F9 Financial Management

Format of the paper

 Format of the paper
• Section A and B questions will be selected from the entire
syllabus.
• Section C questions will mainly focus on the following syllabus
areas but a minority of marks can be drawn from any other area
of the syllabus
• Working capital management (syllabus area C)
• Investment appraisal (syllabus area D)
• Business finance (syllabus area E)
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Financial management function
(A)

Financial management environment (B)

资机
Working capital management (C) 营运
___
Investment appraisal (D)

Business finance (E) Business valuations (F)

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Risk management (G)
 资产流动负债
1总 tea 须
募集
ttmu TotalAssets LessCurrent
Statement of financial position extracts
Liebig
2011 2010
$000 $000 $000 $000
Non-current assets 15,284 14,602
Current assets
Inventory 2,149 1,092
Trade receivables 3,200 1,734
5,349 2,826
Total assets 20,633 17,428
-
Current liabilities
Trade payables 2,865 1,637
Overdraft 1,500 250
4,365 1,887
Equity 上 资本 _
Ordinary shares 8,000 8,000
Reserves 4,268 3,541
\ 12,268 11,541
Long-term liabilities
7% Bonds 4,000 4,000
Total liabilities 20,633 17,428
 课程设计
• F9课程本身的特点：每个模块独立性强！
• 所以课程设计按照考纲模块划分为7个部分。每个部分我根据教材
和历年考题编制讲义录像教授大家。大家跟随录像学习。课后必
须对讲义中（我已教授的习题）进行复习，文字题反复看理解记
住关键词，计算部分必须要能够脱离答案独立完成。这样就已经
基本符合了通过（保守说飘过）考试的标准。
• 得选择题者得天下
 听课提示
• 以前教P阶段，我最喜欢抱怨的一句话。
• 2016年09月改革对F9的影响
• 资料？？？
2014/06 Q2
• (a) Explain ‘risk appetite’ and ‘risk awareness’, and
discuss how Bob’s risk appetite might affect his choice of
investments. (8 marks)
Choice of investments
• If Bob is generally risk averse, he will seek out investments
which have low levels of uncertainty and predictable levels
of return. The ‘price’ of this certainty is usually a lower
return over time than a more risky investment.
• Typical lower-risk investments are company bonds (long-
term loans to a company at an agreed rate of interest) or,
presumed to be even lower risk, government bonds. These
are issued when a country’s national debt is financed by
individual loans at an agreed annual rate over a fixed
number of years.
Choice of investments
• If Bob is generally risk seeking, it is likely he wants greater
returns and is prepared to bear a higher risk in order to
achieve them. He will accordingly seek out investments
which have greater levels of uncertainty and more volatile
levels of return.
• These are likely to be shares in companies in complex or
more turbulent environments, possibly less diversified, and
with a possibility of substantial loss as well as capital
growth.
Choice of investments
• Larger companies with diversified interests and a relatively
predictable long-term level of return are less likely to be a
key part of a risk-seeker’s investment. He or she is more
likely to opt for smaller companies, those in emerging
markets or those in growth sectors which could make a
substantial long-term return compared to more established
alternatives. Beta factors are one way of measuring and
assessing the relative financial risks or volatility faced by an
individual company in a market as a whole. Risk seeking
investors may invest in companies with a beta greater than
one.
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Part A Financial management function
The nature and purpose of
financial management
 What is financial management?
• Financial management can be defined as the
management of the finances of an organisation in order
to achieve the financial objectives of the organisation. The
usual assumption in financial management for the private
sector is that the objective of the company is to maximise
shareholders' wealth.
 Financial planning

The financial manager will need to plan to ensure that enough

funding is available at the right time to meet the needs of the
organisation for short-, medium- and long-term capital.
a) In the short term, funds may be needed to pay for purchases of
inventory, or to smooth out changes in receivables, payables and
cash: the financial manager must ensure that working capital
requirements (ie requirements for day to day operations) are
met.
b) In the medium or long term, the organisation may have
planned purchases of non-current assets, such as plant and
equipment, for which the financial manager must ensure that
funding is available.
 Financial control

