leverage, beta and earnings
  • Market risk of a firm's assets: the unlevered (asset) beta
  • Effect of increased leverage on the beta of equity
  • Leverage and expected earnings per share
  • Dilution and equity value
• The interest tax shield
  • Reintroducing taxes: the levered vs debtless income statement
  • Why take on debt if levered net income is lower?
  • Total payout to all claimants: 250 vs 240
  • Calculating the tax shield from the tax rate and interest
• Value of the levered firm
  • MM Proposition I fails with taxes: VL > VU
  • VL = VU + PV(interest tax shield)
  • Cancelling the risk-free rate: PV(ITS) = Tc x D
  • Worked example: 40% tax rate, permanent debt of 10,000
  • Effect of a leveraged recapitalisation on the value of equity
• The WACC with corporate taxes
  • Graph with taxes: the net (after-tax) cost of debt
  • Why the WACC now falls with leverage
  • The after-tax WACC formula
• Personal taxes and the optimal debt level
  • Effect of personal taxes on the corporate tax benefit of leverage
  • The effective tax rate T*, and when to use it
  • Exam Q: how does debt add value?
  • Levered, perfectly levered and over-levered
  • The optimum: interest expense equals EBIT
  • Worked comparison of the three columns
  • Calculating the tax benefit of debt with personal taxes
  • Optimal debt fraction and the firm's growth rate
  • Do firms under-leverage? domestic and international evidence

• Bankruptcy and financial distress
  • What makes markets imperfect: the list of complications
  • Default risk as the limit to leverage
  • Chapter 7 vs Chapter 11
  • Direct vs indirect costs: the framing and the exam warning
  • The itemised list of direct bankruptcy costs
  • Indirect costs: accounting (receivables, fire-sale losses)
  • Indirect costs: supply chain (employees, suppliers, customers)
  • Indirect costs: management-related
  • Workout vs prepack
  • Exam Q: direct or indirect cost?
  • The effect of bankruptcy in a world of perfect capital markets
  • Why original shareholders bear the PV of distress costs
• Trade-off theory
  • VL = VU + PV(tax shield) - PV(financial distress)
  • The full trade-off, including agency costs and benefits
  • What the exam actually makes you calculate
  • Exam Q: VL with a perpetual financial distress cost
• Agency costs and benefits of debt
  • Agency theory: the principal-agent conflict
  • Managers' information advantage; agency costs reduce firm value
  • Asset substitution / risk shifting
  • Debt overhang and cashing out
  • The leverage ratchet effect
  • Agency benefit: management entrenchment
  • Agency benefit: covenants and less wasteful investment
  • Exam Q: what is asset substitution?
• Asymmetric information and signalling
  • Signalling theory; MM condition three revisited
  • Information asymmetry; firm actions as signals
  • What makes a signal credible
  • Dividends and leverage as credible signals
  • Equity issues and repurchases as signals
  • The lemons principle / adverse selection
• What a firm can do with free cash flow
  • Retain vs pay out
  • Retain: capital expenditure vs building reserves
  • Pay out: dividend vs share repurchase
• The dividend process
  • Why the key dates matter; the exam renames them
  • Declaration, cum-dividend, ex-dividend, record and payment dates
  • Recap of the four dates
  • Worked example: the data and the task
  • Worked example: share price cum- and ex-dividend
  • Dividend per share; price falls by the DPS
  • The no-arbitrage argument
• Share repurchases
  • Repurchase set-up: the same data, pre and post
  • Worked example: shares bought back, price unchanged
  • Conclusion: an open-market repurchase does not move the price
  • Exam Q: when does the share price drop?
  • Dividend vs repurchase side by side
• Dividend irrelevance
  • Investors indifferent; the dividend irrelevance principle
  • Exam Q: which perfect-market payout statement is true?
• Taxes and the clientele effect
  • The clientele effect
  • Who prefers dividends, who prefers repurchases
  • Dividend vs capital-gains tax; the dividend puzzle
  • The effective dividend tax rate: the formula
  • Worked example: 20% vs 30% gives a negative effective rate
  • Worked example: equal rates give 0%
• Payout versus retention
  • MM payout irrelevance
  • Homemade dividends: the concept and its limits
  • Homemade dividend: worked example
  • Homemade dividend around an ex-dividend date (exam Q)
  • Exam Q: price and market cap after a treasury-stock buyback
• Why firms accumulate cash
  • Tax disadvantage of idle cash; cash as negative debt
  • Issuance and distress reasons to hold a buffer
  • Agency cost of excess cash: empire building and perks
  • Signalling recap
  • Stock dividends, stock splits, reverse splits and their effect on price

