Scope and nature of corporate finance

Question 1

Equities/ Shares

• Owned by _____________
• _________________ elect ____________
• _________ elect management
• If unhappy can sell shares/pass on ownership.
• Dividends (paid quarterly, semi-annually or annually) are paid from Net Profit after Tax.

Answer 1

• Owned by Shareholders
• Stockholders elect directors
• Directors elect management
• If unhappy can sell shares/pass on ownership.
• Dividends (paid quarterly, semi-annually or annually) are paid from Net Profit after Tax.

Question 2

Enterprise value (EV) =

Answer 2

Enterprise value (EV) = Value of Bonds + Value of Shares

Question 3

The Role of Finance and the Financial Manager

3 topics (2 each)

Answer 3

Investment

• Choose best projects
• Capital Budgeting

Financing

• Choose source of financing for investment
• Capital Structure

Liquidity

• Ensure you have enough cash and inventory
• Short-Term Financial Planning

Question 4

The Financial Manager (5 roles)

Answer 4

• Responsible for Investment Decisions
• Responsible for Financing Decisions
• Responsible for Short-Term Financial Planning
• Oversee Accounting and Audit Function in Firm
• Ensure the Financial Welfare of the Firm

Question 5

The Goal of corporation or Financial Management (8)

Answer 5

• Survive
• Maximise Profits
• High growth
• Minimise Costs
• Manage Risk
• Avoid Financial Distress
• Maximise Value of Owner’s Equity

Question 6

Why should the financial manager operate in the best interests of shareholders?

• The financial manager will have their own _______________- maximising their _________________, _____, ____ ____________ etc.
• The conflict of managerial objectives with shareholder objectives is referred to as - __________ ___________
• Managerial objectives can be ‘aligned’ with ______________ ______________ through _______________ ______________ and _______________

Answer 6

• The financial manager will have their own objectives - maximising their renumeration, perks, job security etc.
• The conflict of managerial objectives with shareholder objectives is referred to as - agency theory
• Managerial objectives can be ‘aligned’ with shareholder objectives through corporate governance and incentives

Question 7

Corporate Governance

The corporate governance structure _____________ the _______________ __ ________ and _________________ among ____________ ________________ in the corporation, such as the ________, ___________, __________________ and other ________________, and spells out the ________ and ______________ for making decisions on corporate affairs.

Answer 7

The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.

Question 8

What is Corporate transparency?

How is it gauged in PLCs

Answer 8

Describes the extent to which a corporation’s actions are observable by outsiders.

In publicly traded companies, Corporate transparency is the gauged by theamountoffinancialand corporate information to which the public hasassess. (less insider information)

Question 9

What is agency theory?
Who studied this?
What mechanisms can help align these interests (5)

Answer 9

Agency theory really digs into the potential conflicts that can arise when managers and stockholders have different goals. Fama & Jensen (1983) shed light on several mechanisms that can help align these interests:

Stock compensation: Aligns managers’ incentives with those of shareholders by giving managers a stake in the company’s success.

Board of Directors (BOD): Can step in and replace managers if they’re not performing in shareholders’ best interests.

Selling shares and takeover threats: Keeps managers on their toes, knowing poor performance could lead to a takeover bid.

Threat of insolvency: Managers must operate efficiently to avoid financial trouble.

Labour market reputation: Managers care about their reputations, which can be affected by how well they perform.

Question 10

Corporate Governance

Which company has set global principles

5 headings?

Answer 10

The OECD (The Organization for Economic Cooperation and Development) has established a set of global principles under five headings:

1. The rights of shareholders:

• Ensuring shareholders have the ability to influence the company through voting and other rights.

2. The responsibilities of shareholders:

• Encouraging active and informed participation in corporate governance.

3. The rights of stakeholders:

• Acknowledging the importance of employees, suppliers, and others who have an interest in the company’s success.

4. Disclosure and transparency:

• Promoting openness about the company’s operations and financial status.

5. The role and structure of the board:

• Defining how the board should function to effectively oversee management and protect shareholders’ interests.

Question 11

Financial markets

• refer broadly to any ______________ where the ____________ of ______________ occurs, including the ________ market, ______ market, ________ market, and ________________ market, among others. Financial markets are _______ to the smooth operation of ______________ _______________.

Answer 11

• refer broadly to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, among others. Financial markets are vital to the smooth operation of capitalist economies.