• The control function of the financial manager becomes

relevant for funding which has been raised. Are the
various activities of the organisation meeting its
objectives? Are assets being used efficiently? To answer
these questions, the financial manager may compare data
on actual performance with forecast performance.
 Financial management decisions
• The financial manager makes decisions relating to
investment, financing and dividends. The
management of risk must also be considered.
 Financial management decisions

• The retention of profits is a financing decision. The other

side of this decision is that if profits are retained, there is
less to pay out to shareholders as dividends, which might
deter investors.
• An appropriate balance needs to be struck in addressing
the dividend decision: how much of its profits should the
company pay out as dividends and how much should it
retain for investment to provide for future growth and
new investment opportunities?
 Ex
In relation to the financial management of a company, which of the
following provides the best definition of a firm’s primary financial
objective?
A. To achieve long-term growth in earnings
B. To maximise the level of annual dividends
C. To maximise the wealth of its ordinary shareholder
D. To maximise the level of annual profits
 Ex
Which of the following are the THREE key areas covered by
financial management decisions?
Investment
Cash flow
Finance
Dividend (2 marks)
 Ex
Drag and drop to indicate whether the following statements are
true or false.
Statement True False
Financial management is concerned with the
long term raising of finance and the allocation
and control of resources.
Management accounting is concerned with
providing information for the more day-to-day
functions of control and decision making.
Financial accounting is concerned with
providing information about the historical results
of past plans and decisions
2016/09 Q10

Which of the following would you expect to be the

responsibility of financial management?
A Producing annual accounts
B Producing monthly management accounts
C Advising on investment in non-current assets
D Deciding pay rates for staff
练习
 1
Which THREE of the following are the main types of decision
facing the financial manager in a company?
A. Income decision
B. Investment decision
C. Dividend decision
D. Financing decision
 1
Answer B, C and D
Financial management aims to ensure that the money is available to
finance profitable projects and to select those projects which the
company should undertake. Once profits have been made the decision
then needs to be made about how much to distribute to the owners
and how much to re-invest for the future. Income decisions are really
sub-divisions of the investment decision.
 2
The following statements relate to various functions within a business.
1 The financial management function makes decisions relating to finance
2 Management accounts incorporate non-monetary measures
Are the statements true or false?
A. Statement 1 is true and statement 2 is false
B. Both statements are true
C. Statement 1 is false and statement 2 is true
D. Both statements are false
 2
Answer B
Both statements are true.
 3
Are the following statements true or false?
True False
1 Cash flow forecasting is primarily the
responsibility of financial reporting
2 Whether to undertake a particular new
project is a financial management decision
(2 marks)
 3
Answer
Statement 2 is true and statement 1 is false. The financial management
function is responsible for making decisions relating to investment (statement
2) but will also have primary responsibility for cash flow forecasting
(statement 1). Financial reporting control cash flow reporting but not
forecasting.
 4
Which of the following tasks would typically be carried out by
a member of the financial management team?
A. Evaluating proposed expansion plans
B. Review of overtime spending
C. Depreciation of non-current assets
D. Apportioning overheads to cost units
 4
Answer A
A review of overtime spending and apportioning overheads to cost
units is typically carried out by a member of the management
accounting team.
Depreciation of non-current assets is typically carried out by a
member of the financial accounting team.
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Financial objectives and the
relationship with corporate
strategy
 Strategy

• Strategy is a course of action to achieve an objective. There are

three main levels of strategy in an organisation.
• Corporate: the general direction of the whole organisation
• Business: how the organisation or its business units tackle
particular markets
• Operational/functional: specific strategies for different
departments of the business
 Strategy

• Strategy may be defined as a course of action, including the

specification of resources required, to achieve a specific
objective.
• Strategy can be short term or long term, depending on the time
horizon of the objective it is intended to achieve.
• This definition also indicates that since strategy depends on
objectives or targets, the obvious starting point for a study of
strategy is the identification and formulation of objectives.
 Corporate objectives
Corporate objectives are relevant for the organisation as a whole,
relating to key factors for business success.
Objectives should relate to the key factors for business success,
which are typically as follows.
• Profitability (return on investment)
• Market share
• Growth
• Cash flow
• Customer satisfaction
• The quality of the firm's products
• Industrial relations
• Added value
 Corporate objectives

