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26 Cards in this Set
- Front
- Back
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3 main areas in FDM
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Investment decision (which investments to make)
Financing decision (where/how to raise money) Dividend decision (how profits used or distributed) Working capital mngt (key principles in ST financing) |
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Type of company - plc vs ltd difference
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Plc has:
auth share cap of £50k min membership of 2 name ending with plc |
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Main obj of co in theory of finance
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Maximisation of sh wealth in the LT - achieved by maximising combined value of co + returns paid out in divs/return of cap. Maximise its market value.
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What is the time value of money
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Assuming all other things are equal, sh's prefer returns earlier rather than later.
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Dividend policy is constrained by what factors
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Maintain adequate liquidity
Sh's usually prefer steady divs rather than erratic Amount may be read as signal of success Varies depending on nature or co and sector (e.g. growth sectors likely to reinvest) |
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Alternative financial objectives
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Profit - don't necy correspond to sh wealth (e.g. investments temp reduce profit)
EPS - depends on reasons for change in no of shares Dividend growth - amount & rate with discount rate to reflect return - but depends on rate of reinvestment & if sh views investment a portfolio or to gain control (& get add bens) Maximise BS or asset values - but not complete picture, most going concerns have market values in excess of book value (intangible assets) |
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Dividend growth model (amount and rate)
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How the value of a share can be calculated using amount & rate of payment with a discount rate to reflect return.
DGM - total present value of all future divs, discounted at the sh's cost of capital. |
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Net present value maximisation
(steadier target but still related to market expectations) |
Present value of co's future cash flows discounted to allow for the cost of capital (degree of risk) over time.
Ie the amount of money at today's date that would give the future amount if it were invested to earn compound interest. Rate at which discounted to find an NPV is the return required by sh's, so NPV maximised by investing in projects that increase sh's wealth (by giving discounted returns greater than original investment) Total of present values of all co's future cash flows = NPV |
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Shareholder value analysis - SVA
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Based on concept of NPV - simplified and standardised approach to estimation of future cash flows and finding their present values.
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Other objectives (non-financial)
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FIORDS
Fair trade Innovation Operating in compliance with law Raising skills of workforce Differentiating products/services Sustainability |
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Role of finance function
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MACADAMIAS
Maintenance of optimum mix of funding (consider risk) Acquisition of required financial resources - correct volume - internally (profit retention/div policy) or externally (share+debenture issues/loans) Consideration of needs of finance providers inc return req - max wealth, communication. Assessment/eval of investment opps - resources deployed efficiently/profitably Dealing with/handling co reconstructions + combinations Auditing control systems - IA function Mngt of risk and working cap/cash balances to maintain liquidity Investment of surplus cash in ST investments - low risk/access when needed Assurance of compliance w legislation inc prep of FS Setting up/operating control systems to plan/authorise capital expenditure on fixed A's & control levels of CA & CLs (eg stockholding, giving/taking credit) |
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Finance function areas of responsibility
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Controller - capital budgeting & invt appraisal, stock/credit control, ST invts, int/ext audit
Accountant - records, mngt reports, co accounts - mngt/financial accounting split Treasurer/cashier - budgeting for cash flows, liqduidity, security of cash resources, FX mngt Financial strategist - optimum mix of funds, com externally (govt, investors), general mngt Corporate planner - devt if strategic/bus plans - may be resp of a d |
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Risk
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Needs to balanced against return when making decisions about raising and investing capital.
E.g. CDOs - risk not fully understood. CG Code - co's must identify & assess risks they may face. |
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Regulatory framework for co's
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CA06 - FS audited
EU Co Law Directives UK accounting standards (ASB or IASB) |
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Stakeholders - person/body that has made some kind of investment in the co & expects a return, and as a result, has some kind of interest in the success of the co.
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Sh's & investors - max sh wealth, achieve level of EPS & divs per sh, stick to pre-set targets (ROCE or profit to sales ratio), expand, security,cash flow for plans, details of donations.
Banks & other lenders - safety of invt, ratio of debt to equity Business contact group - customers, suppliers, competitors Mngt - most powerful sk E/es Govt - acting as corporate citizen Public |
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Stakeholder theory - framework for analysing relationships of this kind. 3 main models for mngt to resolve conflicts between interests of diff sk groups
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Strong form - mngt answerable to all sk groups - balance demands (& bargaining power) of all
Minimalist version - only to sh's - law. Also nb - if answerable to all, in effect answerable to none. Pragmatic view - not formally answerable to all but should take account of their needs for reasons of commercial practicality. Nb even a single sk group may have conflicting objectives. |
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LT v ST objectives
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UK stock market often v ST - 'short-termism' t/f some cos delisted.
Emphais on ST esp in US - quarterly stmnts & many pay quarterly divs. |
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Agency theory: the principal-agent problem
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Goal congruence occurs when objs of A match those of P. P-A prob is the conflict that airside when sep of mngt & ownership leads to lack of goal congruence. Rewards may not be linked.
Sh's can dismiss mngrs or sell shares but often not the case. Little power. Been passive & uninvolved. This is changing. E.g. intro of incentive schemes but issues eg stock options - lead to volatility in sh price - rebasing of options - profit-related incentives can lead to manipulation of a/cing figures - effected by external factors Lack of GC may manifest itself in satisficing = mngrs do just enough to provide a return sh's consider adequate rather than max sh returns. Discouraged by competitive markets for capital & mngt jobs. |
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Audit
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Turnover £6.5m or gross assets of £3.26m
Auditor opinion re 'true & fair view', properly prepared, in acc w CA06 & IAS. Actions have led to: LLPs longer auditors' reports q re independence auditors not acting as consultants to same co devt of a/cing standards |
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CG a financial aspects - history
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Cadbury Committee (fin reporting & auditing, criminal beh, auditor failures, boards)
Greenbury Committee (req annual FS to discose rem details) Hampel Committee (board make-up & op, d's rem, relations w sh's) Turnbull Report (internal controls guidance, systems in place to monitor risks, annual stmnt) Higgs Review (role & effectiveness of NEDs) Smith Report (comp & role of AC) UKCGC (LEARR) |
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Section C Accountability (UKCGC)
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Present balanced & understandable assessment of co's position/prospects
Determine nature/extent of sig risks willing to take to achieve objs Maintain sounds RMS & ICS Formal & transparent arrangements for applying corporate reporting, RM & IC, and maintaining rel w co's auditor. |
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Section D Remuneration (UKCGC)
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Levels should be suff to attract, retain & motivate d's of quality req but should avoid paying more than necy.
Sig proportion should be structured so as to link rewards to corporate & ind perf. Formal & transparent procedure for developing policy on exec rem & fixing ind packages (no one involved in setting own rem). |
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Multintional companies (MNCs) objectives
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Similar but may be more complicated:
diff currencies exchange rate fluctuations diff costs of capital (options to raise on more favourable terms elsewhere) country-related risks |
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Public sector objectives (PSOs) - differences
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PSOs have monopolies (service or geographical)
Rarely related to profit-making objs - doesn't use price mechanism to test whether public wants services provided - stewardship of funds more imp than profit motive |
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PSOs - New Public Management - nature of accountability
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Parliamentary - through procedures & committees
Financial - stewardship function - ensuring A's extant & only used for purposes specified Legal - actions/expenditures w/in law Managerial (new) - New Public Management - importing private sector managerial practices into PSOs - demonstrate achieved policy objs & value for money/within budget. Emphasis on '3 E's' - economy, efficiency, effectiveness. |
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Charity objectives
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Diff sources (donations, grants, endowment income) uses of funds and aim to operate three E's rather than profitably.
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