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One examiner reveals the most common mistakes made by students in the discursive sections of the Financial Management exam – and how to avoid repeating them

When it comes to the numerical sections of the Professional Level Financial Management (FM) exam, students have consistently performed well. But in the last year, there has been a marked decline in performance on the discursive sections.

The result? A fall in the pass rate below its long-term average. In December 2012, the pass rate stood at 80.1%, but this fell to 78.8% in March 2013, and 73.6% in June 2013.

Though there are many changes in the new FM paper, which launched last month, the balance between the numerical and discursive aspects will remain the same, at roughly 60:40. So getting to grips with the discursive elements of the paper is just as important as ever.

Here, an FM examiner explains some of the most common mistakes made by students – and how to avoid repeating them.

Mistake one

Forgetting to apply your own knowledge to the circumstances described in the question. This is something that students often fail to do, losing them crucial marks. 

Example: Question 1 in the June 2013 paper required candidates to deal with the acquisition of one business by another using NPV. Requirement (c) was as follows.

Explain what is meant by the term ‘real options’ and suggest two real options that might be relevant to Brixham’s purchase of Cabin. (6 marks)

Breaking this requirement down, there is a pure knowledge aspect – what is meant by ‘real options’ – and also an application of real option knowledge to the specific scenario.

Most students addressed the knowledge aspect, then blindly regurgitated material from the study manual that was inappropriate for the circumstance described. Frequent references to ‘the project’ also gave away the fact that they were not considering the specific acquisition scenario.

Mistake two

Failing to answer the actual question. Be clear about what is being asked of you and read ahead to other questions in the set.

Example: Question 2 in the December 2012 paper concerned the WACC and requirements (b) and (c) were as follows.

Discuss the underlying assumptions and weaknesses of the approach you have employed in calculating the cost of equity in part (a). (8 marks)

Discuss any reservations you may have regarding the use of the WACC as a discount factor in appraising Liteform’s potential investment projects next year. (5 marks)

The majority of students answered part (b) as if it read ‘calculating the WACC,’ rather than ‘calculating the cost of equity’. As a result, rather than basing the answer on the dividend valuation model, there was a vast amount in their answers to (b) on keeping the gearing constant, having the same systematic business risk and not having project specific finance that scored nothing.

Unfortunately, what they had written as their answer to (b) was instead relevant to answering (c). The sensible students repeated their answer to (b), ensuring they scored some marks. However, many wrote very little for (c) and scored, in most cases, zero.

Mistake three

Failing to break down the requirements and answer all aspects of the scenario.

Example: Question 3 in the June 2013 paper, again on WACC and part (c) was as follows.

Critically evaluate the suggestions of the finance director, the managing director and the production director, in respect of both the method of financing and the cost of capital. (11 marks)

A well-structured answer would have six distinct parts; the student would have recognised that there are three directors, each commenting on two things (method and cost).

Weaker answers dived straight in, having seen there was debt. Those students adopted the ‘write all I know about M&M’ approach. This comes back to the first point about applying knowledge. 

For links to more FM exam resources, visit your dashboard at icaew.com/dashboard

This article originally appeared in the October 2013 edition of VITAL.