• Financial targets may include targets for: earnings; earnings per

share; dividend per share; gearing level; profit retention;
operating profitability.
• The usual assumption in financial management for the private
sector is that the primary financial objective of the company
is to maximise shareholders' wealth.
 Shareholder wealth maximisation
The wealth of the shareholders in a company comes from:
• Dividends received
• Market value of the shares
A shareholder's return on investment is obtained in the form of:
• Dividends received
• Capital gains from increases in the market value of their shares
 Shareholder wealth maximisation

If there is an increase in earnings and dividends, management

can hope for an increase in the share price too, so that
shareholders benefit from both higher revenue (dividends) and
also capital gains (higher share prices). Total shareholder
return is a measure which combines the increase in share price
and dividends paid and can be calculated as:
(P1 - P0 + D1) / P0

Where
P0 is the share price at the beginning of the period
P1 is the share price at the end of period
D1 is the dividend paid
 Ex
H Co's share price is $3.50 at the end of 20X1 and this includes a capital
gain of $0.75 since the beginning of the period. A dividend of $0.25 has
been declared for 20X1.
What is the shareholder return (to 1 dp)?
%
 Ex
Answer 36.4%
Shareholder return = (P1 – P0 + D1) / P0.
∴ shareholder return = (0.75 + 0.25) / (3.50 – 0.75)
= 36.4%
 2014/12 Q1
TKQ Co has just paid a dividend of 21 cents per share and its share
price one year ago was $3·10 per share. The total shareholder return
for the year was 19·7%.

What is the current share price?

A. $3·50
B. $3·71
C. $3·31
D. $3·35
 Profit maximisation

• Accounting profits can be manipulated to some extent

by choices of accounting policies.
• Profit does not take account of risk. Shareholders will
be very interested in the level of risk, and maximising
profits may be achieved by increasing risk to
unacceptable levels.
• Profits on their own take no account of the volume of
investment
 Question

• Can you give three examples of how accounting profits might

be manipulated?
Answer

Here are some examples you might have chosen.

a) Provisions, such as provisions for depreciation
or anticipated losses
b) The capitalisation of various expenses, such as
development costs
c) Adding overhead costs to inventory valuations
 2014/12 Q12
Which of the following statements concerning profit are
correct?
1 Accounting profit is not the same as economic profit
2 Profit takes account of risk
3 Accounting profit can be manipulated by managers

A. 1 and 3 only
B. 1 and 2 only
C. 2 and 3 only
D. 1, 2 and 3
 Earnings per share growth

• Earnings per share is calculated by dividing the net profit or

loss attributable to ordinary shareholders by the weighted
average number of ordinary shares.
• Earnings per share (EPS) is widely used as a measure of a
company's performance and is of particular importance in
comparing results over a period of several years. A company
must be able to sustain its earnings in order to pay dividends
and reinvest in the business so as to achieve future growth.
Investors also look for growth in the EPS from one year to the
next.
 Ex
Last year ABC Co made profits before tax of $2,628,000. Tax
amounted to $788,000.
ABC Co's share capital was $2,000,000 (2,000,000 shares of $1) and
$4,000,000 6% preference shares.
What was the earnings per share (EPS) for the year?
A. 31c
B. 80c
C. 92c
D. 119c
 Answer
Answer B 80c
$
Profit before tax 2,628,000
Less tax 788,000
Profit after tax 1,840,000
Less preference dividend (6% × 4,000,000) 240,000
Earnings attributable to ordinary shareholders 1,600,000
Number of ordinary shares 2,000,000
EPS = 1,600,000 / 2,000,000 = 80c
 Other financial targets

a) A restriction on the company's level of gearing, or debt. For

example, a company's management might decide:
I. The ratio of long-term debt capital to equity capital
should never exceed, say, 1:1.
II. The cost of interest payments should never be higher
than, say, 25% of total profits before interest and tax.
 Other financial targets

