FM Function

Question 1

Financial objectives

Answer 1

Commercial
Financial

Question 2

Commercial obj

Answer 2

Market share, growth etc

Question 3

Financial

Answer 3

Shareholder wealth, profit maximisation etc

Question 4

Corporate objectives

Answer 4

are the targets that need to be met in order for the business to be successful in
achieving its overall mission and goal(s). These objectives cover the whole organisation and include:
 Commercial objectives (e.g. market share, growth, customer satisfaction)
 Financial objectives (objectives which can be expressed in financial terms – see below

Question 5

Corporate strategy is

Answer 5

the course of action required to achieve the corporate objectives and includes
key business decisions such as how the business will grow (organic vs. acquisition) and in which
markets to operate.

Question 6

Shareholder wealth maximisation

Answer 6

As a general rule the prime financial objective of profit making organisations is to maximise
shareholder wealth. Wealth is delivered to shareholders through the payment of dividends and the
increase in share price. So this combination needs to be maximised.

Question 7

Profit maximisation

Answer 7

Applying shareholder wealth maximisation to internal decisions can be difficult and consequently it is
not uncommon for organisations to follow an objective of profit maximisation. As long as this is long
term profit maximisation, it should be consistent with shareholder wealth maximisation.

Question 8

Earnings per share growth

Answer 8

It can be very difficult to judge whether a company has maximised its shareholders’ wealth or
maximised its long-term profitability, so the word ‘maximised’ will often be replaced with the word
‘increased’. One way of judging whether there has been an increase is to see if earnings per share have
grown. These earnings can either be used to pay a dividend or to reinvest to create capital growth.

Question 9

Return on Capital
Employed (ROCE)

Answer 9

PBIT / TALCL

Measures efficiency in generating profits from all
capital employed (by both lenders + shareholders)

Question 10

Return on
Shareholder Funds

Answer 10

Earnings / Shareholder Funds

Measures efficiency in generating earnings for
shareholders from capital they have contributed

Question 11

Gross Profit Margin

Answer 11

Gross Profit / Revenue

Measures our ability to sell goods for more than
they cost to make

Question 12

Net Profit
(Operating Profit)
Margin

Answer 12

PBIT / Revenue

Measures our ability to make an overall profit on
goods sold

Question 13

Asset turnover

Answer 13

Revenue / TALCL

Measure how efficiently a company uses its assets
to generate sales

Question 14

Growth in Revenue,
PBIT, PAT

Answer 14

Year on year, or geometric
growth

To what extent is turnover growth leading to profit
growth? How good is cost control?

Question 15

Total Shareholder
Return

Answer 15

Divi + change in price / Price at start of year

Measures the total return on investment (based on
income and capital growth) for shareholders

Question 16

Dividend Yield

Answer 16

Dividends per share / Share Price

If you purchased a share today, what % income
return would you expect on your investment?

Question 17

Earnings per share
(EPS)

Answer 17

PAT / Number of shares

The amount of earnings the company has generated
for the shareholders on each share they hold.

Question 18

P/E Ratio

Answer 18

Share Price / EPS

What is the market’s view of our future growth? A
high P/E ratio suggests high predicted growth

Question 19

Growth in EPS, DPS,
share price

Answer 19

Year on year, or geometric
growth

To what extent is earnings growth leading to dividend
growth? How does this compare to share price moves?

Question 20

Debt:Equity Ratio

Answer 20

Long term debt / Equity

What proportion of assets are funded by lenders vs
shareholders (use market values if available)

Question 21

Gearing

Answer 21

Long term debt / Equity + long term debt

What proportion of assets are funded by lenders vs
shareholders (use market values if available)

Question 22

Interest Cover

Answer 22

PBIT / Interest payable

How many times could the annual interest bill be
paid with profits before interest and tax

Question 23

Operational Gearing

Answer 23

Contribution / PBIT
or
Fixed Costs / Total Costs

To what extent are our costs fixed vs. variable?

Question 24

The three E’s

VFM Assessment

Answer 24

Economy – cost of resources used. Are we getting the best value for the lowest cost?
Efficiency – outputs vs. inputs
Effectiveness – achieving targets

Question 25

The achievement of objectives in not-for-profit organisations can be measured by:

Answer 25

 Comparing actual performance to non-financial targets
 Questioning users
 Appointing regulators/experts to monitor performance
 Comparing actual performance to appropriate financial targets