3. Financial Strategy

Question 1

What are the 4 key decision making areas to achieve financial objectives?

Answer 1

1. Financing (how to fund operations and new projects)
2. Investment
3. Dividend policy
4. Risk management

Question 2

What does agency theory say?

Answer 2

That directors, as agents, will always put the shareholders objectives first

Question 3

What is the agency problem?

Answer 3

Directors may be tempted to act in their own best interests rather than the shareholders

Question 4

What are 3 types of agency costs, which try to reduce the agency problem?

Answer 4

1. Reward schemes
2. Corporate governance
3. Audits

Question 5

What is soft capital rationing?

Answer 5

Internal funding restrictions

Question 6

What are 4 internal constraints on financial performance?

Answer 6

1. Stakeholders
2. Agency
3. Funding issues
4. Strategic factors

Question 7

What is hard capital rationing?

Answer 7

When it is not possible to raise external funds

Question 8

What are 3 possible reasons for hard capital rationing?

Answer 8

1. Investors not convinced by business plans
2. Poor credit rating
3. Credit market drying up

Question 9

What are 6 external constraints on financial performance?

Answer 9

1. Unavailability of funding
2. Regulatory pricing controls or quality targets
3. Government legislation restrictions/costs
4. Taxation levels and rules
5. Economic variables
6. Investor relations