b) A target for profit retentions. For example, management

might set a target that dividend cover (the ratio of
distributable profits to dividends actually distributed) should
not be less than, say, 2.5 times.
c) A target for operating profitability. For example,
management might set a target for the profit/sales ratio (say,
a minimum of 10%) or for a return on capital employed (say,
a minimum ROCE of 20%).
 Non-financial objectives

a) The welfare of employees

b) The welfare of management
c) The provision of a service
d) The fulfilment of responsibilities towards customers
e) The fulfilment of responsibilities towards suppliers
f) The welfare of society as a whole
 2014/12 Q3
Which of the following statements are correct?
1. Maximising market share is an example of a financial objective
2. Shareholder wealth maximisation is the primary financial objective
for a company listed on a stock exchange
3. Financial objectives should be quantitative so that their achievement
can be measured

A. 1 and 2 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3
 Ex
Drag and drop to indicate whether the following objectives are
financial or non-financial objectives of a company.
Objective Financial Non-financial
Maximisation of market share
Earnings growth
Sales revenue growth
Achieving a target level of customer satisfaction
Achieving a target level of return on capital
employed
练习
 1
Which of the following is an example of a financial objective
that a company might choose to pursue?
A. Dealing honestly and fairly with customers on all occasions
B. Provision of good working conditions and industrial relations
C. Producing environmentally friendly products
D. Restricting the level of gearing to below a specified target
level
 1
Answer D
This is a financial objective that relates to the level of financial risk
that the company is prepared to accept. The other objectives are
non-financial.
2 2016/12 Q9
Green Co, a listed company, had the following share prices
during the year ended 31 December 20X5:

During the year, Green Co paid a total dividend of $0.15

per share
What is the total shareholder return for 20X5?

A.26% B.22% C.32% D.36%

 2
A.26%

TSR = 100×3.00 - 2.50 + 0.15/2.50 = 26%

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Stakeholders
 Stakeholders

• Stakeholders are individuals or groups who are affected by the

activities of the firm. They can be classified as internal
(employees and managers), connected (shareholders,
customers and suppliers) and external (local communities,
pressure groups, government).
 Ex
Which of the following is an example of an internal stakeholder
in a firm?
A. Company directors
B. Customers
C. Suppliers
D. Finance providers
 Objectives of stakeholder groups

a) Ordinary (equity) shareholders

Ordinary (equity) shareholders are the providers of the risk
capital of a company. Usually their goal will be to maximise the
wealth which they have as a result of the ownership of the shares
in the company.
 Objectives of stakeholder groups

b) Trade payables (Suppier)

Trade payables have supplied goods or services to the firm.
Trade payables will generally be profit maximising firms
themselves and have the objective of being paid the full
amount due by the date agreed. On the other hand, they usually
wish to ensure that they continue their trading relationship with
the firm and may sometimes be prepared to accept later payment
to avoid jeopardising that relationship.
 Objectives of stakeholder groups

c) Long-term payables (creditors)

Long-term payables, which will often be banks, have the
objective of receiving payments of interest and capital on the
loan by the due date for the repayments. Where the loan is
secured on assets of the company, the lender will be able to
appoint a receiver to dispose of the company's assets if the
company defaults on the repayments. To avoid the possibility
that this may result in a loss to the lender if the assets are not
sufficient to cover the loan, the lender will wish to minimise the
risk of default and will not wish to lend more than is prudent.
Objectives of stakeholder groups
d) Employees
Employees will usually want to maximise their rewards
paid to them in salaries and benefits, according to the
particular skills and the rewards available in alternative
employment. Most employees will also want continuity of
employment.
Objectives of stakeholder groups

e) Government
Government has objectives which can be formulated in
political terms. Government agencies affecct the firm's
activities in different ways including through taxation of the
firm's profits, the provision of grants, health and safety
legislation, training initiatives, and so on. Government
policies will often be related to macroeconomic objectives,
such as sustained economic growth and high levels of
employment.
Objectives of stakeholder groups

