B&A Spreadsheet

Question 1

Goals

Answer 1

Profit goals − objectives which lead directly to increased profits (e.g. cost reduction measures)

Surrogate profit goals − objectives which lead indirectly to increased profits

Constraints on profit − objectives restricting profit

Dysfunctional goals − objectives which do not provide a benefit even in the long run

Question 2

Advantages of TSR?

Answer 2

Company that provides the highest returns for its investors will find it easiest to raise new finance and grow

Companies that provide customers with what they require will achieve the highest returns for their investors, consistent with the nation’s economic health

Companies that fail to provide adequate returns may become targets for hostile takeovers

Question 3

Disadvantages of TSR?

Answer 3

Maximising TSR ignores the interests of other stakeholders

It ignores social needs like health, education, police

It ignores market imperfections − it might not be in the public interest to allow monopolies to maximise returns as this may cause high consumer prices.

Question 4

Agency Theory

Answer 4

Agency theory examines the duties and conflicts between the parties within an agency relationship

Principal: Shareholders Agent: Directors - Generate maximum return for shareholders

Principal: Directors Agent: Employees - Work to maximum efficiency

Principal: Loan Creditors Agent: Shareholders - Minimise risk from uses of borrowed funds

Question 5

Encourage Stakeholder Objectives

Answer 5

Performance-related pay – however, relating pay or bonuses to profits include short-termism

Executive share option scheme − the evidence is mixed regarding the success of such schemes in motivating directors to improve performance

Increased shareholder activism (e.g. using voting rights)
Improved corporate governance (e.g. appointing genuinely independent non-executive directors)

Question 6

Principles of Good Governance

Answer 6

The board should have a balance of executive andindependentnon-executive directors

Remuneration committees should be comprised of independent non-executive directors

No director should be involved in setting their remuneration

Question 7

Macroeconomic Policies

Answer 7

Full employment

Economic growth and thereby improving living standards

Price stability and therefore limited inflation

Question 8

Monetary Policy

Answer 8

Directlycontrol the amount of money in circulation (themoney supply)

Attempt to reduce the demand for money through its price (interest rates)

Question 9

Problems of Monetary Policy

Answer 9

A significant time lag often exists between implementing a policy and its effects

Credit control is ineffective in the modern global economy

The relationship between interest rates, level of investment and consumer expenditure is not stable and predictable

Question 10

Fiscal Policy

Answer 10

Reduce taxation to boost both consumption and investment

Increase government spending to increase the level of demand in the economy directly

Question 11

Problems with Keynesian Approach

Answer 11

Government spending is an intervention in a free market, which can lead to the misallocation of resources

Tax cuts are not efficient at boosting domestic demand as, in times of recession, some of the extra disposable income made available will be saved

There is often a significant time lag between the authorisation of additional spending and its actual occurrence

Question 12

Problems with Reducing Demand in the Economy

Answer 12

It is not possible to cut government spending dramatically in sectors such as health care or education

Increasing taxation discourages enterprise and innovation

Question 13

Supply-Side Policies

Answer 13

Policies which focus on creating the right conditions in which private enterprise can grow and raise the capacity of the economy to provide the output demanded

Low corporate tax rates to encourage private enterprise

Limited government spending

A reduction in the power of trade unions

Question 14

Problems with Supply-Side Approach

Answer 14

Time delay before the policies have any impact

Private sector will not provide all the goods and services society requires

Question 15

Exchange Rate Policy

Answer 15

How a government manages its currency in relation to foreign currencies

To prevent a balance of trade surplus. A government may try to bring about a limited rise in exchange rates to make imports less expensive

To stabilise the exchange rate. If importers and exporters face less exchange rate risk, confidence in the currency will improve, facilitating international trade

Question 16

Floating Exchange Rate

Answer 16

A “freely floating” exchange rate means that the currency’s value is allowed to move freely with supply and demand market forces

If imports exceed exports, the supply of the home currency will exceed demand and the home currency will depreciate, boosting demand for exports and correcting the trade imbalance

Main sources of demand: Exports of goods, inflows of foreign investment

Main sources of supply: Impots of goods, outflows of foreign investment

Question 17

Fixed Exchange Rate

Answer 17

A fixed exchange rate (“fixed peg”) regime is one in which the rate is kept fixed against that of another currency, or basket of currencies.Nofluctuations are permitted

