Chpt 1 Financial Management Function

Question 1

Agency relationship

Answer 1

A description of the relationship between business owners (eg shareholders) and those acting as agents on their behalf (eg managers), expressing the idea that managers act as agents for the owners, using delegated powers to run the company in the owners’ best interests.

Question 2

Corporate governance

Answer 2

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

Question 3

Cum dividend

Answer 3

Cum dividend or cum div means the purchaser of shares is entitled to receive the next dividend payment.

Question 4

Ex dividend

Answer 4

Ex dividend or ex div means that the purchaser of shares is not entitled to receive the next dividend payment.

Question 5

Earnings per share (EPS)

Answer 5

Profits distributable to shareholders/Number of ordinary shares

Question 6

Economy

Answer 6

Attaining the appropriate quantity and quality of inputs at the lowest cost to achieve a certain level of outputs.

Question 6

Financial management

Answer 6

The acquisition and deployment of financial resources to achieve key objectives.

Question 7

Effectiveness

Answer 7

The extent to which declared objectives/goals are met.

Question 8

Efficiency

Answer 8

The relationship between inputs and outputs.

Question 9

Goal congruence

Answer 9

The alignment between the objectives of agents acting within an organisation and the objectives of the organisation as a whole.

Question 10

Stakeholders

Answer 10

Groups or individuals whose interests are affected by the activities of a firm.

Question 11

Total shareholder return

Answer 11

Dividend + change in share price/Share price at the start of the year

Question 11

Value for money

Answer 11

This can be defined as getting the best possible combination of services from the least resources, which means maximising the benefits for the lowest possible cost.

Question 12

Management is responsible for

Answer 12

Improving coordination among employees
Controlling the operations of an organisation
Resource allocation, budgeting, and planning

Question 13

Financial decisions are divided into THREE main categories, these are:

Answer 13

Financial decisions are mainly divided into three main categories.
These are investment decisions (where to invest surplus funds); financing decisions (how to raise finance); and dividend decisions (whether to distribute profits or retain them for investments).
Divestment decisions are covered under investment and financing decisions (depending on the circumstances).
Lastly, solvency decisions are covered under financing and dividend decisions

Question 14

financial management is concerned with

Answer 14

It is concerned with finance decisions
It considers risk management
It is concerned with investment decisions
It is concerned with dividend decisions

Question 15

primary objective of financial management

Answer 15

Create wealth for the shareholders

Question 16

For the management to control and direct an organisation, ______ must be determined:

Answer 16

Objectives - The process of management starts with setting goals and devising objectives. Creating strategies, planning, budgeting, and finalising benchmarks all come at a later stage.

Question 17

Calculate dividend yield for a company if total dividends paid in the year were $500,000; the total share price for the company was $20 per share; the total number of ordinary shares was 100,000.

Answer 17

25%

(1) “To calculate dividend yield we have to calculate the dividend per share: Dividend per share = Total dividend / Total number of shares = $500,000 / 100,000 = $5 per share Dividend yield is calculated using the formula: (Dividend paid per share / Share price at the start of the year) x 100 = ($5 / $20) x 100 = 25%”

Question 18

Secondary objectives are:

Answer 18

Actions that promote achievement of primary objectives

Firms will usually have a number of objectives and these are often characterised as primary objectives (the reason for existence), and secondary objectives (the actions which promote the achievement of the primary objectives). Secondary objectives are objectives set to complement primary objectives.

Question 19

information to decide on production over the next six months

Answer 19

Management Accounts - Management accounts are prepared to give information on daily operations so short-term decisions can be made. The management accounting timeframe is much shorter, with organisations preparing them on a monthly or annual basis.

Question 20

which information would financial accounting provide

Answer 20

Annual and prior years’ profitability

Financial accounts give a historical view of the company and are usually prepared annually in accordance with company law. The financial accounts are used by parties external to the organisation, such as government bodies, potential investors and financial institutions. They do not provide detailed information for operational decision-making like management accounts do.

Question 21

When making financial decisions on the long-term sourcing and controlling of the company’s resources, what must be considered?

Answer 21

The impact of gearing on the company’s value

Decisions on where finance can be sourced must be made. When analysing alternatives, consider the impact of different sources on the company’s gearing and risk.