f) Management
Management has, like other employees (and managers who
are not directors will normally be employees), the objective
of maximising its own rewards. Directors, and the
managers to whom they delegate responsibilities, must
manage the company for the benefit of shareholders. The
objective of reward maximisation might conflict with the
exercise of this duty.
练习
 1
The directors of Portico pic have recently engaged a firm of consultants
to negotiate standard terms of trade for one of its strategic business
units. This includes the agreement by Portico pic to pay a 5% penalty
on any late invoice settlement.
This policy is an illustration of the company's concern for which
major stakeholder?
A. Lenders
B. Suppliers
C. Customers
D. Trade unions
 1
Answer B
Invoices are received from suppliers, not any of the other three stakeholders.
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Encouraging shareholder
wealth maximisation
Shareholders and management
 Encouraging shareholder wealth maximisation

Explain ways in which the directors of Darn Co can be

encouraged to achieve the objective of maximisation of
shareholder wealth. (6 marks)
 Managerial reward schemes

• As agents of the company’s shareholders, the directors may not

always act in ways which increase the wealth of shareholders, a
phenomenon called the agency problem.
• They can be encouraged to increase or maximise shareholder
wealth by managerial reward schemes such as performance-
related pay and share option schemes.
• Through these methods, the goals of shareholders and directors
may increase in congruence.
 Managerial reward schemes
• Performance-related pay links part of the remuneration of
directors to some aspect of corporate performance, such
as levels of profit or earnings per share.
• One problem here is that it is difficult to choose an aspect
of corporate performance which is not influenced by the
actions of the directors, leading to the possibility of
managers influencing corporate affairs for their own benefit
rather than the benefit of shareholders, for example,
focusing on short-term performance while neglecting
the longer term.
 Managerial reward schemes
• Share option schemes bring the goals of shareholders and
directors closer together to the extent that directors become
shareholders themselves.
• Share options allow directors to purchase shares at a specified
price on a specified future date, encouraging them to make
decisions which exert an upward pressure on share prices.
• Unfortunately, a general increase in share prices can lead to
directors being rewarded for poor performance, while a general
decrease in share prices can lead to managers not being rewarded
for good performance.
• However, share option schemes can lead to a culture of
performance improvement and so can bring continuing benefit to
stakeholders.
 Ex
Managerial reward schemes should help ensure managers take
decisions which are consistent with the objectives of shareholders.
Which THREE of the following are characteristics of a carefully
designed remuneration package?
A. Linking of rewards to changes in shareholder wealth
B. Matching of managers' time horizons to shareholders’ time
horizons
C. Possibility of manipulation by managers
D. Encouragement for managers to adopt the same attitudes to risk as
shareholders
 Ex
Answer A, B and D
Managerial reward schemes should be clearly defined and impossible
to manipulate.
 Ex
Which of the following are typical criticisms of executive share
option schemes (ESOPs)?
1. When directors exercise their options, they tend to sell the shares
almost immediately to cash in on their profits
2. If the share price falls when options have been awarded, and the
options have no value, they cannot act as an incentive
3. Directors may distort reported profits to protect the share price
and the value of their share options
A. 1 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2, and 3
 Regulatory requirements

• Regulatory requirements can be imposed through

corporate governance codes of best practice and stock
market listing regulations.
• Corporate governance codes of best practice, such as
the UK Corporate Governance Code, seek to reduce
corporate risk and increase corporate accountability.
• An independent perspective is brought to directors’
decisions by appointing non-executive directors to
create a balanced board of directors, and by appointing
non-executive directors to remuneration committees and
audit committees.
Regulatory requirements
 Ex
What is the main purpose of corporate governance?
A. To separate ownership and management control of organisations
B. To maximise shareholder value
C. To facilitate effective management of organisations and to make
organisations more visibly accountable to a wider range of stakeholders
D. To ensure that regulatory frameworks are adhered to
 Ex
Which of the following does NOT form part of the objectives of a
corporate governance best practice framework?
Separation of chairperson and CEO roles
Establishment of audit, nomination and remuneration committees
Minimisation of risk
Employment of non-executive directors
Answer Minimisation of risk.
Corporate governance best practice aims to manage risk to desired and
controlled levels, not to minimise risk. Running a business implies
taking calculated risks in anticipation of a commensurate return.
 Regulatory requirements

