Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd
Upload
8 views

Tutorial 1

The document discusses corporate finance topics including maximizing owners' wealth in capital investment decisions, identifying corporate assets and financial claims, resolving conflicts between managers and owners, defining corporate governance and its importance, explaining the financial decision making process, major financial management decisions involving investment and financing, and the role of the financial manager in strategic decisions, capital markets, risk management, and forecasting.

Uploaded by

chaimeithing0622
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
8 views

Tutorial 1

The document discusses corporate finance topics including maximizing owners' wealth in capital investment decisions, identifying corporate assets and financial claims, resolving conflicts between managers and owners, defining corporate governance and its importance, explaining the financial decision making process, major financial management decisions involving investment and financing, and the role of the financial manager in strategic decisions, capital markets, risk management, and forecasting.

Uploaded by

chaimeithing0622
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 5

Corporate Finance – BBA2103

Tutorial 1 (Questions)
Corporate Finance – BBA2103

1. Why is the goal of maximizing owners’ wealth helpful in analyzing capital investment
decisions? What other goals should also be considered?
The goal of maximizing owners' wealth is the normally accepted economic objective for
resource allocation decisions. Rather than concentrate on the organization, it evaluates
investments from the viewpoint of the organization's owners usually shareholders. Any
investment that increases their stock of wealth (the present value of future cash flows) is
economically acceptable.

In practice, many of the assumptions underlying this goal do not always hold (e.g.
shareholders are only interested in maximizing the market value of their shareholdings).
In addition, owners are often far removed from managerial decision-making, where
capital investment takes place. Accordingly, it is common to find that more easily
measurable criteria are used, such as profitability and growth goals. There are also non-
economic considerations, such as employee welfare and managerial satisfaction, which
can be important for some decisions

1
Corporate Finance – BBA2103

2. Identify the tangible real assets, intangible assets and financial assets below from the
balance sheet of Brownbake Ltd. Who has financial claims on these assets?

Tangible Assets: Machinery and equipment, vehicles, stocks


Intangible Assets: Patents
Financial Assets: Debtors, cash and building society deposit
Financial Claim: Loans, trade creditors and shareholders’ equity (they invest the money
so they will get dividends, no obligations to give the money back because they invest it in
your company).

2
Corporate Finance – BBA2103

3. ‘Managers and owners of businesses may not have the same objectives.’ Explain this
statement, illustrating your answer with examples of possible conflicts of interest. How
can these conflicts be resolved in the best interest of the shareholders?

This statements move towards the issue of agency problem. Whenever a manager disagrees
with a shareholder or there is a conflict in their interests, a potential agency problem exists. It
can be resolved in the following ways:

 Market forces such as major shareholders and the threat of a hostile takeover act to
keep managers in check.
 Design a corporate governance structure that minimizes agency problems and
contributes to the maximization of shareholder wealth.
 A stock option is an incentive allowing managers to purchase stock at the market
price set at the time of the grant.
 Performance plans tie management compensation to measures such as EPS growth;
performance shares and/or cash bonuses are used as compensation under these plans.

4. What is corporate governance and why is it so important for corporations to practice?


Corporate Governance is the system used to direct and control a corporation. Corporate
governance is the system of rules, practices and processes by which a company is
directed and controlled. Corporate governance essentially involves balancing the interests
of a company's many stakeholders, such as shareholders, management, customers,
suppliers, financiers, government and the community. Since corporate governance also
provides the framework for attaining a company's objectives, it encompasses practically
every sphere of management, from action plans and internal controls to performance
measurement and corporate disclosure without which a company would collapse.

3
Corporate Finance – BBA2103

5. Explain the steps in the financial decision making process.


Step 1: Define objectives
Step 2: Identify possible courses of action
Step 3: Assemble data relevant to the decision
Step 4: Assess the data and reach a decision
Step 5: Implement the decision
Step 6: Monitor the effects of the decision

6. What are two major decisions under financial management? What does it involve?
The investment decision, sometimes referred to as the capital budgeting decision, is the
decision to acquire assets.

➤ Real assets may be tangible (e.g. land and buildings, plant and equipment, and stocks)
or intangible (e.g. patents, trademarks and 'know-how').

➤ Financial assets in the form of short-term securities and deposits.

The financing decision addresses the problems of how much capital should be raised to
fund the firm's operations (both existing and proposed).

4
Corporate Finance – BBA2103

7. Describe the role of the Financial Manager.

Strategic investment and financing decisions. Raise the finance to fund growth and assist in the
appraisal of key capital projects.

Dealing with the capital markets. As the intermediary, must develop good links with the
company's bankers and other major financiers, and be aware of the appropriate sources of
finance for corporate requirements.

Managing exposure to risk. Ensure that exposure to adverse movements in interest and exchange
rates is adequately managed. Various techniques for hedging (a term for reducing exposure to
risk) are available.

Forecasting, coordination and control. Assist in and, where appropriate, coordinate and control
activities that have a significant impact on cash flow.

You might also like