Financial Management Function (2)

Question 1

What is corporate strategy?

Answer 1

A long-term plan for how annorganisation intends to compete, and which markets it intends to compete in

Question 2

What are corporate objectives?

Answer 2

Overall aims of an organisations that should result from successful implementation of its corporate strategy

Question 3

Corporate objective (market share)

Answer 3

A certain level of market share is critical to be competitive

Question 4

Corporate objective (social responsibility)

Answer 4

Might include environmental concerns such as pollution and sustainability

Question 5

Corporate objective (survival)

Answer 5

Short-term survivial of a company likely to be best interest of shareholders

Question 6

When should corporate objectives normally only be pursued?

Answer 6

In support of a long-run objective to maximise shareholder wealth

Question 7

Potential conflict between corporate objectives and financial objectives (market share)

Answer 7

Overly aggressive approach to cashing sales can create pressure on profit if prices are cut to do this. Liquidity problems may arise

Question 8

Potential conflict between corporate objectives and financial objectives (social responsibility)

Answer 8

Excessive spending on achieving this objective compromises the competitiveness of a company

Question 9

Potential conflict between corporate objectives and financial objectives (survival)

Answer 9

Better for a company to cease to exist, thereby release funds back to shareholders to invest in a more productive way

Question 10

What is an agency relationship?

Answer 10

Managers act as agents for the owners, using delegated powers to run the company in the owners’ best interests

Question 11

What are managers agents of?

Answer 11

Shareholders

Question 12

Ordinary shareholders in a for-profit company?

Answer 12

Owners of the company to whom the board of directors is accountable, actual powers of shareholders is restricited

Question 13

What is the agency problem/

Answer 13

Managers not acting in a way that maximising shareholder wealth

Question 14

Example of agency problem (short-termism)

Answer 14

Cutting back on investments to ensure short=term targets are met

Question 15

Example of agency problem (minimise dividend payments)

Answer 15

Free up funds to use within the business

Question 16

Example of agency problem (neglect risk management)

Answer 16

A greater focus on profit

Question 17

Example of agency problem (boost their own pay and perks)

Answer 17

Renumeration may ne set at excessively generous levels, that damage shareholder wealth

Question 18

How can agency problems be addressed?

Answer 18

By monitoring actions of management or by use of incentive schemes