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ACCAACCA FM Cheat Sheet: Formulas, Models, and Key Techniques
ExpertMinds Editorial·3 June 2026·10 min read
Practice ACCA questions while you read →FM (Financial Management) sits at the Applied Skills level and has a 50% pass mark. The March 2026 session saw a 50% pass rate — respectable, but the examiner consistently flags the same technical mistakes session after session. This cheat sheet is built from the FM syllabus and the most recent examiner reports. Use it to check your formula recall and lock down the areas where marks are routinely dropped.
Key fact:FM exam format: 3-hour CBE · 100 marks · Pass mark 50% · Quarterly sessions (March, June, September, December). Sections A (multiple choice, 20 marks), B (objective test cases, 30 marks), C (constructed response, 50 marks).
Investment Appraisal
| Technique | Formula / Rule | Use when |
|---|---|---|
| NPV | Sum of PV of cash inflows − Initial investment | Always preferred — measures absolute value added |
| IRR | Lower rate + [NPV(L) / (NPV(L) − NPV(H))] × (Higher − Lower) | Compare to cost of capital; accept if IRR > WACC |
| MIRR | Use if reinvestment rate ≠ IRR; gives more realistic return | When asked to compare mutually exclusive projects |
| Payback Period | Year before payback + (remaining cost / year cash flow) | Liquidity focus; ignores time value — always secondary |
| ARR | Average annual profit / Average investment × 100% | Accounting measure; ignores time value — rarely best method |
| Annuity factor | From present value tables; use when equal annual cash flows | Saves calculation time in exam conditions |
Watch out:IRR examiner trap: the interpolation formula uses NPV(L) − NPV(H) in the denominator. When NPV(H) is negative, subtracting a negative number increases the denominator. Candidates consistently miss the double negative and calculate a wrong IRR. Write the formula out in full before substituting numbers.
Cost of Capital
| Model | Formula | Notes |
|---|---|---|
| WACC | (Ve / Ve+Vd) × Ke + (Vd / Ve+Vd) × Kd(1-t) | Use market values, not book values for Ve and Vd |
| Dividend Growth Model (Ke) | (D₀(1+g) / P₀) + g | g = Gordon Growth: g = rb, where b = retention rate, r = return on equity |
| CAPM (Ke) | Rf + β(Rm − Rf) | Rm − Rf = equity risk premium; β reflects systematic risk only |
| Cost of Irredeemable Debt | Kd = I(1-t) / MV | I = annual interest, t = tax rate, MV = market value |
| Cost of Redeemable Debt | IRR of after-tax cash flows using YTM approach | Use interpolation as with IRR above |
| Dividend Growth (g from retention) | g = r × b | r = post-tax return on investment; b = proportion of earnings retained |
Watch out:Modigliani-Miller examiner trap: candidates frequently state "more debt always reduces WACC." Under MM with tax, WACC falls as gearing rises — BUT only up to the point where financial distress costs kick in. The examiner specifically flags failure to acknowledge that excessive debt increases bankruptcy risk and can raise WACC. Always qualify your MM answer.
Tip:WACC vs cost of debt: WACC is the blended rate used for appraising projects that match the company's existing risk profile. The cost of debt alone is never used to discount project cash flows — a mistake that appears in the examiner report every session.
Business Valuations
| Method | Formula / Approach | When used |
|---|---|---|
| Asset-based (NAV) | Net assets at fair value / revalued book value | Liquidation scenario; asset-rich businesses (property); minimum floor value |
| P/E ratio valuation | Maintainable earnings × appropriate P/E ratio | Earnings-based; use industry P/E if company P/E unavailable |
| Dividend valuation (DVM) | D₁ / (Ke − g) | Minority shareholding; dividend-paying company with stable growth |
| Earnings yield | Earnings / Earnings yield rate | Alternative earnings-based; inverse of P/E |
| DCF / Free Cash Flow | PV of free cash flows + terminal value | Most theoretically robust; used for whole-company acquisitions |
Practice ACCA questions while you read
Questions graded, hints, and explained.
