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S T U D Y ÐßÐÛÎ Úç T E Ú×ÒßÒÝ×ßÔ ÓßÒßÙÛÓÛÒÌ X T In this edition approved by ACCA We discuss the best strategies for studying for ACCA exams WWW.ACCAGLOBE.TKWe highlight the most important elements in the syllabus and the key skills you will need We signpost how each chapter links to the syllabus and the study guide We provide lots of exam focus points demonstrating what the examiner will want you to do We emphasise key points in regular fast forward summaries We test your knowledge of what you've studied in quick quizzes We examine your understanding in our examquestion bank ThiNganHang.comBPP'sWe ri-Learneferenceandall thei-Passimportaproducts also support this paper.nt topics in our full index ÚÑÎ ÛÈßÓÍ ×Ò ÜÛÝÛÓÞÛÎ îððç ßÒÜ ÖËÒÛ îðïð ThiNganHang.com
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First edition 2007 Third edition June 2009 ISBN 9780 7517 6373 7 (Previous ISBN 9780 7517 4732 4) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library All our rights reserved. No part of this publication may be Published by reproduced, stored in a retrieval system or transmitted, in BPP Learning Media Ltd any form or by any means, electronic, mechanical, BPP House, Aldine Place photocopying, recording or otherwise, without the prior London W12 8AA written permission of BPP Learning Media Ltd. www.bpp.com/learningmedia We are grateful to the Association of Chartered Certified WWW.ACCAGLOBE.TKPrinted in the United Kingdom Accountants for permission to reproduce pastexamination questions. The suggested solutions in theexam answer bank have been prepared by BPP Learning Media Ltd, except where otherwise stated. Your learning materials, published by BPP ThiNganHang.comLearning Media Ltd, are printed on papersourced from sustainable, managed forests. © BPP Learning Media Ltd 2009 ii ThiNganHang.com
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Contents Page Introduction How the BPP ACCA-approved Study Text can help you pass iv Studying F9 vii The exam paper and exam formulae viii Part A Financial management function 1 Financial management and financial objectives 3 Part B Financial management environment 2 The economic environment for business 35 3 Financial markets and institutions 53 Part C Working capital management 4 Working capital 65 5 Managing working capital 79 6 Working capital finance 103 Part D Investment appraisal 7 Investment decisions 127 8 Investment appraisal using DCF methods 141 9 Allowing for inflation and taxation 157 10 Project appraisal and risk 169 11 Specific investment decisions 181 Part E Business finance 12 Sources of finance 201 13 Dividend policy 223 14 Gearing and capital structure 231 Part F Cost of capital 15 The cost of capital 253 WWW.ACCAGLOBE.TK16 Capital structure 275 Part G Business valuations 17 Business valuations 293 18 Market efficiency 313 Part H Risk management 19 Foreign currency risk 325 ThiNganHang.com20 Interest rate risk 349 Mathematical tables 361 Exam question bank 367 Exam answer bank 389 Index 447 Review form and free prize draw ................................................................... Contents iii ThiNganHang.com
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A note about copyright Dear Customer What does the little © mean and why does it matter? Your market-leading BPP books, course materials and e-learning materials do not write and update themselves. People write them: on their own behalf or as employees of an organisation that invests in this activity. Copyright law protects their livelihoods. It does so by creating rights over the use of the content. Breach of copyright is a form of theft as well as being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics. With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: Photocopying our materials is a breach of copyright Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright You can, of course, sell your books, in the form in which you have bought them once you have finished with them. (Is this fair to your fellow students? We update for a reason.) But the e-products are sold on a single user licence basis: we do not supply unlock codes to people who have bought them second-hand. And what about outside the UK? BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website. A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that do. If they act illegally and unethically in one area, can you really trust them? WWW.ACCAGLOBE.TK ThiNganHang.com iv Introduction ThiNganHang.com
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How the BPP ACCA-approved Study Text can help you pass your exams AND help you with your Practical Experience Requirement! NEW FEATURE the PER alert! Before you can qualify as an ACCA member, you do not only have to pass all your exams but also fulfil a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the PER alert feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement. Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success. Developing exam awareness Our Texts are completely focused on helping you pass your exam. Our advice on Studying F9 outlines the content of the paper, the necessary skills the examiner expects you to demonstrate and any brought forward knowledge you are expected to have. Exam focus points are included within the chapters to highlight when and how specific topics were examined, or how they might be examined in the future. Using the Syllabus and Study Guide WWW.ACCAGLOBE.TKwww.accaglobal.com/students/study_exams/qualifications/acca_choose/acca/professional/fm/You can find the syllabus, Study Guide and other useful resources for F9 on the ACCA web site: The Study Text covers all aspects of the syllabus to ensure you are as fully prepared for the exam as possible. Testing what you can do ThiNganHang.comTesting yourself helps you develop the skills you need to pass the exam and also confirms that you canrecall what you have learnt. We include Questions lots of them - both within chapters and in the Exam Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content. Introduction v ThiNganHang.com
