Chapter 1 - Strategic Objectives

Question 1

What is value for money?

Answer 1

• Performance of an activity in such a manner as to achieve economy, efficiency and effectiveness
• Used to appraise not for profit org’s

Question 2

What are primary objectives (profit making org’s)?

Answer 2

• Long-term objectives

* Often financial

Question 3

What are secondary objectives (profit making org’s) ?

Answer 3

• Lower priority objectives (stepping stone) to achieving primary objectives

Question 4

What are primary objectives (not for profit org’s)

Answer 4

• Grouped under effectiveness (high quality, high take up of service or timeliness)
• Are usually non-financial

Question 5

What are secondary objectives (not for profit org’s)?

Answer 5

• Can be grouped under:
  1. Economy (purchase of inputs of appropriate quality at minimum cost)
  2. Efficiency (using inputs to maximize outputs or operating within budget)
• Will often be financial

Question 6

Reasons why profit is not a sufficient objective?

Answer 6

Investors care about:

• The future
• Dividends
• Financing plans
• Risk management

Question 7

Maximization of shareholder wealth can be measured as:

Answer 7

Total shareholder return (dividend yield + capital gain)

Question 8

Total shareholder return:

Answer 8

• Increase in share price plus dividends received during the year
• Reflects the fact that both share price growth and dividends are important to investors

Question 9

Earnings per share formula:

Answer 9

(Profits distributable to ordinary shareholders (profit after tax,interest and pref.dividends )
/
(Number of ordinary shares)

Question 10

Share price formula:

Answer 10

P/E ratio x EPS

Question 11

Total shareholder return as a % formula:

Answer 11

(Dividend per share + Capital gain)
/
(Share price at the start of the year) 
×10
* Capital gain = current year share price – prev. share price

Question 12

Other financial objectives:

Answer 12

• Profit-based ratios such as EPS and ratios measuring risk is still important as secondary financial objectives, because if profit targets are missed, shareholder wealth maximisation is unlikely to be achieved.

Question 13

Profit based ratios:

Answer 13

• EPS

* Return on shareholders funds (equity)

Question 14

EPS formula:

Answer 14

(Profits distributable to ordinary shareholders)
/
(Number of ordinary shares)

Question 15

Return on shareholders funds (equity) formula:

Answer 15

Earnings
/
shareholders funds

• If shareholder funds are not given in question:
  Shareholder funds = ordinary shares + reserves (book value)

Question 16

Ratios measuring financial risk:

Answer 16

• Gearing

* Interest cover

Question 17

Gearing Ratio formula:

Answer 17

Debt / Equity
OR
Debt / Debt + Equity

• Equity = shareholders funds

Question 18

Interest cover formula:

Answer 18

PBIT / interest

Question 19

Earnings growth / dividend growth analysis allows:

Answer 19

• Analysis of growth of earnings or dividends can allow investors to make assessments about the company’s performance

Question 20

Growth formula:

Answer 20

g = n √((Latest dividend) / (Earliest dividend) -1)
n = growth periods

Question 21

Sensitivity of objectives to economic and business variables - exchange rates:

Answer 21

• Exchange rates = change in exchange rates can impact the selling prices and hence the profitability ratios which could cause earnings objectives to not be met.

Question 22

Sensitivity of objectives to economic and business variables - interest rates:

Answer 22

• Interest rate parity theory suggests that the forward rate of exchange can be found by adjusting the spot rate of exchange to reflect the differences in interest rates between two countries.
• The difference in interest rates should offset the difference between the spot exchange rate and the forward exchange rate over the same period

Question 23

Interest Rate Parity Formula:

Answer 23

FO = SO × ([1+r var])/([1+r base])

FO = Forward rate of exchange
SO = Spot rate of exchange
R var = Interest rate of variable currency
R base = interest rate of base currency (exchange rate expressed as 1)

Question 24

Why use non-financial objectives?