Question 22

How can an organisation assess if it is achieving value for money?

Answer 22

Benchmark its results against similar organisations

To assess value for money (VFM) objective the organisation can: (1) Benchmark against other organisations; (2) Use performance indicators to measure if value for money has been achieved; (3) Undertaking an internal value for money audit.

Question 23

Which of the following is true regarding not-for-profit organisations?

Answer 23

NFPs income is usually irregular & unpredictable
Wealth Maximisation is not essential to donors and thus not an objective of NFPs
NFPs goals are to continue to provide for a need in society

Question 24

There is always a “trade-off” between which of the following TWO Es of the value for money:

Answer 24

Efficiency
Effectiveness

Question 25

Which of the following will increase value for money for a not for profit organization

Answer 25

Diversify the sources of finance of a NFP organisation
Undertake a value for money audit in a NFP organisaction

To improve value for money in a not for profit, the resources used need to be the cheapest available for the desired quality. To assess value for money (VFM) objective, the organisation can undertake an internal value for money audit resulting in finding ways to increase it.

Question 26

Which of the following will have the biggest positive impact on shareholder wealth?

Answer 26

The directors select a long-term investment project with a positive NPV

By selecting an investment project with a positive NPV will increase the value of the company the most. If Directors salaries are decided by independent remuneration committees this is good corporate governance and will positively affect the value of the shareholders’ investment but not as much as option referring to long term projects with positive NPV. Options referring to increase in EPS and dividends are focused on short-term profitability and not long-term growth and will not affect shareholder wealth as positively as option referring to long term projects with positive NPV because they impact negatively on long-term growth.

Question 27

The local transport authority received government funding to build a new railway station. However, the senior management have decided that the money is better spent on road repairs as it is more economic and efficient. Which of the following statements are correct?

Answer 27

There is a stewardship issue

Question 28

Which are the 3 Es of value for money

Answer 28

The three 3 Es are economy (input), efficiency (input vs. output), and effeteness (output).

Question 29

Help Inc is a not for profits whose objective is to improve the quality of life of people suffering from chronic illness. Which of the following performance indicators would help the organisation assess the achievement of their objective?

Answer 29

Service users recommending Help Inc to friends and family

When assessing a not-for-profit both financial and non-financial performance indicators should be used. As the objective of Help Inc is a qualitative one it is harder to measure. The organisation wants to improve the quality of life of its users and user satisfaction would indicate how well they are achieving their target. If users refer friends and family to Help Inc they are happy with the service provided.

Question 30

Why are the objectives of a not-for-profit organisation (NFP) different from a traditional for-profit organisation

Answer 30

Their main objective is not maximising the wealth of investors

The objectives of not-for-profit organisations are not to maximise investor wealth. Their objectives are often non-quantifiable so their impact is hard to measure.

Question 31

_______ is where money received for a particular purpose is used for that purpose and that purpose only.

Answer 31

Stewardship

Stewardship is where money received for a particular purpose is used for that purpose and that purpose only. For example, if a transport department received government funding to build a road, that is where the money must be spent, not on finishing a railway station.

Question 32

Hello Inc paid 20c per dividend in 20x7, their share price was $5, in 20x6 the share price was $4.80. What were the total shareholders return?

Answer 32

8%

(1) “Total shareholders return = [(Current share price – Previous years share price) + current dividend ]/ Previous years share price * 100% = [(500-480) +20]/480 * 100 = 8%”

Question 33

Efficiency is all about:

Answer 33

getting the greatest output possible for the level of inputs

Efficiency is all about getting the greatest output possible for the level of inputs, that is, no waste. Effectiveness is concerned with achieving the result or objective. The economy will focus on the inputs for an organisation and obtaining them at the lowest acceptable cost possible.

Question 34

Muzak Inc is appraising two investment opportunities. Opportunity A has a NPV of $1 million and a ROCE of 15%. Opportunity B has a NPV of $2 million and a ROCE of 5%. The directors have selected option A as it offers a higher return on capital employed. The director’s bonus is based on increasing the ROCE.

Answer 34

Muzak has an agency problem