FM Flashcards
Financial Objectives (3)
- Shareholder wealth maximisation
- Profit maximisation
- Earnings per share growth
Total Shareholder Return
Divi + Change in Share Price / Price at the start of the year
Dividend Yield
Dividends per share / Share Price
If you purchased a share today, what % income
return would you expect on your investment?
EPS - Earnings per share
PAT / No of shares
The amount of earnings the company has generated
for the shareholders on each share they hold
P/E Ratio
Share Price / EPS
What is the market’s view of our future growth? A
high P/E ratio suggests high predicted growth
Agency Theory and Problem
Theory - Directors put shareholders worth first
Problem - May be tempted to act in their own interests
Macroeconomic policy targets (5)
Strengthening business to make the economy more competitive
Protecting the environment
Increasing employment opportunities
Ensuring fairness for families and communities
Delivering macroeconomic stability to encourage long term planning and investment
Fiscal Policy
How Governments raise and spend money
Taxation and government spending. E.g. inc tax or decrease public expenditure = decrease demand and output
Monetary Policy
Governments to regulate the supply of money
Aim = achieve price stability
E.g. reduce interest rates or quantitive easing = borrowing cheaper and therefore increase demand
Quantitive Easing
Central banks can increase the supply of money by repurchasing government debt from banks
Money + Capital Markets
Money = less than 12 months
Capital = 12+ months
Both have a primary and secondary market, issues and trading
Role of money markets (3)
Providing short-term liquidity to industry and the public sector
Providing short-term trade finance
Allowing an organisation to manage its exposure to foreign currency risk and interest rate risk
Functions of a stock market
To enable companies to raise new finance
To enable existing investors to sell their investments
To aid takeovers by issuing shares to finance the takeover
To enable private company shareholders to realise part/all of their investment by floating the
company
Functions of a corporate bond market (4)
To enable companies to disintermediate i.e. to deal directly with lenders
To enable companies to raise new debt finance
To enable existing debt investors to sell their debt
To aid takeovers by issuing debt to finance the takeover
Advantages of financial intermediaries
Security
Convenience
Aggregation. An intermediary can take small amounts from investors and lend on in larger
packages. This is a significant benefit as lenders and borrowers do not need to find people who
want to deal with exactly the same amounts as them.
Maturity transformation. The intermediary can provide investors and borrowers with
their desired timescales.
Source of funds. A borrower will normally be able to find an intermediary who is prepared to
provide them with some funds even if the general market conditions are not that favourable.
Advantages of ROCE (4)
It is simple to calculate
As a percentage the measure is familiar to non-accountants
It looks at the entire project
It reflects the way external investors judge the organisation
Disadvantages of ROCE (6)
No account is taken of the project life
No account is taken of the timing of the cashflows/it ignores the time value of money
The result may vary according to the accounting policy used
It may ignore working capital
It does not measure absolute gain
It does not give a definite decision
Advantages of payback (5)
It is simple to calculate
It is easy to understand, especially for non-accountants
It uses relevant cash flows
It can be used as an initial screening tool on projects before undertaking a more detailed review
It (rather crudely) allows for risk
Disadvantages of payback (4)
It ignores returns after the payback period
It ignores the timing of the cash flows
It does not give a definite decision
It ignores project profitability
Advantages of NPV (5)
It allows for the time value of money
It uses cash flows rather than profits
It shows the change in shareholders’ wealth/it gives an absolute measure of return
It can allow for risk via the cost of capital
It looks at the entire project
Disadvantages of NPV (3)
It can be difficult to understand or explain to managers
It requires knowledge of the cost of capital
It is relatively complex
Advantages of IRR (6)
It allows for the time value of money
It uses cash flows not profits
It does not require the exact cost of funds to be known
As a percentage, the measure is familiar to non-accountants
It looks at the entire project
It provides a relative measure of performance
Disadvantages of IRR (5)
It is not an absolute measure
Interpolation provides only and estimate and an accurate estimate requires the use of a
spreadsheet programme
It is fairly complex to calculate
Non conventional cash flows may give rise to multiple IRRs
It contains the inherent assumption that cash returned from the project will be re-invested at
the project’s IRR which may not be true
Advantages of sensitivity analysis (4)
Simple
Provides more information to allow management to make subjective judgements
Indicates which forecasts should be researched further
Indicates which variables require the closest control once the project starts
Disadvantages of sensitivity analysis (3)
Assumes variables change independently of each other
Does not assess the likelihood of change
Does not lead to a definite decision
Objectives of working capital management (2)
Liquidity, Profitability
Aggressive and Conservative Working Capital
A - Low level WC, higher profit, lower liquid, higher risk
C - high level WC, lower profit, higher liquidity, lower risk
Advantages of JIT
Reduced holding costs
Increased flexibility
Increased quality and efficiency
Closer relationships with suppliers and increased
price transparency
Disadvantages of JIT
Increased risk of stock-out
Less opportunity for bulk discounts
Low staff morale due to unpredictable production
schedule
Not appropriate for all organisations (e.g. NHS!)
Factoring, Invoice Discounting
Factoring doesn’t take administration
Invoice Discounting more for temporary cash shortage
Benefits of centralised treasury management and cash control
Allows the internal netting off of local surpluses and deficits which is cheaper
Lower bank charges due to increased volumes through a single point
Better interest rates on borrowing and lending due to increased volumes
Reduced external foreign exchange due to internal netting off
Allows the employment of experts due to the volume of work required
Real / Nominal Rate
Real rate (excludes inflation, compensates the lender for the time value of money)
Nominal rate (includes inflation, compensates the lender for TVM and inflation)
Hard / Soft Capital Rationing
Hard - Organisation would like to but no shareholder will invest. E.g. returns not being high enough for risk
Soft - Organisation could but chooses not to. E.g. finance too expensive
