Chapter 1 - Strategic Financial Objectives

Question 1

What are some key stakeholders and their objectives?

Answer 1

Shareholders - require returns
Employess/managers - require job security, promotion prospects, training and pay increases
Customers - require good quality products at reasonable prices
Suppliers/lenders - require payment when due
Government - require taxes to be paid and laws to be followed
Local community - More local employment opportunities

Question 2

What is the primary objective of a for-profit entity?

Answer 2

Maximisation of shareholder wealth which can be increased through paying dividends or by increasing the share price

Question 3

What is shareholder wealth linked to?

Answer 3

NPV, by doing positive NPV projects an entity should increase the wealth of its shareholders

Question 4

What are some examples of financial objectives in for-profit entities?

Answer 4

Profitability
Dividends
Cash Generation
Gearing

Question 5

What can achievement of non-financial objectives do?

Answer 5

Improve the image and reputation of entity

Question 6

What are the categories of non-financial objectives in for-profit entities?

Answer 6

Human
Intellectual
Natural
Social and Relationship

Question 7

What are the aims of a not-for-profit entity?

Answer 7

Not run to make profits, but to benefit prescribed groups of people

Question 8

What are the secondary objectives of a NFP entity?

Answer 8

Raise the maximum possible funds each year and to use the funds efficiently to maximise the benefit generated

Question 9

What are the three constituent elements of Value for money (VFM)?

Answer 9

Economy: minimising the cost of resources used or required - spending less
Effieciency: Relationship between the output from goods or services and the resources to produce them - spending well
Effectiveness: The relationship between the intended and actual results of public spending - spending wisely

Question 10

What is the four E of VFM applied in some places?

Answer 10

Equity: Extent to which services are available to and reach all people that they are intended to - spending fairly

Question 11

What are some profitability ratios?

Answer 11

Operating profit margin = (operating profit/revenue) x 100%
Gross profit margin = (Gross profit/revenue) x 100%
ROCE = (Operating profit/capital employed) x 100%
ROE = (Net profit/Equity value) x 100%

Question 12

What is the breakdown of ROCE?

Answer 12

Operating profit margin x Asset turnover

Asset turnover = revenue/capital employed

Question 13

What are some lender ratios?

Answer 13

SFP:
Financial gearing = debt value/equity value
Higher gearing indicates higher risk for the lender

P&L:
Interest cover = profit before interest and tax/Interest payable
Low ratio indicates high risk for the lender

Question 14

What are the some investor ratios?

Answer 14

P/E Ratio = Share price/EPD
Dividend cover = EPS/Dividend per share
Dividend yield = DPS/Share price
EPS = Profit after interest, tax and preference dividends/Number of shares

Question 15

If GBP is strengthening/appreciating what does it mean?

Answer 15

GBP 1 is worth MORE foreign currency
GBP has stengthened

Question 16

If GBP is weakening/depreciating what does it mean?

Answer 16

GBP 1 is worth LESS foreign currency
GBP has weakened

Question 17

What are some examples of economic variables?

Answer 17

Interest rates, exchange rates and inflation

Question 18

What are some examples of business variables?

Answer 18

Margins and volumes of activity