Answer 24

• Non-fin objectives do not negate the importance of financial objectives, but instead highlights the importance of companies having targets other than maximising shareholder wealth

Question 25

Non-financial objectives can be determined using:

Answer 25

* The balanced scorecard | * The capitals of integrated reporting

Question 26

The balanced scorecard perspectives includes:

Answer 26

The balanced scorecard: * Improved innovation and learning * Improved business processes * Improved customer relationships * Improved financial performance * In addition, it can be argued for both business and ethical reasons, broader social and environmental objectives should be set, measured and monitored.

Question 27

Traditional reporting vs. integrated reporting:

Answer 27

* Traditional financial reporting focuses on annual financial performance and how it fits with an entity’s aim to create shareholder wealth over the long term * Traditional financial reporting does not relate to: 1. An entity’s overall business model 2. How it is achieving its aims over time 3. How other stakeholders are impacted by the focus of creation of wealth * Integrated reporting encourages businesses to focus on: 1. The value creators within their business 2. With a view of the longer-term success of a business 3. Rather than the short-term focus on results that arises from other types of reporting

Question 28

The aim of integrated reporting:

Answer 28

It explains how a business creates value over time and the nature and quality of the org’s relationships with its stakeholders

Question 29

Integrated reporting involves:

Answer 29

* Reporting on sustainability/ environmental issues which may help to enhance the importance with which these issues are treated. * Integrated reporting is designed to make visible the capitals on which the org depends and how these capitals are used to create value in the short, medium and long term.

Question 30

The capitals:

Answer 30

* Financial * Intellectual * Social & relationship * Human * Manufactured * Natural

Question 31

Financial capital:

Answer 31

* Source of funds available to entity such as share capital and loans. * Financial objectives = TSR, EPS & Gearing

Question 32

Intellectual capital:

Answer 32

* Entity’s formal R&D and less formal knowledge that is gathered, used and managed by the entity. * Objectives = attracting high caliber employees and brand recognition

Question 33

Social & relationship capital:

Answer 33

* Relationships within an entity and with external stakeholders * Objectives = paying suppliers on time & improving customer service

Question 34

Human Capital:

Answer 34

* Entity’s management & employees and their skills developed through education, training and experience. * Objectives = Staff retention and increasing number of training days

Question 35

Manufactured Capital:

Answer 35

* Equipment & tools used in entity’s production process. | * Objectives = increasing capital budget

Question 36

Natural capital:

Answer 36

* Renewable and non-renewable environmental resources and processes. * Objectives = increased recycling and reduced carbon footprint

Question 37

Why use non-financial reporting?

Answer 37

* Non-financial reporting enables entities to be more transparent in communicating non-financial elements of their business to their stakeholders. * Non-financial reporting can provide tremendous advantages for the entity’s reputation and positive stakeholder engagement

Question 38

Global Reporting Initiative Standards Principles:

Answer 38

* Materiality * Stakeholder inclusiveness * Completeness * Sustainability context

Question 39

Sustainability reporting integrates:

Answer 39

* Environmental * Social * And economic performance data and measures (including the economic element of sustainability such as wages, taxes and core financial statistics)

Question 40

Sustainability Reporting - The global reporting initiative

Answer 40

* Develop and disseminate globally applicable GRI standards on sustainability reporting for voluntary use by org’s.

Question 41

Core values of a sustainable business:

Answer 41

* Economic viability * Environmental responsibility * Social accountability

Question 42

Environmental reporting:

Answer 42

* Aim is the disclosure of an org’s corporate environmental responsibilities and effects of its activities on its environment. * External reporting of social and environmental issues is now seen as a key part of orgs dialogue with its stakeholders

Question 43

Aim of Social reporting:

Answer 43

* Aim is to measure and disclose the social impact of a businesses’ activities

Question 44

Social measures can include:

Answer 44

* Philanthropic donations * Employee satisfaction levels and remuneration issues * Community support * Stakeholder consultation info