Corporate Objectives and Financial Management

Corporate Objectives

• The main objective of a corporation is to maximize shareholder wealth.
• Efficient acquisition and deployment of financial resources are essential to achieve this objective.

Financial Management

• Financial management involves providing information to management for day-to-day functions of control and decision making.
• It also involves raising funds to finance investment projects and managing surplus assets.
• Non-executive directors' appointment to the remuneration committee is not a part of financial management.

Shareholder Preferences

• Finance managers must consider shareholders' preferences for dividends versus capital gains to align company decisions with shareholder interests.

Liquidity Ratios

• Current ratio and quick ratio measure a company's ability to meet its short-term obligations.
• An increase in overdraft to buy and pay for inventory immediately will decrease the current ratio and quick ratio.

Industry Characteristics

• Industries competing based on volume of sales tend to have low return on sales but high inventory turnover.

Debt Management

• Gearing ratio, debt ratio, and interest coverage ratio are used to manage a firm's debt level.
• Gross profit margin is not a ratio used to manage debt.

Short-term Financing

• Short-term financing is used for payment of wages to employees and other short-term needs.
• Common sources of short-term financing include account receivables backed loans, bank overdrafts, factoring account receivables, and banker acceptances.

Long-term Financing

• Long-term financing sources include bonds and stocks.

Commercial Paper

• Commercial paper is a type of short-term unsecured debt issued by firms to get funding from investors, typically used by firms with high credit ratings such as banks.

Working Capital Management

• Working capital management involves managing cash, account receivables, and account payables.
• Staff management is not a part of working capital management.

Working Capital Ratios

• Current ratio, inventory turnover period, and receivables collection period are all working capital ratios.
• Debt ratio is not a working capital ratio.

Account Receivables Collection

• The steps in an account receivables collection process include sending statements of account, personal visits to clients, and legal proceedings.
• Appointing illegal collection agencies is not a part of the collection process.

Cash Flow

• Cash outflows to be recorded in a project's cash flow include incremental fixed costs, cannibalisation, and changes in net working capital.
• Sunk cost is not a relevant cash outflow.

Project Evaluation

• The initial investment of a project includes the costs of equipment, marketing surveys, and other expenses.
• Average Accounting Rate of Return (ARR) is calculated based on the projected net income over the project's life.

Risk Management

• Systematic risk includes interest risk, market risk, and inflation risk.
• Financial risk is not a type of systematic risk.

Diversification

• Diversification involves spreading risk by investing in various projects with different levels of risk.
• It does not involve investing in high-risk projects, specialized industries, or government projects.

Payback Period

• Payback period indicates the length of time a project takes to recover the cost of an investment.
• It is not the same as accounting rate of return, net present value, or internal rate of return.