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finance and corporate governance > finance and corporate governance > Flashcards

finance and corporate governance Flashcards

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1
Q

What are the basic decisions involved in finance? Which is most important?

A

The capital budgeting decision and the financing decision. Capital as the cost of mistakes are high, future cashflow uncertain and loss of choice.

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2
Q

What is the Capital decision? Who is responsible?

A

What real assets should the firm invest in? CFO/Board of directors.

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3
Q

What is the Financing decision? Who is responsible?

A

how should the cash for the investment be raised? Treasurer, CFO, Directors.

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4
Q

Give an example of a Capital Market? What is the relationship between the capital markets and finance managers?

A

Share and bond market. Helps the finance managers make financial decisions and provides information to assess the performance of finance managers.

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5
Q

If the interests of ownership and management diverge, what can this lead to?

A

Principal agent problems and agency costs.

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6
Q

What is the agency theory?

A

Relationship between principal and agent, conflicts of interest and agency costs as well as incentives of managers.

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7
Q

How is the value of a company determined?

A

discounting the cashflows at an appropriate discount rate ie an investor required rate of return.

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8
Q

Why do valuations of a company vary?

A

Needs and objectives of the indiciual share holders vary

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9
Q

Whhat are the 2 regulatory bodies of financial reporting?

A

International Accounting standards Board and Financial Reporting Council

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10
Q

What are the main principles of corporate governance?

A 
Board leadership and company purpose
Division of responsibilities 
Composition, succession and evaluation 
Audit, risk and internal control
Remuneration 
Accountibility Transparancy Probity Focus on Long term success
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11
Q

What are the objectives of shareholders?

A

Dividend
Sell shares for more than purchased
Max overall return

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12
Q

What are the objectives of a manager?

A

Job security
Good wage
Good benefits
Power

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13
Q

What are the objectives of an employee?

A

Good benefits
stay in business
paid market rates
provide training

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14
Q

What are the objectives of a bank leader?

A

Stay in business
Meet deadlines
Pay market rates for borrowed funds.

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15
Q

What are the objectives of the customer?

A

Stay in business
Reasonably priced goods
Ethically sourced goods
High quality goods

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16
Q

What are the Objectives of the government?

A

Perform well, therefore pay more corporation tax
Perform well = more jobs for the public
Act legally and morally

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17
Q

What are the conflicts between Shareholder and Manager?

A

Manager wants to pursue and intersting project but the shareholder wants profitable projects to ensure the most retuen. Manager wants a luxurious working lifestyle so a satisfactory return is enough to ensure job security as less risky.

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18
Q

What are the conflicts between Lenders and shareholders?

A

Lenders short term desire for security vs shareholders long term interest for company development. Lenders have no interest in upside profit. Shareholders more keen for high risk investments as they give higher return.

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19
Q

Conflict between shareholder managers vs workers?

A

labour saving tech - loss of jobs for workers

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20
Q

Conflict between shareholders managers and emplyees vs public?

A

Company expansion = visual/air pollution and congestion.

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21
Q

What is the contractual theory?

A

Firm is a system of contracts defining rights/obligations/roles of various participants in an organisation.

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22
Q

How the capital markets affects a firm?

A

Affects the way a firm raises finance (investment decisions are affected). More exposure to mergers and takeovers.

23
Q

What is the theory of shareholder wealth maximisation?

A

Idea that company and shareholder objective is to maximise shareholder wealth within external constraints. Managers role is to act in the best interest of shareholder.

24
Q

What are the problems with the theory of shareholder wealth maximisation?

A

Angency theory
Information asymmetries - not all parties share the same insights in the companies fortune
The role of agreements - written agreements cover key aspects but not everything
Social responsibility - responsibility of the company to consider job security/ health and safety/ enviornemnt etc

25
Q

what does EVa stand for? What is it?

A

Economic value added. Net operating profit after tax vs. firms total cost of capital (including equity)

26
Q

What does Positive EVA mean?

A

Managers added value for shareholders.

27
Q

What is corporate governance?

A

Way companies are directed and controlled

28
Q

What are the 4 types of business entity?

A

Sole trader, partnership, limited company, limited liability partnership.

29
Q

What is a sole trader?

A

Business which is owned by one person and not a limited company. Unlimited liability for their business debt

30
Q

What is a partnership?

A

Business owned by more than one but still not a limited company. All the partners are joined and severally liable for any business debt

31
Q

Waht is a limited company?

A

Buisness with legal identity seperate from the owners of the buisness. A company is owned by its shareholders, their liabilty is limited to the fully paid value of their shares.

32
Q

What is a public limited company?

A

Sells shares to public and has an issued share capital of at least 50000. Can apply for a listing on the stock exchange.

33
Q

What is a private limited company?

A

Non public limited company, not on stock exchange

34
Q

What is a limited liability partnership

A

owned by its members but has a seperate legal identity. Limited liability. Free to agree amongst themselves the relationship between them.

35
Q

Pros of limited company?

A

Limited liability makes it easier for a comapy to raise capital.

36
Q

Cons of limited company?

A

Creditiors may not get their money back if the company is wound up. Ownership divorced from control.

37
Q

Which sorces may you pay personal tax on?

A

Income
Profit (if sole trader or partner)
Capital gains (sold something for more than you bought)
Inheritance
Wealth
SOCIAL SECURITY COSTS IF SOLE TRADER OR PARTNER

38
Q

What does taxable income exclude?

A

Tax free income and tax free expenditure

39
Q

What does taxable income include?

A

Income in kind and investment income

40
Q

How is taxable income reduced?

A

allowances e.g. age related

41
Q

Issues with collecting tax

A

limited to cashflow: easier to tax income rather than wealth.
tax in arrears - ensure people have money
taxing once - may not always be the case

42
Q

What are chargable gains (in terms of CGT)? What does it feature e.g capital loss?

A

sale price - purchase cost. Capital loss can carry forward to capital gain in the same year. CGT allowance in uk.

43
Q

How to adjust accounting profit to taxable profit?

A

more business expenditure
more depreciation
reduce capital allowance
reduce special reliefs

44
Q

How does governmant use tax to control?

A

Encourage investment by taxing return profits less (investment means faster economic growth)
To encourage pension schemes as tax reief on pension costs.

45
Q

What id a doubole taxation agreement?

A

Agreement between contries to offset tax paid overseas against domestic tax for overseas income.

46
Q

How is accounting profit calculated?

A

operating profit = sales rev - expenses
Profit before tax and interest = operating profit + non trading income
Profit before tax = less interest
Deduct tax = After tax profits.

47
Q

after tax profits proportion goes towards shareholder dividend. why?

A

relief given to shareholders to avoid CG tax and personal tax. ‘Franked income’

48
Q

What are the typical CGT rates in the UK

A

10 - 20 % but some assets are exempt from CGT.

49
Q

How can long term comapny finace be classified?

A

Share capital and loan capital.

50
Q

What is the share capital of a long term comapny?

A

Owners of company
dividend paid through profits
right to residual value.
Authorised. (max wihtout approval)

51
Q

What is the loan capital of a long term company?

A

Creditors
Payment/cost to company (not discounted from profits)
Payments

52
Q

What are ordinary shares regarding long term finace?

A

most common type of share capital
give rights to a share of residyal profits of the company to the residual capital value if the compamy is wound up, together with the voting righta and various other rights - dividends vary depending on company profit.

53
Q

What are preferance shares

A

Gie their holders a preferential right to the dividends and return of capital comapred to ordinary shareholders. Preferance shares usually pay a fixed dividend. They normally give voting rights only when dividends not declared.

finance and corporate governance (1 decks)

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