September 2024
Top tutor Andrew Mower runs through the changes to the AFM exam – and proffers his views on them.
ACCA AFM students – the formula sheet and tables are changing! ACCA have amended what is provided to students in the exam, from September 2024 exams onwards.
So what are the changes, and what do they mean for students?
Normal distribution table
The change
Along with the present value and annuity tables, AFM students have always been given a normal distribution table within the exam software.
This has been used for two purposes: firstly, when calculating Black-Sholes manually (more on that later) and, secondly, when finding the Value at Risk (VaR) of an investment.
But – it’s gone! From September 2024 onwards, the normal distribution table will not be provided in the exam.
Impact on students
Most students will now use the BSOP calculator instead of doing the manual calculation anyway, so this won’t affect this approach. For anyone still doing the manual method using the normal distribution tables, it is long overdue that you switch to using the BSOP calculator!
The more important change is when calculating VaR. Rather than having to find the number of standard deviations from the edge of the normal
distribution table at a given confidence level, the AFM examiner will now just provide this number within the question.
My opinion
This is a positive move. It will certainly save precious time in the exam when having to calculate VaR. It also forces students to use the BSOP calculator when calculating option prices, which is the better approach anyway.
Black-Scholes equations
The change
Nearly all of the Black-Scholes equations have been removed from the formula sheet – leaving just the call option formula.
Impact on students
For those students who are wisely using the BSOP calculator within ACCA’s software, this will have no impact. If you were using the equations to do it manually, you will need to learn to use the BSOP calculator instead. It is quicker, easier and more accurate.
Expert tutor tip – the BSOP calculator will only appear in the exam software if you need to use it in that question. So, if it’s there (below the word processor and spreadsheet), use it!
My opinion
This makes perfect sense. Students need to use the BSOP calculator, and so this change ensures they do. The equations were also quite intimidating to look at, and tricky to calculate – so it makes for a far calmer formula sheet.
Modigliani and Miller’s Proposition 2 Formula
The change
ACCA have provided a rearranged version of M&M’s Proposition 2 formula, which sits just below the original formula which has always been provided.
The original formula is used to find the cost of equity (Ke) of a company if their ungeared cost of equity (Kie) and other variables are known.
The new rearranged version can be used to find the ungeared cost of equity (Kie) more easily if a company’s normal cost of equity (Ke) is known.
Impact on students
Students may need to use this rearranged version to find the ungeared cost of equity (Kie) – remember, this figure can be used to discount the ‘base- case NPV’ when doing an Adjusted Present Value (APV) calculation.
The new version still requires some algebra to find Kie, so it is definitely one to practice ahead of the exam! I have made handy video on how to use this new formula on my YouTube channel (@andrewmowertuition).
My opinion
This is an interesting move from ACCA. It could indicate the revival of a formula that hasn’t been widely needed by students in AFM exams, and so students should definitely practice using this new rearranged version. Even the rearranged format still requires some fiddly maths!
Summary
Overall, these are positive moves from ACCA to streamline the formula sheets by removing equations and tables that students don’t need to use in exams anymore.
Practise using the BSOP calculator on ACCA’s practice software and know what all the variable inputs and outputs mean.
As always, the key to passing AFM is question practise TO TIME – there are loads of great past exams on the practice platform. Have a go at the pre-September 2024 mock exam on there – I am recording ACCA’s debrief videos, which will be available on ACCA’s YouTube channel.
- Andrew Mower is an AFM expert tutor, and is a previous winner of the ‘PQ Lecturer of the Year’ award. He now offers his own on-demand AFM courses through AMA Learn Online.
