Module 1 Flashcards
Ultimate objective for finance?
Maximise the value of the company
- maximise shareholder wealth (if profit seeking)
What is market capitalisation?
Market value
How to calculate market capitalisation?
Market share price x number of shares
What is the objective of financial management in a corporation?
Maximise shareholder wealth
How are public sector bodies measured?
Economy
Efficiency
Effectiveness
Subject of finance can be thought of as
Obtaining money and using that money to give maximum advantage to the organisation
What are the three key finance functions?
Investment
Financing
Management of daily financial activities
Any investment undertaken should
Increase profits in the longer term adding to the market value of the organisation
What is the cost of capital?
The cost of obtaining funding
E.g interest rate, opportunity cost
How is an investment worthwhile?
Return expected to arise must be greater than the cost of capital
Foregoing dividends to shareholders to invest the money would?
May cause shareholders to sell shares
What is capital structure?
Split between debt and equity
An increase in the debt within an organisation makes the organisation what from the point of view from the shareholder?
More risky
Got an obligation so riskier, obliged to pay interest
Working capital calculation?
Stock + debtors + cash - creditors = working capital
Stock
Debtors
Cash
Creditors
What is included in management of daily activities?
Stock management
Debtor management
Cash management
Creditors
What is overtrading?
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
Aim of stock management?
To ensure an optimum amount of stock is held
Avoid cost of holding for too long but ensure meet demand
Downside of debtors?
Lack of cash has to be found elsewhere
Should be cautious and chase aged debtors
Chief executive makes
Long term strategic decisions
In a larger business the role of financial management may be seen to be undertaken by who?
The board of directors
Maximising shareholder wealth is long or short term?
Long term objective
How many years are long medium and short term?
Long 5-10
Medium in between
Short up to 1 year
The relationship between the shareholders and the management is known as what?
Agency relationship
Exists when someone hires another to represent his or her own interests
(Large public company)
What may the renumeration packages consist of?
Basic annual salary
Pension
Annual bonus if set target is achieved
Share options
Annual bonus should never be related to what?
A target based on an increase in the share price
- not their fault if stock market crashes
- would encourage to make risky decisions
Rewards should be in areas that are?
In managers control
Motivation to prevent untoward behaviour
Organisations strategy will be set out in a?
Corporate plan
A financial plan is?
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
When drawing up the financial plan managers should consider what?
Environmental constraints
Market structure and quality
Products and skills
What are the key considerations of financing?
Cost of capital
Dividends
Capital structure
For any investment to be worthwhile
The return expected should be greater than the cost of capital
Any investment undertaken should?
Increase profit a in the longer term adding to the market value and shareholder wealth