Key fact:In FM, "business valuation" questions often require you to compute using multiple methods and then comment on which is most appropriate. Always state why the chosen method suits the scenario (e.g., asset-based is appropriate for a property company facing liquidation).
Test yourself on FM calculations
Reading formulas is not the same as being able to apply them under exam pressure. Practise full FM questions with worked solutions.
Working Capital Management
| Concept | Formula / Key point |
|---|---|
| Cash Operating Cycle | Inventory days + Receivable days − Payable days |
| Inventory days | (Inventory / Cost of sales) × 365 |
| Receivable days | (Receivables / Revenue) × 365 |
| Payable days | (Payables / Cost of sales) × 365 |
| EOQ (Economic Order Quantity) | √(2 × Co × D / Ch) — Co = ordering cost, D = annual demand, Ch = holding cost per unit |
| Early settlement discount | Annualised cost = [d / (1-d)] × [365 / (N−discount period)] |
| Aggressive WC strategy | Low inventory, low receivables, high payables — higher risk, lower cost |
| Conservative WC strategy | High inventory buffer, generous credit — lower risk, higher cost |
Watch out:Working capital funding strategy examiner trap: candidates frequently cannot identify whether a company uses aggressive, moderate, or conservative funding. Key signal: does the company finance current assets (or part of them) with short-term or long-term funding? Short-term financing of permanent current assets = aggressive. The examiner flags this as a consistently weak area.
Risk Management
| Risk type | Instruments | Key exam points |
|---|---|---|
| Interest rate risk | Forward Rate Agreements (FRAs), interest rate futures, interest rate options, swaps | FRAs fix a rate; futures hedge with standardised contracts; options give the right but not obligation; swaps exchange fixed for floating |
| Foreign exchange risk | Forward contracts, currency futures, currency options, money market hedge, swaps | Transaction exposure (specific cash flows); translation exposure (balance sheet); economic exposure (long-term competitiveness) |
| Forward contract | Lock in today's exchange rate for a future transaction | Obligation to transact at agreed rate; no upside benefit |
| Currency option | Right but not obligation to exchange at strike rate | Pay premium; retain upside if rate moves favourably |
| Money market hedge (receipt) | Borrow foreign currency now → convert → invest in home currency | Creates a natural hedge; compare cost vs forward contract |
| Interest rate swap | Fixed-for-floating exchange between two counterparties | Both parties benefit if they have comparative advantage in different markets |
Tip:Hedging recommendation questions: the examiner requires a clear recommendation ("the company should use X because..."), not just a description of the instruments. Candidates who describe all options without committing to a recommendation lose the professional skills marks. State the hedge, compute the outcome, and compare it to the unhedged position.
Business Finance — Sources and Capital Structure
| Source | Key features | Exam trigger |
|---|---|---|
| Equity (rights issue) | No repayment obligation; dilutes EPS and control; TERP calculation required | "Existing shareholders", "maintain control proportionally" |
| Debt (bond/debenture) | Tax-deductible interest; fixed obligation; increases gearing | "Tax shield", "lower cost than equity", "fixed charge" |
| Convertible debt | Lower initial coupon; dilutive on conversion; floor value = straight debt value | "Deferred equity", "attractive to growth companies" |
| Preference shares | Fixed dividend; not tax-deductible; ranks above equity on wind-up | "Fixed return", "not debt but hybrid" |
| Lease vs buy | Compare PV of lease payments vs PV of purchase (after-tax, after capital allowances) | "Off-balance sheet" no longer applies under IFRS 16 |
| Venture capital | Equity stake; hands-on involvement; exit via IPO or trade sale | "Early stage", "high risk", "no track record" |
Key fact:TERP (Theoretical Ex-Rights Price) = [(N × current price) + issue price] / (N+1), where N = number of existing shares required per new share. This is the price the share should theoretically trade at after the rights issue. The value of a right = TERP − issue price.
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