Stakeholder Theory in Business Management
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Questions and Answers

What is the primary objective of a company according to the stakeholder view?

  • Minimizing company risk
  • Balancing shareholder wealth with stakeholder objectives (correct)
  • Maximization of shareholder wealth
  • Ensuring good accounting records
  • Which stakeholder group is primarily concerned with high salaries and job safety?

  • Suppliers
  • Staff (correct)
  • Customers
  • Managers
  • What do shareholders primarily seek from a company?

  • Good liquidity
  • Quality service
  • Minimized company risk
  • High share price and dividend growth (correct)
  • Which of the following objectives is associated with banks as stakeholders?

    <p>Minimizing company risk (C)</p> Signup and view all the answers

    What objective is commonly expected of customers as stakeholders?

    <p>Quality service (A)</p> Signup and view all the answers

    What is a common objective of customers when purchasing products or services?

    <p>High quality at a low price (C)</p> Signup and view all the answers

    What is one potential conflict in stakeholder objectives mentioned?

    <p>Suppliers prefer immediate payment (D)</p> Signup and view all the answers

    What is the Agency Problem in business management?

    <p>Managers not acting in the best interest of owners (B)</p> Signup and view all the answers

    How do performance-related pay schemes help reconcile stakeholder objectives?

    <p>They align interests between staff and shareholders (B)</p> Signup and view all the answers

    Why is it challenging for management to meet all stakeholder objectives?

    <p>Objectives of different stakeholders often conflict (A)</p> Signup and view all the answers

    What are the key decisions a finance manager is responsible for?

    <p>Investment, financing, and dividends (B)</p> Signup and view all the answers

    Which models aid in the valuation of shares?

    <p>Discounted Cash Flow Models (C)</p> Signup and view all the answers

    What does the Efficient Market Hypothesis (EMH) suggest about share valuation?

    <p>All information, public and private, is always reflected in asset prices (D)</p> Signup and view all the answers

    What is the primary purpose of valuing financial assets?

    <p>To assess their market potential and predict future performance (D)</p> Signup and view all the answers

    Which approach is generally not associated with risk management?

    <p>Risk amplification (C)</p> Signup and view all the answers

    What causes exchange rate differences?

    <p>Interest rate variations and economic indicators (D)</p> Signup and view all the answers

    Which technique is primarily used for hedging against interest rate risk?

    <p>Swaps (C)</p> Signup and view all the answers

    Regarding risk management, what is the definition of risk retention?

    <p>Accepting the risk and bearing the consequences (A)</p> Signup and view all the answers

    What is the acceptable figure for interest cover in a stable company?

    <p>3 (B)</p> Signup and view all the answers

    What factors contribute to a higher financial gearing ratio?

    <p>High long-term debt and preference shares (B)</p> Signup and view all the answers

    Which statement accurately describes the dividend yield calculation?

    <p>It indicates the percentage of dividend in relation to the market price per share. (B)</p> Signup and view all the answers

    Given Company A with an EPS of €2 and a share price of €20, and Company B with an EPS of €0.20 and a share price of €0.40, which company has a higher price-earnings (PE) ratio?

    <p>Company B (D)</p> Signup and view all the answers

    What does a higher financial gearing indicate about a company?

    <p>Increased risk (D)</p> Signup and view all the answers

    Which of the following components is NOT part of the financial gearing calculation?

    <p>Market value of shares (A)</p> Signup and view all the answers

    What is a limitation of the dividend yield formula?

    <p>It does not account for the total income from dividends and capital gains. (D)</p> Signup and view all the answers

    How does the price-earnings (PE) ratio help an investor?

    <p>It shows how much investors are willing to pay for each euro of earnings. (B)</p> Signup and view all the answers

    What is the primary consequence of high interest rates on the economy?

    <p>A potential recession (B)</p> Signup and view all the answers

    What does the exchange rate policy aim to influence?

    <p>The level of the currency's exchange rate (C)</p> Signup and view all the answers

    How does a fall in the exchange rate affect import and export prices?

    <p>Import prices decrease while export prices rise (C)</p> Signup and view all the answers

    What happens to output and unemployment when exports rise due to a favorable exchange rate?

    <p>Output rises and unemployment falls (C)</p> Signup and view all the answers

    What effect do higher import prices have on inflation?

    <p>They could lead to a rise in inflation (B)</p> Signup and view all the answers

    Which policy involves adjusting interest rates to influence economic growth?