• The three valuation methods
  • Overview of WACC, APV and FTE
  • When each is used; all three give the same answer
• WACC method
  • The formula and the discounting logic
  • Why free cash flow to the FIRM
  • FCFF component by component (EBIT, depreciation, capex, NWC)
  • Unlevered net income; the after-tax cost of debt in the denominator
  • The WACC formula
  • Worked example: building FCFF year by year
  • Worked example: computing the WACC, using net debt
  • Discounting to the levered firm value (51.28)
  • From firm value to project NPV (30.28)
• APV method
  • What APV splits into
  • The pre-tax WACC as the discount rate
  • Worked example: computing rU
  • Why rU is higher than the WACC
  • Worked example: value of the unlevered firm (50.1)
  • Setting up the tax-shield table; work backwards
  • Levered firm value in each year (the recursion)
  • Debt capacity from the target leverage ratio
  • Interest is charged on the prior year's debt
  • Interest tax shield per year
  • Discounting the tax shield; APV reconciles with the WACC method
• Setting the debt level (four methods)
  • Overview of the four
  • Predetermined debt schedule, discounted at rD
  • Constant / permanent debt: PV(ITS) = tax rate x D
  • Constant interest coverage (worked)
  • Exam Q: the main difference between APV and WACC
• Flow-to-equity method
  • What FTE is: an NPV of the flow to equity holders
  • The two routes to FCFE
  • FCFE built from net income
  • Why net borrowings are added
  • FCFE from FCFF; why rE is the discount rate
  • Worked example: net borrowing year by year
  • After-tax interest and the completed FCFE row
  • Discounting FCFE to the equity NPV (30.28)
  • From NPV back to the levered firm value (51.28)
• Choosing between the methods
  • WACC, APV and FTE side by side
  • Situations in which each is advisable
• Terminal value (going concern)
  • Why cash flows do not stop after year 4
  • Terminal value as a growing perpetuity
  • Worked example: g = 2%, WACC = 10%
  • The terminal value must itself be discounted, and it dominates
  • Firm value versus equity value
• Project cost of capital
  • Cost of capital when the project's risk differs from the firm's
  • Cost of capital from a project's debt-to-value ratio under target leverage
  • Overall incremental impact of a project's leverage on the firm
• Exam drill
  • Tax shield in year 2 from a target leverage ratio (full chain)

• The field
  • Financial vs management accounting
  • Exam Q: which user needs management accounting?
  • The decision-making, planning and control process
  • Profit maximisation as the objective of commercial organisations
  • Changes in the business environment; key success factors and customer satisfaction
  • Functions of a cost and management accounting system
  • The three purposes for which cost information is required
• Direct/indirect and variable/fixed
  • The two dimensions, with the bicycle example
  • Indirect costs and the word overhead
  • Indirect variable vs indirect fixed
  • Exam Q: total cost and unit cost when output falls
• Manufacturing cost terminology
  • Manufacturing vs non-manufacturing costs
  • Direct material, direct labour, manufacturing overhead; prime cost
  • Prime cost vs conversion cost
  • Exam Q: which statement about indirect manufacturing costs is true?
  • Product costs vs period costs
• Cost assignment vocabulary
  • Tracing direct costs vs allocating indirect costs
  • Cost object, cost driver and allocation base
• Costs for decision making (used again in week 7)
  • Relevant vs irrelevant; avoidable vs unavoidable
  • Incremental, marginal, sunk and opportunity cost
  • What feeds an opportunity-cost calculation
• Cost behaviour: relevant range and stepped costs
  • The relevant range
  • Step-fixed costs
  • Exam Q: cost per unit with stepped fixed costs and tiered material cost