Central bank intervenes to maintain the exchange rat

Question 18

Causes of Inflation

Answer 18

Demand-pull inflation:inflation arises due to demand exceeding the maximum output of the economy with full employment

Cost-push inflation:increases in the cost of raw materials or the cost of labour lead to increases in the unit costs of production

Question 19

General Economic Consequences of Inflation

Answer 19

A fall in the exchange rate

Redistribution of income from those in a weak bargaining position to those in a strong bargaining position

A disincentive to save, as the purchasing power of investments may be reduced

Question 20

Consequences of Inflation for Businesses

Answer 20

International competitiveness suffers where prices rise faster than those of foreign competitors

Higher interest rates reduce the number of profitable investment opportunities, reducing the level of investment

Increased uncertainty reduces new investment by existing businesses

Question 21

Government Intervention

Answer 21

Monopolies, mergers or restrictive practices operate against the public interest

Free market creates social injustice

Free market fails to provide sufficient public goods

Question 22

Benefits of Privatisation

Answer 22

An increase in competition where a state monopoly is split into several operating companies before sale or where the monopoly position is removed

A short-term boost to government revenues

Widening share ownership, which increases individuals’ stake in the economy as a whole

Question 23

Disadvantages of Privatisation

Answer 23

The creation of private sector monopolies, which have then required regulation to ensure that their monopoly position is not abused

Breaking up large organisations into smaller companies results in the loss of economies of scale

Quality of service may deteriorate

Question 24

Role of Financial Intermediaries

Answer 24

Aggregation: small deposits are combined and lent to large borrowers

Maturity transformation: a continuing stream of short-term deposits can be used to lend monies in the long term

Risk diversification: risk is spread by investing in a range of investments across different markets

Liquidity: providing a liquid market with flexibility and choice for lenders and borrowers

Question 25

Commercial Clearing Banks

Answer 25

Accept deposits from their customers into current or deposit accounts Issue certificates of deposit, which may then be traded Provide a money transmission service through the clearing system

Question 26

Bank Lending

Answer 26

Overdraft facilities and term loans to individuals and business customers Purchase of short-term government securities Investments in other financial intermediaries, such as leasing companies

Question 27

Financial Markets

Answer 27

Financial markets include the capital markets (for medium- and long-term capital)  Money markets (for short-term capital) Primary market activity − selling new securities to raise new funds Secondary market activity − trading existing securities

Question 28

Capital Markets

Answer 28

Official List at the London Stock Exchange These markets provide long-term capital: equity capital, ordinary and preference shares, or debt capital such as loan notes

Question 29

Money Markets

Answer 29

Money market is not a physical market; it is the term used to describe trading between banks and other financial institutions Transfer money from parties with surplus funds to parties with a deficit, allow governments and businesses to raise short-term funds Bill of exchange, commercial paper, treasury bills

Question 30

Interest Rates

Answer 30

Level of risk: the higher the level of risk, the greater return an investor will expect General level of interest rates in the economy: These rates are affected by: Inflation, Government Monetary Policy Duration of the loan: if it is assumed that, in the long-term, interest rates are expected to remain stable Term structure of interest rates: the return provided by a security will vary according to the length of time before the security matures

Question 31

Main Impact of Fintech

Answer 31

Disintermediation Availability of credit Security token offerings

Question 32

Security Token Offerings

Answer 32

Enhances the regulatory objectives of disclosure, fairness and market integrity Supports innovation and efficiency through automation and “smart contracts”

Question 33

Higher interest rate effect on currency?

Answer 33

Strengthens it

Question 34

Lower interest rate effect on currency?

Answer 34

Weakens it

Question 35

Long-term interest rates vs short term interest rates in the yield curve

Answer 35

Long-term rates are higher than short-term rates

Question 36

What happens to the yield curve if investors start preferring long-term?

Answer 36

It becomes inverted

Question 37

If imports > exports affect on currency?

Answer 37

Currency weakens as supply > demand

Question 38

What increases demand?

Answer 38

Decreasing taxation Increasing government expenditure Decreasing interest rates

Question 39

Primary capital market vs secondary capital market?

Answer 39

Secondary market deals in "second-hand" securities not the porimary market