Chapters 1-2 Flashcards
2 types of financing decision
loan or debt
what is the deployment of financial resources
choosing whether to invest or pay dividends
what is the formula for earnings per share
profit after tax - preference dividends / no of ordinary shares
what are the drawbacks for using profit as your main objective
its historic and not future orientated
doesn’t measure liquidity or risk
can be manipulated
what is the main objective for a for-profit organisation
maximisation of shareholder wealth
2 ways shareholder wealth is maximised
market value of wealth
dividends recieved
formula for total shareholder return
dividend + change in share price / share price at the start of the year
what is the agency relationship
relationship between shareholders and agents ( managers )
who are the agents for shareholders
management
what is corporate governance
the rules and processes by which the behaviour of a firm is directed
3 rules for board of directors
seperate MD and chairman
significant % of the board are NEDs
NEDs must be independant
what is the remuneration committee
pay and incentives of exec directors are set by NEDs
what is the audit committee
NEDs only
monitors risk management
what is the nomination committee
choice of new directors by NEDs
what is goal congruence
the alignment between objectives of agents and the objectives of the organisation as a whole
2 methods of remuneration incentives
share options
performance related pay
3 types of stakeholder
internal
connected
external
formula for return on capital employed
operating profits / capital employed x 100
formula for capital employed
equity + long term debt
formula for interest cover
operating profit / interest
current ratio
current assets / current liabilities
acid test ratio
current assets - inventory / current liabilities
definition for value for money
getting the best possible combination of services for the least resources
3 E’s for value for money
economy
effectiveness
efficiency
what is macro-economics
concerned with issues affecting the economy as a whole, eg economics, growth, inflation, unemployment
4 aims for the goverment on the economy
economic growth - increase in national income
control inflation - managing price inflation
full employment
balance of payments stability - balance of payments on imports and exports
3 policys the government may use for macro-economics
fiscal policy
monetary policy
exchange rate policy
how might a government intervene in the economy (fiscal policy)
spending more or less money on services such as health and education
changing rate of direct tax
changing rate of indirect tax
how would a lower exchange rate affect businesses
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
how would a higher exchange rate affect businesses
demands for exports fall as more expensive
foreign goods are cheaper so demands for import rises
imported materials are cheaper so production costs fall
what is market failure
said to occur when the market mechanism fails to work efficiently and therefore the outcome is sub-optimal
4 types of market failure
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
definition of financial intermediary
an institution bringing together providers of finance and users of finance
examples of financial intermediaries
retail banks
investment banks
mutual societies
institutional investors
what does a financial intermediary do
links lenders with borrowers by obtaining deposits from lenders and re- lending them to banks
mnemonic for the benefits of financial intermediaries
MAP
what is the M in MAP
Maturity transformation
what is the A in MAP
aggregation of funds
what is the P in MAP
pooling losses
what is maturity tranformation
they allow you to borrow money on shorter timeframes than they lend out so short term deposits become long term investments
what is aggregation of funds
a financial intermediary can aggregate smaller savings from savers and lend to borrowers in large amounts
what is pooling losses
any losses suffered by borrowers are suffered by the financial intermediary
what is disintermediation
cutting out the middle man in finance ie banks
what is the money market
market for short term finance
what is the capital market
medium to long term finance
3 types of money market instruments
interest - bearing instruments
discount instruments
derivatives
how to calculate annualized yield on a discount instrument
( discounted amount / face value amount ) x 100
what are the 2 types of prinicipal capital markets
stock exchange main market
alternative investment market
2 types of long / medium term capital
share capital
debt capital
what is a loan note
IOU
what is a reverse yield gap
dividend yield on shares is lower than interest yield on low risk debt
what is a eurobond
a bond denominated in a currency which often differs from that of the country of issue