    <p>Monetary policy (B)</p> Signup and view all the answers

    In what scenario might a government lower interest rates?

    <p>To stimulate economic growth (C)</p> Signup and view all the answers

    What is one potential drawback of a fall in the exchange rate?

    <p>Higher inflation in the economy (B)</p> Signup and view all the answers

    What is the primary function of the capital market?

    <p>To raise long-term funds (A)</p> Signup and view all the answers

    Which of the following is a key feature of Euromarkets?

    <p>Involvement of international commercial banks (B)</p> Signup and view all the answers

    What type of companies typically issue unsecured debt in the Euromarkets?

    <p>Large companies with excellent credit ratings (C)</p> Signup and view all the answers

    What is one major characteristic that differentiates the Euromarkets from domestic capital markets?

    <p>Access to a broader range of investors (A)</p> Signup and view all the answers

    What is one reason companies might prefer to utilize the Euromarkets?

    <p>Ability to avoid certain domestic regulations (C)</p> Signup and view all the answers

    How long is the typical debt instrument issued in the Euromarkets?

    <p>5-15 years (B)</p> Signup and view all the answers

    What is a significant advantage of raising finance via the capital market?

    <p>Ability to raise large amounts of long-term capital (B)</p> Signup and view all the answers

    Which instruments are primarily involved in a capital market?