• Stock exchange listing regulations can place obligations

on directors to manage companies in ways which support
the achievement of objectives such as the maximisation of
shareholder wealth.
• For example, listing regulations may require companies to
publish regular financial reports, to provide detailed
information on directorial rewards and to publish detailed
reports on corporate governance and corporate social
responsibility.
 SME& Listed company

a) Discuss the reasons why small and medium-sized

entities (SMEs) might experience less conflict
between the objectives of shareholders and directors
than large listed companies. (4 marks)
 SME& Listed company

• Conflict between the objectives of shareholders and

directors in a listed company is associated with the agency
problem, which has three main causes.
• First, there is a separation between ownership and control,
as shareholders and directors are different people.
• Second,the objectives of shareholders and directors may be
different. （self-interest）
• Third, there is asymmetry of information, so that
shareholders have access to less information about the
company than directors, making it hard for shareholders to
monitor the actions and decisions of directors.
 SME& Listed company

• One reason why small and medium-sized entities (SMEs)

might experience less conflict between shareholders and
directors than larger listed companies is that in many cases
shareholders are not different from directors, for example in
a family-owned company. Where that is the case, there is no
separation between ownership and control, there is no
difference between the objectives of shareholders and
directors, and there is no asymmetry of information. Conflict
between the objectives of shareholders and directors will
therefore not arise.
 SME& Listed company

• Another reason why there may be less conflict between the

objectives of shareholders and directors in SMEs than in
larger listed companies is that the shares of SMEs are often
owned by a small number of shareholders, who may be in
regular contact with the company and its directors. In these
circumstances, the possibility of conflict is very much
reduced.
练习
 1 2014/12 Q11
Which of the following is LEAST likely to fall within financial
management?
A. The dividend payment to shareholders is increased
B. Funds are raised to finance an investment project
C. Surplus assets are sold off
D. Non-executive directors are appointed to the remuneration
committee
1
Answer D
 2
The agency problem is a driving force behind the growing importance
attached to sound corporate governance.
In this context, who are the agents?
A. Customers
B. Shareholders
C. Managers
D. Auditors
 2
Answer C
The separation of ownership and control creates a situation where
managers act as the agents of the owners (shareholders).
 3
Under the terms of the UK Corporate Governance Code, what are
the only type of directors permitted to sit on a company's audit
committee?
A. Independent non-executive directors
B. Non-executive directors
C. Executive directors
D. Directors with financial experience
 3
Answer A
The Code clearly states that the requirement is for independent non-
executive directors, but only one member of the committee (as a
minimum) needs have recent and relevant financial experience, not all
of them.
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Measuring the achievement
of stakeholder objectives
 Measuring the achievement of stakeholder objectives
Ratio analysis is often used by stakeholders to assess the
performance of a company. Ratios are normally split into 4
categories :
a) Profitability – important to assess managerial performance
b) Debt – important to banks
c) Liquidity – important to suppliers and customers
d) Shareholder investor ratios – important to shareholders
Profitability ratios include:
Profit from operations
ROCE = %
Capital employed
Profit from operations Revenue
ROCE = ×
Revenue Capital employed
Profit margin × Asset turnover
Debt ratios include:
Book value of debt
Gearing =
Book value of equity
Profit from operations
Interest cover =
Interest
Liquidity ratios include:
Current ratio = Current assets : Current liabilities
Acid Test ratio = Current assets less inventory: Current liabilities
Shareholder investor ratios include:
Dividend yield = Dividend per share ×100
Market price per share

