SU1 - Financial Goal of a Firm

Question 1

What is the purpose of a company’s mission statement?

Answer 1

It provides DIRECTION and FOCUS to the firm’s management on how to best utilise its resources in a competitive environment.

Question 2

Provide a list of 5 forces of the Competitive Environment.

Answer 2

1. Rivalry within an industry
2. Bargaining power of suppliers
3. Bargaining power of clients
4. Threat of new entrants
5. Threat of new tehcnology

Question 3

Provide the 3 Strategies used that provides a company with a competitive advantage.

Answer 3

1. Cost Leadership
2. Differentiation
3. Focus Strategy

Question 4

Explain Cost Leadership.

Answer 4

It involves:

1. Sustainable mass production and
2. Marketing of standardised items at a cost below that of competitors.

Question 5

What is meant by the Focus Strategy?

Answer 5

Focus on serving a narrowly defined market, called a market niche.

Question 6

What 5 generic strategies must reflect in the marketing plan?

Answer 6

1. Customer’s needs
2. Product or services to be provided
3. Price at which it can be sold
4. Promotion methods to be used
5. Distribution of products and service to the client.

Question 7

What are the limitations within the formation of a public company?

Answer 7

1. Must have at least ONE director

2. Can have between 1 and 50 Shareholders

Question 8

What are the limitations within the formation of a private company?

Answer 8

1. Must have a minimum of TWO directors

2. Can have between 7 and infinite number of shareholders.

Question 9

Provide the 4 main asset classes.

Answer 9

1. Real Estate - rent generating assets
2. Shares - dividend generating assets
3. Fixed interest securities - interest generating assets
4. Cash

Question 10

How can we increase the value of the firm in order to accomplish our long term goals by increasing the wealth of the owners?

Answer 10

1. We could invest in assets that would add value to the firm.
2. We could keep the firm’s cost of capital as low as possible.

Question 11

How can we accomplish the short term goals?

Answer 11

Ensuring:

1. Profitability
2. Liquidity
3. Sovency

Question 12

Explain Solvency.

Answer 12

It refers tot he extent to which the firm’s assets exceeds its liabilities.

Question 13

What are the Fundamental Principles of Financial Management?

Answer 13

1. Cost-Benefit Principle
2. Risk-Return Principle
3. Time Value of Money Principle