Chapters 1-2

Question 1

2 types of financing decision

Answer 1

loan or debt

Question 2

what is the deployment of financial resources

Answer 2

choosing whether to invest or pay dividends

Question 3

what is the formula for earnings per share

Answer 3

profit after tax - preference dividends / no of ordinary shares

Question 4

what are the drawbacks for using profit as your main objective

Answer 4

its historic and not future orientated
doesn’t measure liquidity or risk
can be manipulated

Question 5

what is the main objective for a for-profit organisation

Answer 5

maximisation of shareholder wealth

Question 6

2 ways shareholder wealth is maximised

Answer 6

market value of wealth

dividends recieved

Question 7

formula for total shareholder return

Answer 7

dividend + change in share price / share price at the start of the year

Question 8

what is the agency relationship

Answer 8

relationship between shareholders and agents ( managers )

Question 9

who are the agents for shareholders

Answer 9

management

Question 10

what is corporate governance

Answer 10

the rules and processes by which the behaviour of a firm is directed

Question 11

3 rules for board of directors

Answer 11

seperate MD and chairman
significant % of the board are NEDs
NEDs must be independant

Question 12

what is the remuneration committee

Answer 12

pay and incentives of exec directors are set by NEDs

Question 13

what is the audit committee

Answer 13

NEDs only

monitors risk management

Question 14

what is the nomination committee

Answer 14

choice of new directors by NEDs

Question 15

what is goal congruence

Answer 15

the alignment between objectives of agents and the objectives of the organisation as a whole

Question 16

2 methods of remuneration incentives

Answer 16

share options

performance related pay

Question 17

3 types of stakeholder

Answer 17

internal
connected
external

Question 18

formula for return on capital employed

Answer 18

operating profits / capital employed x 100

Question 19

formula for capital employed

Answer 19

equity + long term debt

Question 20

formula for interest cover

Answer 20

operating profit / interest

Question 21

current ratio

Answer 21

current assets / current liabilities

Question 22

acid test ratio

Answer 22

current assets - inventory / current liabilities

Question 23

definition for value for money

Answer 23

getting the best possible combination of services for the least resources

Question 24

3 E’s for value for money

Answer 24

economy
effectiveness
efficiency

Question 25

what is macro-economics

Answer 25

concerned with issues affecting the economy as a whole, eg economics, growth, inflation, unemployment

Question 26

4 aims for the goverment on the economy

Answer 26

economic growth - increase in national income control inflation - managing price inflation full employment balance of payments stability - balance of payments on imports and exports

Question 27

3 policys the government may use for macro-economics

Answer 27

fiscal policy monetary policy exchange rate policy

Question 28

how might a government intervene in the economy (fiscal policy)

Answer 28

spending more or less money on services such as health and education changing rate of direct tax changing rate of indirect tax

Question 29

how would a lower exchange rate affect businesses

Answer 29

domestic goods are cheaper in foreign markets so theres an increase in demand demands for imports fall as they are more expense increased production costs as imports more expensive

Question 30

how would a higher exchange rate affect businesses

Answer 30

demands for exports fall as more expensive foreign goods are cheaper so demands for import rises imported materials are cheaper so production costs fall

Question 31

what is market failure

Answer 31

said to occur when the market mechanism fails to work efficiently and therefore the outcome is sub-optimal

Question 32

4 types of market failure

Answer 32

imperfect competition - one company has too large of a share and has excessive profits social costs - there is a negative impact on society ( pollution ) and have to be regulated imperfect information - false info is put into the public domain fairness - government may regulate to improve social justice

Question 33

definition of financial intermediary

Answer 33

an institution bringing together providers of finance and users of finance

Question 34

examples of financial intermediaries

Answer 34

retail banks investment banks mutual societies institutional investors

Question 35

what does a financial intermediary do

Answer 35

links lenders with borrowers by obtaining deposits from lenders and re- lending them to banks

Question 36

mnemonic for the benefits of financial intermediaries

Answer 36

MAP

Question 37

what is the M in MAP

Answer 37

Maturity transformation

Question 38

what is the A in MAP

Answer 38

aggregation of funds

Question 39

what is the P in MAP

Answer 39

pooling losses

Question 40

what is maturity tranformation

Answer 40

they allow you to borrow money on shorter timeframes than they lend out so short term deposits become long term investments

Question 41

what is aggregation of funds

Answer 41

a financial intermediary can aggregate smaller savings from savers and lend to borrowers in large amounts

Question 42

what is pooling losses

Answer 42

any losses suffered by borrowers are suffered by the financial intermediary

Question 43

what is disintermediation

Answer 43

cutting out the middle man in finance ie banks

Question 44

what is the money market

Answer 44

market for short term finance

Question 45

what is the capital market

Answer 45

medium to long term finance

Question 46

3 types of money market instruments

Answer 46

interest - bearing instruments discount instruments derivatives

Question 47

how to calculate annualized yield on a discount instrument

Answer 47

( discounted amount / face value amount ) x 100

Question 48

what are the 2 types of prinicipal capital markets

Answer 48

stock exchange main market | alternative investment market

Question 49

2 types of long / medium term capital

Answer 49

share capital | debt capital

Question 50

what is a loan note

Answer 50

IOU

Question 51

what is a reverse yield gap

Answer 51

dividend yield on shares is lower than interest yield on low risk debt

Question 52

what is a eurobond

Answer 52

a bond denominated in a currency which often differs from that of the country of issue