The Corporate Finance Framework and Environment Flashcards
(25 cards)
What does a company being a separate legal entity mean
A company is a separate legal entity, meaning it can own assets, incur liabilities, and enter contracts independently of its shareholders
What is limited liability
Limited liability is where shareholders are only liable for losses up to the amount they invested
Who owns the company
Shareholders own the company
Who manages the company
The board of directors manage the company
What does the separation of shareholders and the board of directors lay the foundation for
The separation of shareholders and the board of directors lays the foundation for later topics like agency theory and corporate governance
How do many large business operate
Many large businesses operate through groups
How do group companies work
Group companies have a parent company and multiple subsidiaries, allowing for specialisation, risk management, and legal/tax structuring
Where does financial management operate
Financial management operates across both historic reporting and future planning
What are the short-term responsibilities of financial management
The short term responsibilities of financial management are:
- Cash flow forecasting and working capital management
- Hedging financial risks like foreign exchange and interest rates
What are the long-term responsibilities of financial management
The long term responsibilities of financial management are:
- Investment appraisal
- Long-term financing decisions
- Dividend policy
What three key financial statements are used to assess and monitor corporate financial performance
The three key financial statements used to assess and monitor corporate financial performance are:
- Income statement
- Statement of financial position (Balance sheet)
- Cash flow statement
Who does stakeholders include
Stakeholders includes shareholders, employees, creditors, suppliers, customers, and the government
What approach do directors often follow
While directors are legally obliged to act in the best interest of the company as a whole, in practice they often follow a shareholder primacy approach
What does a shareholder primacy approach focus on
A shareholder primary approach focuses on increasing long-term shareholder wealth
How is increasing long-term shareholder wealth usually measured
Long-term shareholder wealth is usually measured by:
- Rising share prices
- Consistent or growing dividend shares
How is the agency problem defined by Jensen and Meckling (1976)
Defined by Jensen and Meckling (1976), the agency problem arises because of the divergence between ownership and control
What does the agency problem mean directors may peruse
The agency problem means directors may pursue personal goals rather than shareholder value
What does the agency problem lead to
The agency problem leads to the need for corporate governance mechanisms to align interests
What does effective governance involve
Effective governance involves internal and external controls designed to reduce agency problems
What is statutory governance
Statutory governance involves legal requirements, including audits and reporting obligations
What is non-statutory governance
Non-statutory governance includes: Frameworks like the UK corporate governance code, which operates on a “comply or explain” basis
What are the key elements of corporate governance
Key elements of corporate governance include:
- Board composition
- Division of roles
- Risk management and internal controls
- Transparent remuneration policies
What are executive share option schemes (ESOS)
ESOS are incentives designed to align directors; interests with shareholders
How does ESOS align shareholder and director interests
ESOS aligns interests as:
- Directors are given the right to buy shares at fixed prices in the future
- If the market price exceeds the fixed price, they profit - encouraging growth
- If not, the options expire worthless