    <p>Bonds and equities (C)</p> Signup and view all the answers

    Study Notes

    FM Course Notes Summary

    • The course covers financial management, focusing on the functions, environment, and management of working capital, investment appraisal, business finance, valuations, and risk management.
    • The course is designed to help students become Finance Managers of businesses, responsible for investment, financing, and dividend decisions.
    • Financial management involves acquiring and effectively utilizing financial resources to achieve organizational objectives. Profit maximization is not a sufficient objective, as other factors such as future prospects, dividend payouts, financing plans, and risk management are also crucial for investors.
    • A better objective for profitability-focused companies is shareholder wealth maximization, which measures total shareholder return (dividend per share plus capital gain divided by initial share price).
    • Key decisions in financial management include investment (in projects or takeovers or working capital), finance (debt level), and dividends (how returns are distributed to shareholders). The level of gearing depends on the business life-cycle, operating gearing, stability of revenue, and availability of security.
    • The key objectives of financial management include wealth creation, generating cash, and providing an adequate return on investment, while considering accompanying risks and invested resources.
    • Financial planning ensures adequate funding at the right time, managing short-term and long-term needs.
    • Financial control is crucial for ensuring objectives are met by monitoring, assessing asset utilization (efficiency), and asset security.
    • Financial decision-making involves investment, financing, and dividend policies. Finance must be raised, and alternative methods involve selling shares, borrowing from banks, or obtaining credit from suppliers. Decisions on profit retention or distribution to shareholders are also key.
    • Financial management is closely linked to financial and management accounting. Financial accounting provides information about past events and is legally obligated, whereas management accounting helps manage day-to-day operations.
    • Corporate objectives, such as return on investment, market share, growth, customer satisfaction, and quality, guide the creation of financial objectives.
    • Shareholder wealth maximization, profit maximization, and earnings per share growth are examples of financial objectives used by organizations.
    • Shareholder wealth maximization (share price) is vital. This is due to the theoretical value calculation of share price incorporating all future dividends. There may be short-term changes in share price for reasons outside the objective of maximizing profitability, such as profit increases and share price falls, suggesting that profit alone is not a sufficient or sufficient objective.
    • Earnings per share (EPS) is calculated as profit after tax minus preferred dividends, divided by weighted average ordinary shares.
    • Stakeholders have diverse objectives, including staff salaries, manager bonuses, shareholder wealth (high share price, dividend growth), banks minimizing risk, customer quality service, suppliers' liquidity, and government compliance.
    • There's a potential conflict between stakeholder objectives. It's impossible for a company to entirely fulfill all stakeholder objectives due to conflict, and a compromise is often achieved.
    • The agency problem arises where managers, acting as agents for owners, may not always prioritize shareholder wealth, leading to various management compensation schemes, like performance-related pay and share option schemes.
    • Return on Capital Employed (accounting rate of return) is important, and should be higher than the borrowing rate, using operating profits divided by capital employed to show profitability. Return on Equity reflects how the company uses shareholder equity to generate earnings.
    • Return on Equity (ROE) measures the profitability of shareholder investments, and high ROE typically signals a company performs effectively with the given equity.
    • Dividend per share is directly related to dividends declared to shareholders, which, in the short-term, may hurt the company and its growth.
    • The price-earnings (PE) ratio compares a company's share price to its earnings per share.
    • Total shareholder return measures the aggregate return on investment over a specific period. This includes dividends per share plus capital gained, separated by the initial share price.
    • Methods to encourage stakeholder objectives include managerial reward schemes, such as share options and performance-related pay, and regulatory requirements such as corporate governance codes of best practice and stock exchange rules.
    • Non-profit organizations prioritize their missions (which often include socially desirable needs) over profit maximization.
    • Value for money is essential, encompassing efficiency (maximizing output from resources), effectiveness (achievement of goals), and financial prudence.
    • Measurement of non-financial objectives is possible through statistics relating to services/activities (e.g., client/user numbers).
    • Financial management deals with long-term financing decisions, while financial accounting accounts for past company performance.
    • Financial markets, like money and capital markets, facilitate the exchange of financial securities for purposes like raising capital and facilitating transactions. These are either direct through financial markets or indirect through financial intermediaries, including merchant banks, pension funds, and insurance companies.
    • Euromarkets deal with offshore currency transactions, usually in large volumes, often with less regulation compared to domestic markets, which usually involves borrowers with high, credible credit ratings.
    • Money markets concern short-term finance from borrowing/lending, while capital markets deal in long-term funds through stock, commodities, and bond markets. Securities are used to document transactions.
    • Financial intermediaries, like banks, are important for facilitating transactions, transferring risks, and transforming the maturity of funds (making long-term funds available for short-term needs). Intermediaries also aggregate individual's relatively small sums into larger ones. These functions reduce transaction costs and credit risk.
    • The concept of risk in relation to investment and returns is critical. Risk involves the variability of returns, which can be quantified, while uncertainty cannot.
    • Sensitivity analysis quantifies the effect of variations in different factors on profitability measures.
    • Probability analysis enables assigning probabilities of expected outcomes and estimates of expected values.
    • Methods for managing currency risk include dealing in a company's home currency, matching transactions with payments, leading, lagging, forward exchange contracts, money market hedging, and asset/liability management.
    • Methods for managing interest rate risk include matching and smoothing, asset and liability management, and forward rate agreements.
    • Working capital is essential money needed for daily tasks, with current assets (cash, inventories, receivables) offset by current liabilities (overdraft, payables less than a year).
    • Inventory management, accounts receivable management, payable management, cash management are critical in effective working capital management.
    • The concept of overtrading in reference to capital issues means that companies are taking on too many risks. Overtrading issues may arise from problems with liquidity (financial ability) or a lack of sufficient capital to support the current level of business. Investment in working capital should not increase as fast as the increase of sales.
    • There are different approaches to managing working capital, such as the conservative approach (higher levels of inventory and less risk, but potentially less profitable) and the aggressive approach (lower inventory and more risk, but potentially high profitability).
    • Various techniques exist to manage inventory, including the Economic Order Quantity (EOQ) model and Just-in-Time (JIT) techniques.
    • Managing receivables involves assessing creditworthiness, formulating credit policies, collecting overdue payments, offering early settlement discounts, and utilizing factoring or invoice discounting.
    • Managing foreign receivables/payables involves using different methods, such as cash in advance, payment on shipment, or documentary letters of credit—the exporter agrees for a bank to secure the payment.
    • Managing cash involves preparing cash flow forecasts, determining a company’s short-term funding needs to balance cash shortages with excess cash and its investment or lending options, and selecting from available sources.
    • Different sources of long-term finance for companies include equity finance (via a rights issue, placing, or public offer), debt finance (loan, bonds, or debentures), lease finance, and venture capital.
    • A creditor hierarchy dictates the order of payment when a company liquidates: those with fixed charges, then floating, then unsecured creditors, and lastly preference and ordinary shareholders.
    • Methods for capital rationing when there isn't enough financial resources available involve profitability indexes (PI) for divisible projects.

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    Description

    This quiz explores the fundamental concepts of stakeholder theory in business management. It delves into the objectives of different stakeholders such as shareholders, customers, and banks, and examines the conflicts and challenges in meeting these objectives. Test your understanding of the dynamics between stakeholder interests and company management.

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