Price earnings (P/E) ratio = Market price per share

EPS

Dividend cover = Earning per share

Div per share
Dividend payout ratio
 Ex
The following information relates to A Co for the last financial year.
Revenue $200 million
Asset turnover 10 times
Interest payable $1.5 million
Interest cover ratio 5 times
What is the return on capital employed for A Co for the year?
%
Answer 37.5%
ROCE = Profit before interest and tax/Capital employed
As interest cover = 5 times, and interest payable = $1.5m. Profit before
interest and tax = 5 × 1.5 = $7.5m
Asset turnover = Revenue/Capital employed. Revenue = $200m so
Capital employed = 200/10 = $20m
Therefore ROCE = 7.5 / 20 = 0.375 = 37.5%
 Ex
Which of the following statements are valid criticisms of return on capital
employed (ROCE) as a performance measure?
1 It is misleading if used to compare departments with different levels of risk
2 It is misleading if used to compare departments with assets of different ages
3 Its use may discourage investment in new or replacement assets
4 The figures needed are not easily available
2 and 3 only
2 and 4 only
1 and 3 only
1, 2 and 3
 Ex
The following information relates to the ordinary shares of G Co.
Earnings per share 60c
Dividend cover 2.5
Published dividend yield 4.8%
What is the price of G Co’s ordinary shares implied by the data
above?
A. 24c
B. 115c
C. 313c
D. 500c
Answer D 500 cents
Step 1 Calculate the dividend amount using dividend cover
Dividend cover = EPS / Dividend per share
∴ Dividend per share = EPS / Dividend cover
∴ Dividend per share = 60 / 2.5 = 24c
Step 2 Calculate the market price of share using dividend yield
Dividend yield = Dividend per share / Market price per share
∴ Market price per share = Dividend per share / Dividend yield
∴ Market price per share = 24 / 0.048 = 500c
 Ex
A company has recently declared a dividend of 12c per share. The share
price is $3.72 cum div and earnings for the most recent year were 60c
per share.
What is the P/E ratio?
A. 0.17
B. 6.00
C. 6.20
D. 6.60
Answer B

MV ex div = 3.72 – 0.12 = 3.60. The ex div price is used because it

reflects the underlying value of the share after the dividend has been
paid.
 2015/06 Q4
Which of the following statements is correct?

A. One of the problems with maximising accounting profit

as a financial objective is that accounting profit can be
manipulated
B. A target for a minimum level of dividend cover is a target
for a minimum dividend payout ratio
C. The welfare of employees is a financial objective
D. One reason shareholders are interested in earnings per
share is that accounting profit takes account of risk
练习
 1 2015/06 Q3
The following information relates to a company:
Year 0 1 2 3
Earnings per share (cents) 30·0 31·8 33·9 35·7
Dividends per share (cents) 13·0 13·2 13·3 15·0
Share price at start of year ($) 1·95 1·98 2·01 2·25

Which of the following statements is correct?

A. The dividend payout ratio is greater than 40% in every year in the period
B. Mean growth in dividends per share over the period is 4%
C. Total shareholder return for the third year is 26%
D. Mean growth in earnings per share over the period is 6% per year
1
Answer D
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Not for profit organisations
 Value for money

Many organisations are not for profit, in this case a more appropriate
objective is to make sure that the organisation is getting good value
for money; economy, efficiency, effectiveness.
a) Economy – purchase of inputs of appropriate quality at minimum
cost
b) Efficiency – use of these inputs to maximise output
c) Effectiveness – use of these inputs to achieves it goals (quality,
speed of response)
 Ex
Which of the following is most appropriate as an objective of a not-
for-profit organisation?
A. To achieve long term growth in earnings
B. To maximise shareholder wealth
C. To make efficient use of resources
D. To minimise input costs
Answer C
Not-for-profit organisations have objectives generally
concerned with efficient use of resources in the light of
specific targets. Controlling input costs will be important
(economy) but minimising input costs would be likely to
affect quality.
 Ex
A school decides to have larger classes, and examination results suffer
as a result. In terms of the 'value for money' framework, which one of
the following statements is true?
Economy has increased but efficiency has decreased
Efficiency has increased but effectiveness has decreased
Economy has increased but effectiveness has decreased
Economy has increased, but efficiency and effectiveness have
decreased
Answer Efficiency has increased but effectiveness has decreased
Economy is the cost of inputs (for example teacher salaries). This is not
mentioned in the question.
Efficiency is the ratio of inputs to outputs. Each teacher (input) is now
teaching more students, so efficiency has increased.
Effectiveness is the quality of outputs. The output in this example is
exam results, which have suffered - hence effectiveness is reduced.
 Ex
Value for money is an important objective for not-for-profit
organisations.
Which of the following actions is consistent with increasing
value for money?
A. Using a cheaper source of goods and thereby decreasing the
quality of not-for-profit organisation services
B. Searching for ways to diversify the finances of the not-for-
profit organisation
C. Decreasing waste in the provision of a service by the not-for-
profit organisation
D. Focusing on meeting the financial objectives of the not-for-
profit organization
 2015/06 Q8
Which of the following statements are correct?
1. Share option schemes always reward good performance by
managers
2. Performance-related pay can encourage dysfunctional
behaviour
3. Value for money as an objective in not-for-profit organisations
requires the pursuit of economy, efficiency and effectiveness

