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Financial Management > Chapters 1-2 > Flashcards

Chapters 1-2 Flashcards

1
Q

2 types of financing decision

A

loan or debt

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2
Q

what is the deployment of financial resources

A

choosing whether to invest or pay dividends

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3
Q

what is the formula for earnings per share

A

profit after tax - preference dividends / no of ordinary shares

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4
Q

what are the drawbacks for using profit as your main objective

A

its historic and not future orientated
doesn’t measure liquidity or risk
can be manipulated

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5
Q

what is the main objective for a for-profit organisation

A

maximisation of shareholder wealth

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6
Q

2 ways shareholder wealth is maximised

A

market value of wealth

dividends recieved

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7
Q

formula for total shareholder return

A

dividend + change in share price / share price at the start of the year

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8
Q

what is the agency relationship

A

relationship between shareholders and agents ( managers )

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9
Q

who are the agents for shareholders

A

management

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10
Q

what is corporate governance

A

the rules and processes by which the behaviour of a firm is directed

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11
Q

3 rules for board of directors

A

seperate MD and chairman
significant % of the board are NEDs
NEDs must be independant

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12
Q

what is the remuneration committee

A

pay and incentives of exec directors are set by NEDs

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13
Q

what is the audit committee

A

NEDs only

monitors risk management

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14
Q

what is the nomination committee

A

choice of new directors by NEDs

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15
Q

what is goal congruence

A

the alignment between objectives of agents and the objectives of the organisation as a whole

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16
Q

2 methods of remuneration incentives

A

share options

performance related pay

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17
Q

3 types of stakeholder

A

internal
connected
external

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18
Q

formula for return on capital employed

A

operating profits / capital employed x 100

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19
Q

formula for capital employed

A

equity + long term debt

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20
Q

formula for interest cover

A

operating profit / interest

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21
Q

current ratio

A

current assets / current liabilities

22
Q

acid test ratio

A

current assets - inventory / current liabilities

23
Q

definition for value for money

A

getting the best possible combination of services for the least resources

24
Q

3 E’s for value for money

A

economy
effectiveness
efficiency

25
Q

what is macro-economics

A

concerned with issues affecting the economy as a whole, eg economics, growth, inflation, unemployment

26
Q

4 aims for the goverment on the economy

A

economic growth - increase in national income

control inflation - managing price inflation

full employment

balance of payments stability - balance of payments on imports and exports

27
Q

3 policys the government may use for macro-economics

A

fiscal policy
monetary policy
exchange rate policy

28
Q

how might a government intervene in the economy (fiscal policy)

A

spending more or less money on services such as health and education
changing rate of direct tax
changing rate of indirect tax

29
Q

how would a lower exchange rate affect businesses

A

domestic goods are cheaper in foreign markets so theres an increase in demand

demands for imports fall as they are more expense

increased production costs as imports more expensive

30
Q

how would a higher exchange rate affect businesses

A

demands for exports fall as more expensive

foreign goods are cheaper so demands for import rises

imported materials are cheaper so production costs fall

31
Q

what is market failure

A

said to occur when the market mechanism fails to work efficiently and therefore the outcome is sub-optimal

32
Q

4 types of market failure

A

imperfect competition - one company has too large of a share and has excessive profits

social costs - there is a negative impact on society ( pollution ) and have to be regulated

imperfect information - false info is put into the public domain

fairness - government may regulate to improve social justice

33
Q

definition of financial intermediary

A

an institution bringing together providers of finance and users of finance

34
Q

examples of financial intermediaries

A

retail banks
investment banks
mutual societies
institutional investors

35
Q

what does a financial intermediary do

A

links lenders with borrowers by obtaining deposits from lenders and re- lending them to banks

36
Q

mnemonic for the benefits of financial intermediaries

A

MAP

37
Q

what is the M in MAP

A

Maturity transformation

38
Q

what is the A in MAP

A

aggregation of funds

39
Q

what is the P in MAP

A

pooling losses

40
Q

what is maturity tranformation

A

they allow you to borrow money on shorter timeframes than they lend out so short term deposits become long term investments

41
Q

what is aggregation of funds

A

a financial intermediary can aggregate smaller savings from savers and lend to borrowers in large amounts

42
Q

what is pooling losses

A

any losses suffered by borrowers are suffered by the financial intermediary

43
Q

what is disintermediation

A

cutting out the middle man in finance ie banks

44
Q

what is the money market

A

market for short term finance

45
Q

what is the capital market

A

medium to long term finance

46
Q

3 types of money market instruments

A

interest - bearing instruments

discount instruments

derivatives

47
Q

how to calculate annualized yield on a discount instrument

A

( discounted amount / face value amount ) x 100

48
Q

what are the 2 types of prinicipal capital markets

A

stock exchange main market

alternative investment market

49
Q

2 types of long / medium term capital

A

share capital

debt capital

50
Q

what is a loan note

A

IOU

51
Q

what is a reverse yield gap

A

dividend yield on shares is lower than interest yield on low risk debt

52
Q

what is a eurobond

A

a bond denominated in a currency which often differs from that of the country of issue

Financial Management (8 decks)

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