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CIMA BA1 Fundamentals of Business Economics > 1 The Goals and Decisions of Organisations > Flashcards

1 The Goals and Decisions of Organisations Flashcards

1
Q

What are the two main sectors of organisations which define who they are owned by?

A
  • Public Sector

- Private Sector

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2
Q

What are the two main categories of ‘objectives’ of organisations?

A
  • Non Profit

- Profit

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3
Q

What is the public sector?

A

Provide goods or services by and for the govt at national, regional and local level e.g. NHS Hospitals, Schools, Defence & Police. Also public owned corps e.g. British Telecom

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4
Q

What are the goals of public organisations?

A
  1. Provide Services
  2. Demonstrate their efficiency in the allocation and use of their resources
  3. State Owned Entreprise may have more commercial freedom to make decisions with profir motive, even if goals set by govt
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5
Q

What are examples of developments within public sector?

A
  • Shift to privitisation from state-owned orgs.
  • Govt joined forces with the private sector => public-private partnerships e.g. construction projects
  • Rationale is brought by pricate sector => public services run more efficiently
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6
Q

Examples of non-profit orgs include a mutual - what is a mutual?

A
  • A mutual exists with the purpose of raising funds from members which are used to provide common services to all members of the org or society
  • Owned and run for the benefit of members, no external shareholders to pay dividends to
  • E.g. Nationwide Building Society
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7
Q

Examples of non-profit orgs include a Co-operative - what is a co-operative?

A

Co-operatives are member-owned businesses with membership open to those who use its services.

  • Returns any profits to members based on usage
  • Similar to mutual, co-ops are ‘to each according to their use’, mutual is more ‘to each according to need’
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8
Q

What is the goal of a mutual?

A

Create a fund that all members can fall back on in times of need. whilst they purchase insurance policies etc, they hope they will never need them. Whereas a Co-op, members use as often as poss so can gain maximium benefit

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9
Q

What are the objectives of non-profit orgs?

A 
Mutuals = Try to commercially make a surplus and this is used to meet the needs of their members
Charities = provide service to whole of society 
Members Club (sports club) = provide facility and appropiate equipment
Quangos = non-departmental public bodies that perform range of tasks on behalf of govt.
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10
Q

What is the general goal and what is this measured by for non-profit orgs?

A

General goal - value for money. Measured by:

  • Economy
  • Efficiency
  • Effectiveness
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11
Q

What is a private sector organisation?

A 
Organisation that is not owned by the state
 Private
 => Profit
- Sole Trader
- Partnership
- Limited Company -Public/private
=> Non-profit
- Mutuals 
- Chairities
- Other
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12
Q

What are examples profit making organisations?

A
  • Sole traders & partnerships = lest admin & red tape, unlimited liability, no shares, maybe partnership agreement
  • Limited Company - exposure limited to value of shares they have acquired Private Ltd, cant offer shares for public. Plc can has shares listed and traded on the stock exchange => ‘quoted company’
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13
Q

What are the objectives of profit-making orgs?

A
  • maximisation of profits
  • Increasing share price
  • Growth in the annual dividends
  • Return on capital employed (ROCE)
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14
Q

What are the key stakeholders?

A
  • Customers
  • Suppliers
  • Employees
  • Managers and directors
  • Government
  • Local residents
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15
Q

What can stakeholders be categorised into?

A

Primary: - Internal e.g. employees/management - Connected e.g. shareholders, customers, suppliers etc

Secondary: - External e.g. local community, govt, pressure groups

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16
Q

What are 3 other managerial theories?

A
  • Revenue maximisation (e.g. Baumol)
  • Long term survival
  • Satisficing theories
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17
Q

What would a shareholder expect in return for investing shares in a limited company?

A
  • recieve a return (dividends) and

- have a say on the way the company is run - ‘vote’ in general meeting

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18
Q

What is another phrase for ‘required rate of return’?

A

‘Cost of Capital’ = minimum acceptable return on investment by an organisation - how efficient capital is

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19
Q

What is the equation for measure return on capital employed?

A

profit from operations (before interest and tax)/
total assets less current liabilities (same as longterm debt + equity)
= ROCE

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20
Q

What is the equation for earnings per share (EPS)?

A

Profit available for ordinary shareholders (after tax and preference dividends)/ number of equity shares in issue
= EPS

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21
Q

What are the three drawbacks of ROCE and EPS?

A
  1. only report historic performance
  2. investors interested in future performance
  3. forward looking long run measures give better indication of value
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22
Q

What is the P/E ratio equation?

A

share price / EPS

23
Q

What is the use of a P/E ratio?

A

guide as to market’s perception of future growth potential of the company. If share price of A was twice as large than share price B - investors believe there is much better future potential in A than in B.

24
Q

What is the net present value?

A

this is the value of future cash flows in today’s terms. You need it for a

  • future cash flow
  • an annuity
  • a perpetuity
25
Q

What is a ‘free cash flow’?

A

crude estimate of the after tax cash flow available the finance providers

26
Q

How do you work out the Free Cash Flow to Firms (FCFF)?

