5016 - Investment and Financial Analysis - Corporate Investment - Financial Objectives of the Firm p1-60

Question 1

Process of Creating Shareholder Value

Answer 1

Set objectives that recognise the supremacy of shareholders

Select an appropriate measure of shareholder return

Generate these returns through focused management

Measure shareholder returns and see whether objectives are being achieved, repeat the last 2

Question 2

Accounting Profit

Answer 2

Net income after subtracting all costs from revenue

Question 3

Problems with using account profit

Answer 3

Short term focus

Cost of capital ignored

Influenced by accounting policies

Risks ignored

Question 4

What are shareholders?

Answer 4

Legal owners of the business, they appoint directors or managers on their behalf to run the day to day of the business

Question 5

What are Directors and managers?

Answer 5

Agents working on behalf of the shareholders or in some cases the only shareholders depending on the size of the business.

Directors should act in the interests of the shareholders and not themselves

Question 6

What is AGM?

Answer 6

Annual General meeting

Question 7

What are the characteristics of shareholders?

Answer 7

Often ignorant about companies position and future

Have no right to inspect the accounting books

Their view of the future is based off annual reports, accounts, stockbrokers, investment journals and newspapers (Limited view)

Can possess the ability to change the managers and directors of the business

Question 8

Characteristics of Directors

Answer 8

Sometimes have conflicting personal interests with the shareholders

Depending on how many shares the directors have, they can act in their own interests with little to no consequences i.e pay themselves a lot at the expense of the other shareholders

Question 9

How are directors compensated

Answer 9

Either on a fixed or variable basis

Fixed means base salary and benefits

Variable means short term performance rewards and long terms ones too

Question 10

What maximises shareholder wealth?

Answer 10

Investors buy a share for:
A stake in a business
Personal interest
Control of the asset
Financial Gain mainly through dividends and capital gain

Question 11

Dividends

Answer 11

Profits distributed between shareholders, usually at set percentage levels

Question 12

Capital Gains

Answer 12

Gain from your stock increasing in value

Question 13

What increases the price of a stock?

Answer 13

Supply decreasing or demand increasing or a speculation that the company will make profit in the future i.e Tesla

Question 14

Companies need to consider their

Answer 14

Dividend Policy

Finance and ability to finance new projects

Investment in terms of what to invest in and will it be worth it

Question 15

Factors impacting dividends

Answer 15

Loan commitments
Threat of takeover
Profit stability
Future investing and financial opportunities
Control
Legal Requirements
Inside information
Market Expectations

Question 16

What to consider in regards to finance and the ability to finance new projects

Answer 16

They should not take too much cash out of the business as it effects cashflow

They may need to borrow to finance new projects which incurs a cost of doing so which impacts profit and loss and therefore the shareholders

Risk and return needs to be balanced

Question 17

Ordinary Shares

Answer 17

Also known as common stocks. These are stocks sold on a public exchange and usually give the right to one vote per one share at the AGM these stocks make up the majority of stocks

Question 18

Preference Shares

Answer 18

Shares of a companies stock with dividend that are paid out to shareholders BEFORE common stock dividends are issued.

Question 19

What is EPS and DPS

Answer 19

Earnings per share

Dividends per share

Question 20

Earnings per share calculation

Answer 20

Available Earnings / Number of shares x 100

Question 21

Dividend per share calculation

Answer 21

Dividend / Number of Shares x 100

Question 22

What is a Bonus Share Issue?

Answer 22

An offer of free shares to existing share holders based on the number of shares they hold

Question 23

Why are bonus shares issued ?

Answer 23

To improve marketability of shares by reducing their individual price

To increase lender confidence

To signal investors the directors confidence in the future