How to attempt discursive requirements in Financial Management

First example

First, let’s consider the following requirement from Question 32(c) of the September/December 2017 sample questions. This requirement is as follows:

Critically discuss the views of the directors on Pelta Co’s investment appraisal.
(6 marks)

To consider how to answer any question, students should first consider the verb used in the requirement. Here, it is ‘critically discuss’. This means that students should consider and debate/argue about the pros and cons of an issue, referring where appropriate to relevant financial management theory. To see which issues should be covered in their answer, they need to review the question scenario. In this instance the relevant part of the scenario is as follows:

The views of the directors of Pelta Co are that all investment projects must be evaluated over four years of operations, with an assumed terminal value at the end of the fourth year of 5% of the initial investment cost. Both net present value and discounted payback must be used, with a maximum discounted payback period of two years.

This shows there are three parts to the director’s views on investment appraisal:

• The evaluation period
• The assumed terminal value
• The use of discounted payback alongside NPV

An answer will need to discuss all three of these points in order to get full marks for this requirement. Indeed, this is supported by the marking scheme, which shows two marks are available for each of these points.

To answer this question, each of these views should be taken in turn with a discussion of what this means for the investment appraisal, and why this may be a good or a bad thing for the company to do.

We will now look at different examples of how this might be answered along with an indication of how many marks each example would be awarded.

For example, the following answer successfully addresses the first point.

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This answer makes two distinct points and would attract both of the available marks, showing that a short, focused answer can gain relevant marks in full.

A less-developed answer such as the following would receive one of the two marks.

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A weaker answer than this might be:

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This does not say what the implication of the four-year time horizon is and what the impact on the company is, and would receive no marks.

A different type of answer which some students might provide, is a bullet point list that does not contain full sentences. An example of this which covers all of the directors’ views could be as follows.

• Four years doesn’t consider all cash flows
• Terminal value is an estimate
• Discounted payback less useful than NPV

This does not actually address the question requirement at all and would not receive any marks. Answers to discursive requirements should be in full sentences and need to address the question asked in order to gain credit.

In this instance, answers that talked about general points relating to investment appraisal and the points specifically in the scenario would also not receive any credit as, again, they do not address directly the question requirement.

Second example

Now we will consider another example of a discursive requirement and look at the following requirement from the December 2016 CBE exam.

Discuss the reasons why hard and soft capital rationing occur. (5 marks)

The requirement provides a good illustration of the importance of ensuring that the question is being answered. It does not ask for an explanation of what hard and soft capital rationing are, but instead for the reasons why the different types of capital rationing occur. Answers that consist of a detailed explanation of what hard and soft capital rationing are will gain few, if any, marks.

You should assume that there are an equal number of marks available for discussing the causes of hard and soft capital rationing and structure your answer accordingly. The marking scheme confirms this with two marks shown against reasons for soft capital rationing and two marks shown against reasons for hard capital rationing, with one mark for additional detail, which can be given to a reason for either soft or hard capital rationing. 

The examiner’s report for this session highlighted the need for precision in answers to this question.

This can be highlighted in answers such as the following:

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This would not gain any credit, but a more developed answer would be awarded a mark. An example would be the following:

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This demonstrates the importance of fully developing points in your answer to maximise the number of marks you are awarded.

Third example

Finally, we will consider a requirement which asks for a set number of techniques – for example, Question 31(b) from the March/June 2017 sample questions.

Discuss FIVE techniques that Pangli Co could use in managing trade receivables. (10 marks)

You can tell how many marks are available for each technique. In this case it is two marks for each technique. Use this as a guide for how much you will need to write, and also ensure that you clearly indicate the five different techniques you are discussing. Numbering the techniques you are discussing is a good way to do this.

There are no extra marks for discussing more than five techniques, so do not waste time in the exam by discussing a sixth technique. Instead, spend that time making sure your answer is addressing the question requirement.

An example of a good attempt at this question is as follows:

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The first three techniques are discussed well, with two parts to each point and these would score two marks each.

Techniques 4 and 5 are less well-developed and would score one mark each, meaning this response would score a good mark of eight out of 10.

A weaker response to this requirement would be as follows:

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In this answer it is not clear how many techniques the student believes are being discussed and the marker must therefore interpret where they believe one technique ends and another technique starts.

An answer such as this would score four marks, with one mark each for the first two paragraphs and two marks for the third paragraph.

Conclusion

This article has shown you some important considerations for dealing with narrative Financial Management questions that will enable you to tackle discursive requirements in a structured way. This should mean that you score well and it could make the difference between passing and failing.