Financial Management for Decision Makers Summary 4.1

FINANCIAL MANAGEMENT FOR
DECISION MAKERS
Finance block 4.1



TABLE OF CONTENTS
Chapter 1: The World of Financial Management................................................................................................. 2
Chapter 2: Financial Planning ................................................................................................................................... 5
Multiple Choice Questions: Chapter 2 .......................................................................................................... 14
Chapter 3: Analysing and Interpreting Financial Statements .......................................................................... 16
Multiple Choice Questions: Chapter 3 .......................................................................................................... 23
Chapter 6: Financing a Business 1: Sources of Finance ...................................................................................... 25
Multiple Choice Questions: Chapter 6 .......................................................................................................... 30
Chapter 7: Financing a Business 2: Raising Long-Term Finance........................................................................ 32
Multiple Choice Questions: Chapter 7 .......................................................................................................... 37
Mock Exam: Fim 4.1 ................................................................................................................................................ 39




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,CHAPTER 1: THE WORLD OF FINANCIAL MANAGEMENT

The role of managers: Help managers in carrying out their tasks
1. Strategic management: Aims, objectives, and long-term strategies;
2. Risk management: Nature of business operations and the way a business is financed;
3. Operations management: Day to day control of business functions.


The task of the finance function: Help managers in carrying out their tasks
1. Financial planning: Projections and estimations;
2. Financing and capital market operations: Stock markets and banks. Financial structure: short-term
and long-term internal (profits) and external shareholders and lenders.
3. Financial control: Reporting information: profitability, working capital, cash flow, and monitor
performance;
4. Investment project appraisal: Long-term appraisal of profitability and risk.


Primary objective of a business:
Shareholder wealth (market value of ordinary shares) maximization over the long-term!
− Not the same as profit maximization;
− To achieve wealth maximization the needs of other stakeholders must be considered;
− High ethical standards may be needed to maximize shareholders wealth.


Profit maximization problems: Does not automatically lead to shareholder wealth maximization
− Profit is an imprecise term; (different measures)
− Profit cannot be objectively determined; (different accounting policies)
− Period over which profit should be maximized is unclear;
− Profit takes no account of risk; (higher risk projects, is higher profits)
− Profit takes no account of opportunity cost. (reinvest profits vs. distribute)


Shareholders:
Shareholders Are the effective owners, with a residual claim
and bear the risk. They are incentivized to
increase their residual claim through
entrepreneurial activity.
Objective of the shareholders:
1. May encourage excessive cost cutting;
2. May undermined the status of other stakeholders; (fixed claim)
3. May encourage unethical behavior.


Stakeholder approach: problems:
1. Does not offer clear-cut objectives, but multiple objectives;
2. Increases problems of accountability; (improvements vs. deterioration: managers own objectives)
3. Raises difficult questions concerning who the stakeholders are and how they should be treated.




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, Relationship between risk and return in investments:




Corporate governance:
Ways a business is directed and controlled. Control of directors’ behavior:
− Incentive plans linking remuneration to share performances;
− Close monitoring.
➔ Shareholders (principals) vs. Managers (agents): agency problem can exists by protecting
shareholders.


Principles underpinning a framework of rules:
1. Disclosure: Performance of directors is reflected in the price of the shares;
2. Accountability: Monitoring process controlling;
3. Fairness: Inside information restrictions on the ability of directors to buy and sell shares.


The main forms of shareholder activism:
1. Exercising voting rights;
2. Meeting with directors;
3. Direct intervention in business affairs.


The UK Corporate Governance Code: Aims to ensure that
− Powers and responsibilities of directors are clearly delineated;
− Appropriate checks and balances are in place;
− Every listed company should have a board of directors;
− There should be a clear division of responsibilities between the chairman and the chief
executive officer;
− Non-executive directors should challenge and help develop proposals on strategy;
− There should be a balance of skills, experience, independence and knowledge;
− The board should receive timely information;
− Appointments to the board should be the subject of rigorous, formal and transparent procedures;
− All directors should submit themselves to re-election at regular intervals;
− Remuneration levels should be sufficient to attract, retain and motivate directors of the
appropriate quality;
− There should be formal and transparent procedures for developing policy on directors’
remuneration;



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