A. 1 and 2 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3
 2016/12 Q14
14. Which of the following statements is true?

A. Value for money is usually taken to mean economy,

efficiency and engagement
B. Cum dividend means the buyer of the share is not entitled to
receive the dividend shortly to be paid
C. The dividend payout ratio compares the dividend per share
with the market price per share
D. The agency problem means that shareholder wealth is not
being maximised
 Answer
D. The agency problem means that shareholder wealth is not
being maximized

It is correct that the agency problem means that shareholder

wealth is not being maximized.
练习
 1
A government body uses measures based upon the 'three Es' to measure
value for money generated by a publicly funded hospital.
Which of the following relates to efficiency?
Cost per successfully treated patient
Cost per operation
Proportion of patients readmitted after unsuccessful treatment
Percentage change in doctors’ salaries compared with previous year
 1
Answer
‘Cost per successfully treated patient’ relates to efficiency. Efficiency
measures relate the resources used to the output produced (getting as
much as possible for what goes in).
‘Proportion of patients readmitted after unsuccessful treatment’ relates
to effectiveness. Effectiveness means, getting done, by means of
economy and efficiency, what was supposed to be done.
‘Cost per operation’ relates to economy (spending money frugally). As
does ‘Percentage change in doctors’ salaries compared with previous
year’.
 2
In not-for-profit businesses and state-run entities, a value-for-money
audit can be used to measure performance. It covers three key areas:
economy, efficiency and effectiveness. Which of the following could
be used to describe effectiveness in this context?
Avoiding waste of inputs
Achieving agreed targets
Achieving a given level of profit
Obtaining suitable quality inputs at the lowest price
 2
Answer Achieving agreed targets
Effectiveness can only be measured in terms of achieved performance.
Economy consists of minimising costs, for example, by obtaining
suitable inputs at the lowest price.
Efficiency, in the narrow sense used here, consists of achieving the
greatest output per unit of input: avoiding waste of inputs would
contribute to this. Achieving a given level of profit is a measure of
overall efficiency.
 3
Which TWO of the following statements are correct?
1. Maximising market share is an example of a financial objective
2. Shareholder wealth maximisation is the primary financial
objective for a company listed on a stock exchange
3. Financial objectives should be quantitative so that their
achievement can be measured
4. Three E's are used as a performance measure to assess value of
money in not for profit organisations. The three E's stand for
economy, efficiency and environment
 3
Answer Statements 2 and 3 are correct.
The three E's in statement 4 should be economy, efficiency and
effectiveness.
 4
Which of the following is an ′efficiency′ target that a not for
profit organisation might put in place?
A. Negotiation of bulk discounts
B. Pay rates for staff of appropriate levels of qualification
C. Staff utilisation
D. Customer satisfaction ratings
 4
Answer C
Negotiation of bulk discounts is an 'economy target' (A).
Paying rates for staff of appropriate levels of qualification is also
an /economy, target (B).
Customer satisfaction rating is an 'effectiveness' target (D).
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