Module 1

Question 1

Ultimate objective for finance?

Answer 1

Maximise the value of the company

- maximise shareholder wealth (if profit seeking)

Question 2

What is market capitalisation?

Answer 2

Market value

Question 3

How to calculate market capitalisation?

Answer 3

Market share price x number of shares

Question 4

What is the objective of financial management in a corporation?

Answer 4

Maximise shareholder wealth

Question 5

How are public sector bodies measured?

Answer 5

Economy
Efficiency
Effectiveness

Question 6

Subject of finance can be thought of as

Answer 6

Obtaining money and using that money to give maximum advantage to the organisation

Question 7

What are the three key finance functions?

Answer 7

Investment
Financing
Management of daily financial activities

Question 8

Any investment undertaken should

Answer 8

Increase profits in the longer term adding to the market value of the organisation

Question 9

What is the cost of capital?

Answer 9

The cost of obtaining funding

E.g interest rate, opportunity cost

Question 10

How is an investment worthwhile?

Answer 10

Return expected to arise must be greater than the cost of capital

Question 11

Foregoing dividends to shareholders to invest the money would?

Answer 11

May cause shareholders to sell shares

Question 12

What is capital structure?

Answer 12

Split between debt and equity

Question 13

An increase in the debt within an organisation makes the organisation what from the point of view from the shareholder?

Answer 13

More risky

Got an obligation so riskier, obliged to pay interest

Question 14

Working capital calculation?

Answer 14

Stock + debtors + cash - creditors = working capital

Stock
Debtors
Cash
Creditors

Question 15

What is included in management of daily activities?

Answer 15

Stock management
Debtor management
Cash management
Creditors

Question 16

What is overtrading?

Answer 16

Take on too many new customers (debtors)
Tie up cash (buying stock)
Delay payments to suppliers

As a result of rapid expansion
Not lacking in profit but lacking in cash

Question 17

Aim of stock management?

Answer 17

To ensure an optimum amount of stock is held

Avoid cost of holding for too long but ensure meet demand

Question 18

Downside of debtors?

Answer 18

Lack of cash has to be found elsewhere

Should be cautious and chase aged debtors

Question 19

Chief executive makes

Answer 19

Long term strategic decisions

Question 20

In a larger business the role of financial management may be seen to be undertaken by who?

Answer 20

The board of directors

Question 21

Maximising shareholder wealth is long or short term?

Answer 21

Long term objective

Question 22

How many years are long medium and short term?

Answer 22

Long 5-10
Medium in between
Short up to 1 year

Question 23

The relationship between the shareholders and the management is known as what?

Answer 23

Agency relationship
Exists when someone hires another to represent his or her own interests
(Large public company)

Question 24

What may the renumeration packages consist of?

Answer 24

Basic annual salary
Pension
Annual bonus if set target is achieved
Share options

Question 25

Annual bonus should never be related to what?

Answer 25

A target based on an increase in the share price - not their fault if stock market crashes - would encourage to make risky decisions

Question 26

Rewards should be in areas that are?

Answer 26

In managers control | Motivation to prevent untoward behaviour

Question 27

Organisations strategy will be set out in a?

Answer 27

Corporate plan

Question 28

A financial plan is?

Answer 28

Subsidiary to the corporate plan The planning and provision of adequate financial resources to meet existing obligations as they fall due and to finance future business developing

Question 29

When drawing up the financial plan managers should consider what?

Answer 29

Environmental constraints Market structure and quality Products and skills

Question 30

What are the key considerations of financing?

Answer 30

Cost of capital Dividends Capital structure

Question 31

For any investment to be worthwhile

Answer 31

The return expected should be greater than the cost of capital

Question 32

Any investment undertaken should?

Answer 32

Increase profit a in the longer term adding to the market value and shareholder wealth