Objectives and Sustainability Flashcards
What is strategy?
Strategic planning is concerned with the long-term direction of the business (e.g., which products should it sell in which markets), and how the business will achieve its objectives, i.e. its business strategy.
What are the four key decisions we have to consider when setting financial strategy?
Financing
Investment
Dividend
Risk management
What is the difference between the financing and the investment decision?
Financing - how to fund the existing operations of the company and any new projects.
Investment - which new projects to invest in
What is the dividend decision?
How much profit to pay back to ordinary shareholders and when.
How might the dividend decision affect other decisions within financial strategy?
If a company increases its dividends (the dividend decision), this will reduce the level of retained cash and increase the need for external finance (the financing decision) in order to fund capital investment projects (the investment decision).
List key stakeholders:
Shareholders, Lenders, Directors/Managers, Employees, Customers, Suppliers, Government, Community, Environment
What are the key objectives of shareholders?
Share price maximisation, dividend maximisation, earnings growth, maintenance of control
What are the key objectives of directors and employees?
D - Maximise remuneration, Security of tenure, maximisation of power and influence
E - Maximise remuneration, security of tenure, career development, training
What are the key objectives of customers, suppliers and lenders?
C - Value for money, high quality, reliable service, innovation
S - Certainty of payment, further business
L - Certainty of payment, security of capital, further loans
What are the key objectives of the governemnt and community?
Gov - Creation of employment, payment of taxes
Comm - Environmental improvements, creation of wealth
What is the agency theory?
Agency theory says the directors will always put the shareholders’ objectives first. That is not to say the directors will ignore all other stakeholders’ objectives as if the remaining stakeholders are unhappy, then it will be difficult to maximise shareholder wealth.
What is the agency problem?
The Agency Problem refers to the situation where the directors may be tempted to act in their own best interests rather than the shareholders.
Explain how agency problem could arise in a takeover situation.
Shareholders may receive a large pay off in the event of a takeover and so are incentivised to sell the business, whereas directors would fear job-loss which is common for management roles of taken-over businesses. Hence, directors might try and dissuade a takeover - conflicting with best interests of shareholders.
Explain how agency problem could arise from a time horizon.
The perception and continued employment of directors is often based off of short-term success e.g., annual profits, and so directors often act with these inmind rather than the long-term investment interests of the shareholders.
Explain how agency problem could arise from varying risk and debt attitudes.
Directors would be reluctant to take on larger amounts of debts and may be less likely to accept certain risks because it may increase the vulnerability of their position within the company - could lead to job-loss in worst case. However, shareholders whom ahve investments in multiple companies would have a larger risk appetite which is not being fulfilled.