• Allocation bases
  • Cause-and-effect vs arbitrary allocation bases
  • Why different cost information is required for different purposes
• Traditional vs activity-based costing
  • One cost pool and one driver vs several
  • The support-department example data
  • Worked: traditional allocation
  • Worked: ABC with three activities
  • What the exam gives you for each method
  • Exam Q: ABC cost allocated to product A
  • Exam Q: the same data under traditional costing
  • Why the two answers differ by almost 10,000
  • Benefits and drawbacks of each method
  • Exam Q: ABC cost allocated to product A (second run)
• Overhead rates and their recovery
  • Blanket vs departmental overhead rates
  • Constructing an overhead analysis sheet and cost-centre rates
  • Budgeted vs actual overhead rates
  • Accounting treatment of the under-/over-recovery of overheads
  • Extending cost assignment to non-manufacturing organisations
  • Levels of sophistication; choosing an optimal cost system
• Inter-service-department reallocation
  • The three methods and how much interaction each allows
  • Reading the reciprocal-usage table
  • Direct allocation method (worked)
  • Step-down: choosing which department allocates first
  • Step-down: the five allocations (worked)
  • Simultaneous method: setting up and solving the two equations
  • Simultaneous method: the six allocations (worked)
  • Reciprocal method by iteration
• Materials recording and stores pricing
  • Why it matters: valuing COGS and closing inventory
  • The three methods previewed
  • FIFO, LIFO and weighted average defined
  • The worked-example data
  • FIFO worked: ending-inventory unit cost
  • LIFO worked, and why post-sale purchases cannot be used
  • Weighted average worked (two stages)
  • Effect of rising and falling prices
  • The materials recording procedure (stores ledger, requisitions)
• Job costing
  • Job costing and its accounting entries
• Process costing: fully completed output
  • When process costing applies; what scrap is
  • The six scenarios and the running ink example
  • Scenario 1: no loss, no scrap
  • Scenario 2: normal loss, no scrap
  • Scenario 3: abnormal loss, no scrap
  • Scenario 4: normal loss with scrap
  • Scenario 5: abnormal loss with scrap
  • Scenario 6: abnormal gain with scrap
  • Summary of all six scenarios
  • Exam drill: abnormal loss with a percentage normal-loss rate
  • Preparing process, normal-loss, abnormal-loss and abnormal-gain accounts
• Non-fully completed output — weighted average
  • Completed vs non-completed units; the three cost components
  • Why equivalent units are needed
  • The five steps
  • The data set: opening WIP, production, completed, closing WIP
  • Step 1: flow of units
  • Step 2: equivalent units
  • Steps 3-4: total cost and cost per equivalent unit
  • Step 5: assigning cost to each category
  • Reading off COGS and inventory value
  • Second example, now with opening-WIP cost
  • Recap drill: four linked exam questions
• Non-fully completed output — FIFO
  • Step 1: splitting completed units into opening WIP and newly completed
  • Step 2: equivalent units as the work still to do
  • Steps 3-4: period costs only, opening-WIP cost excluded
  • Step 5: adding the opening-WIP cost back in
  • Reading off COGS and inventory value under FIFO
  • Exam Q: units input during the period
  • Exam Q: value of closing WIP under FIFO

• Absorption vs variable costing: the two systems
  • What each includes in the inventory cost
  • Variable-costing inventory cost (4.15)
  • Fixed manufacturing cost per unit (0.75, total 4.90)
  • The two profit-statement layouts
• Worked comparison
  • The data and the two blank statements
  • The variable-costing statement
  • The absorption-costing statement
  • Why the profits differ: the inventory build
  • The shortcut: change in inventory x fixed cost per unit
  • Exam Q using the shortcut
  • The incentive to overproduce
  • Adjusting for under- and over-absorption
  • Negative change in inventory (selling out of stock)
  • Exam Q: reduction in profit under marginal costing (the 4,000 distractor)
  • Exam Q: operating profit under variable costing
• Denominator levels
  • Why the denominator choice matters
  • Theoretical, practical, normal and budgeted capacity
• Arguments for and against
  • The arguments for and against variable and absorption costing
• Break-even fundamentals
  • The two methods; derive rather than memorise
  • Deriving break-even from profit = 0
  • The formula, the break-even point and the contribution margin
  • Relevant range and step-fixed costs
  • The break-even chart; margin of safety
• Applying the CVP formula
  • Exam Q: what decreases the break-even point, and the plug-in-numbers technique
  • The profit-volume ratio: derivation and why it is the same formula
  • Margin of safety as a percentage
  • Operating leverage
  • Break-even and target-profit calculation
  • The rounding trap on break-even units
  • Exam Q: target profit with rounding
  • Exam Q: sales revenue for a target profit via the P/V ratio
• Further CVP theory
  • The assumptions underlying CVP analysis
  • Justifying linear cost and revenue functions
  • Contribution graph and profit-volume graph
  • Multi-product CVP with a sales mix

• Relevant cost basics
  • Relevant vs irrelevant, sunk and opportunity cost
  • Special order: set-up and the spare-capacity check
  • The full-cost comparison (the deliberate wrong answer)
  • Which costs are relevant, and why marketing is not
  • The accept/reject conclusion
  • Second scenario: a capacity constraint and its opportunity cost
• Worked relevant-cost problems
  • Relevant cost of labour: overtime vs diverting production from product X
  • Relevant cost of materials: replacement cost plus the resale value of stock
• Further decision types
  • Outsourcing / make-or-buy decisions
  • Product mix with a capacity constraint; contribution per limiting factor
  • Discontinuation decisions
  • Equipment replacement: why book value is irrelevant
  • The importance of qualitative factors
  • Common misconceptions about relevant costs and revenues