A

PBIT + Depreciation - Tax - CAPEX = FFCF

27
Q

How do you work out the Free Cash Flow to Equity (FCFE)

A

PBIT + Depreciation - INTEREST - Tax - CAPEX = FFCE

28
Q

What are discount factors?

A
  • Based on investors’ required returns
  • includes allowance for expected inflation and risk
  • reflects the need for the investor to be compensated for tying up their money for a period of time
29
Q

What formula do you use to find the present value of future cash flows?

A

S = X [1 + r] -n
Therefore X at present value = S x 1/ (1 + r)n
R = [percentage rate as a decimal]
n = number of periods/years/months etc

The fraction is the discount factor

30
Q

What is an Annuity?

A
  • investments that generate a constant return
  • it is assumed that the first payment/ receipt takes place in one year’s/period’s time. It is not the case if it is advanced or delayed. If advanced = take place now T0. Have to add a year’s amount which ahs not been discounted to normal annuity calc.
  • e.g if receive $120 every year for 12 years starting now, calc perpetuity for 11 years and add $150
31
Q

What is the formula calculating an annuity?

A

PV = S x 1/r {1 - 1/ (1+r)n} DONT NEED TO LEARN THIS FORMULA

32
Q

What is the terminal value?

A

The terminal value of an annuity is the final, end value of the amount

33
Q

What are perpetuities?

A

Some annuities last forever - calculated by the following:
PV = 1/r

They can also be delayed or advanced in the same way as annuities

34
Q

What are net present values?

A
  • Most investments involve a series of cash outflows and inflows at different points in time.
  • If we calculate the present value of each cash flow and add all present values together we can then calc the Net Present Value (NPV) of the investment
  • Investments with positive NPV should be undertaken, those with negative NPV should not.
  • The discount rate used will be the cost of capital (return required by investors)
35
Q

What is the internal rate of return?

A

This is the discount factor which gives a zero NPV
- In simple terms the IRR tells us the actual % return that the project generates. Calculate it by:
Step 1- Find NPV of project using the discount rate given or an estimate
Step 2 - Fine NPV of project using second disc rate, if NPV in step 1 is positive then use higher disc rate in step 2 and vice versa
Step 3 - Use the IRR formula to estimate IRR

L + NPVL/ NPVL - NPVH (H - L)

36
Q

Using the IRR, how do you find out whether or not a project should be accepted?

A

If the IRR is > cost of capital = accept project

If the IRR is < cost of capital = reject project

37
Q

What are the benefits of IRR?

A
  1. Allows for time value of money
  2. Does not require an exact cost of funds to be known
  3. As a % it is familiar to non-accountants
  4. Looks at the entire project
38
Q

What are the drawbacks of IRR?

A
  1. Does not tell you whether to accept or reject the proposal
  2. Possible to have more than one IRR
39
Q

What is corporate governance?

A

This is the way in which an organisation is managed and controlled and there has been much debate in recent years as to what constitutes good corporate governance.

40
Q

What are principals in agency theory?

A

These are shareholders who act as principals, appoint directors to act as their agents.
- Principal-agency relationship = how agents (directors) can be motivated in accordance with principals of shareholders objectives

41
Q

What are shareholders main goals?

A

Wealth maximisation (share price and dividends)

42
Q

What are directors goals?

A

Salary, status, job security

43
Q

What is the Baumol model?

A

This is where orgs have sales maximisation as biggest factor, concentrate on expanding sales => prestige, bonuses & job security

44
Q

What is the Williamson model?

A

This is management discretion, managers will try to benefit themselves both financially - subject to minimum profit acceptability

45
Q

What is the Cyert & March model?

A

Organisational Coalition - stakeholders have to accept compromise positions to maintain a political balance

46
Q

What is the principal/agent issue in non-profit making orgs?

A
  • No profit driver motive, different objectives that are competing for funds.
  • likely not enough funds to satisfy all stakeholders
  • prioritisation required
47
Q

What is a market?

A

This is when potential buyers of good/service come together with seller of good/service

48
Q

What is the price mechanism?

A
  • Means by which consumers/ retailers determine the allocation of scarce resources between different goods and services.
  • Price change acts as a signal to consumers & producers to change quantity made/sold
49
Q

What is a free market economy?

A
  • The forces of supply and demand determine what is made, what quantity and who gets the output
  • Very little govt intervention
50
Q

What is a planned (command) economy?

A
  1. Factors of production owned by state.
  2. Decisions what to product and allocation of production are made centrally
  3. Individual consumers have no/little control
51
Q

What is a mixed economy?

A

Market forces and state interact to determine what is produced, what quantity and who receives the output.

52
Q

What is the method of expansion within the market - organic growth?

A
  1. Internal growth from developing products, acquiring extra resources.
  2. Expand business at its own pace => keep in control and growth can be slower
53
Q

What is the method of expansion within the market - growth via mergers and acquisitions?

A
  1. Two or more firms are combined into one business entity
  2. Coming together of two firms where there is a balance of control between the two management boards of directors
  3. Acquisitions occur where one business takes control of another

CIMA BA1 Fundamentals of Business Economics (8 decks)

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