1: The Goals Of Organisations & Measuring Returns To Share Holders

Question 1

What is the principal agent factor?

Answer 1

The actions of an organisations management are based on their own self interest. Rather than the interests of the Shareholders.

Question 2

What are options to address principal agent factor?

Answer 2

Performance related Pay & Share options.

Question 3

What are examples of public sector organisations?

Answer 3

Schools
QUANGOs

Question 4

What does Effectiveness relate to in the 3 Es?

Answer 4

The extent to which an organisation achieves its objectives.

Question 5

What does Economy relate to in the 3 Es?

Answer 5

Achieving the appropriate quantity and quality of inputs at the lowest possible costs.

Question 6

What does efficiency relate to in the 3 Es?

Answer 6

Achieving the maximum output from given input.

Question 7

What is an example of a mutual organisation?

Answer 7

Trade unions.

Question 8

How to calculate EPS?

Answer 8

Step 1: Calculate Profit after Tax, Interest & Preference Dividends.

Step 2: Divide by number of shares in issue.

Step 3: Answer = Earnings Per Share.

Question 9

How to calculate company’s share price on the basis of Free cash flows to equity?

Answer 9

Step 1: Calculate FCF2E by deducting any finance costs.
Step 2: Calculate present value of cash flows. (If perp = FCF2E / Cost of equity %.
Step 3: Divide by number of shares in issue.

Question 10

How to calculate Free cash flows to the firm?

Answer 10

PBIT - Taxation - Capital Expenditure

Question 11

How to calculate % change in share value with given expected dividend & change in expected rate of return?

Answer 11

Step 1: Dividend / Original Expected Rate
Step 2: Dividend / New Expected Rate
Step 3:Find difference
Step 4: Difference / Original Value of shares = % Change.

Question 12

What can cause an increase in the rate of expected return?

Answer 12

An increase in risk to the organisation

Question 13

Can a fall in interest rates increase share price?If so, why?

Answer 13

Yes - It reduces the rate of return which will increase the present value of free cash flows to equity.

Question 14

How to calculate the minimum level of profit investors expect in a company? & Compare this to current profit?

Answer 14

(Share capital + RE) * Expected rate of return.

Compare this figure to profit after interest, tax and preference dividends.

Question 15

How to calculate the rate of return earned by investors?

Answer 15

(Change in share price + dividend) / Share price at start

Question 16

How to calculate dividend yield?

Answer 16

Dividend per share / Market value of the shares.