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Chapter features Each chapter contains a number of helpful features to guide you through each topic. Topic list Tells you what you will be studying in this chapter and the Topic list Syllabusreference relevant section numbers, together the ACCA syllabus references. Introduction Puts the chapter content in the context of the syllabus as a whole. Study Guide Links the chapter content with ACCA guidance. Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined. Knowledge brought forward from earlier studies What you are assumed to know from previous studies/exams. Summarises the content of main chapter headings, FAST FORWARD allowing you to preview and review each section easily. Examples Demonstrate how to apply key knowledge and techniques. Definitions of important concepts that can often earn you Key terms easy marks in exams. Tell you when and how specific topics were examined, or Exam focus points how they may be examined in the future. Formulae that are not given in the exam but which have to Formula to learn be learnt. This is a new feature that gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement WWW.ACCAGLOBE.TK(PER). Question Give you essential practice of techniques covered in the chapter. Case Study Provide real world examples of theories and techniques. ThiNganHang.comChapter Roundup A full list of the Fast Forwards included in the chapter, providing an easy source of review. Quick Quiz A quick test of your knowledge of the main topics in the chapter. Found at the back of the Study Text with more Exam Question Bank comprehensive chapter questions. Cross referenced for easy navigation. vi Introduction ThiNganHang.com
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Studying F9 This paper examines a wide range of financial management topics, many of which will be completely new to you. You will need to be competent at a range of quite tricky calculations as well as able to explain and discuss financial management techniques and issues. The examiner is Tony Head who was the examiner for Paper 2.4 under the old syllabus. He expects you to be able to perform and comment on calculations, exercise critical abilities, clearly demonstrate understanding of the syllabus and use question information. 1 What F9 is about The aim of this syllabus is to develop the knowledge and skills expected of a finance manager, in relation to investment, financing and dividend policy decisions. F9 is a middle level paper in the ACCA qualification structure. There are some links to material you have covered in F2, particularly short-term decision making techniques. The paper with a direct link following F9 is P4 which thinks strategically and considers wider environmental factors. F9 requires you to be able to apply techniques and think about their impact on the organisation. 2 What skills are required? You are expected to have a core of financial management knowledge You will be required to carry out calculations, with clear workings and a logical structure You will be required to explain financial management techniques and discuss whether they are appropriate for a particular organisation You must be able to apply your skills in a practical context 3 How to improve your chances of passing There is no choice in this paper, all questions have to be answered You must therefore study the entire syllabus, there are no short-cuts Practising questions under timed conditions is essential. BPPs revision kit contains 25 mark questions on all areas of the syllabus Questions will be based on simple scenarios and answers must be focused and specific to the WWW.ACCAGLOBE.TKorganisation Answer all parts of the question. Even if you cannot do all of the calculation elements, you will still be able to gain marks in the discussion parts Make sure you write full answers to discussion sections, not one or two word lists, the examiner is looking for understanding to be demonstrated Plan your written answers and write legibly ThiNganHang.comInclude all your workings and label them clearly 4 Brought forward knowledge You will need to have a good working knowledge of certain management accounting techniques from 1.2 (old syllabus) or F2 (new syllabus). In particular, short-term decision making techniques such as cost- volume-profit analysis and the calculation of relevant costs. This Study Text revises these topics and brought forward knowledge is identified. If you struggle with the examples and questions used, you must go back and revisit your previous work. The examiner will assume you know this material and it may form part of an exam question. Introduction vii ThiNganHang.com
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The exam paper The exam is a threehour paper containing four compulsory 25 mark questions. Analysis of past papers The table below provides details of when each element of the syllabus has been examined and the question number and section in which each element appeared. Further details can be found in the Exam Focus Points in the relevant chapters. Covered in Text Dec June Dec Pilot chapter 2008 2008 2007 Paper FINANCIAL MANAGEMENT FUNCTION 1 Nature & purpose 1 Objectives 1 Stakeholders 1e FINANCIAL MANAGEMENT ENVIRONMENT 2 Economic environment 3 Financial markets and institutions WORKING CAPITAL MANAGEMENT 4, 5 Management 2b,c 3a,b,c,d 4a,b,c 3a,b,c 6 Funding strategies 3d INVESTMENT APPRAISAL 7 Non-discounted cash flow techniques 4b 8, 9 Discounted cash flow techniques 3b 1b, 4a,b,c,d 2a,b 4a,c 10 Risk and uncertainty 2c 11 Specific investment decisions BUSINESS FINANCE 12 Sources of short-term finance 3d 12 Sources of long term-finance 1a, 4a 2b,e 3b,c 13 Dividend policy 3a WWW.ACCAGLOBE.TK14 Finance for SMEs COST OF CAPITAL 15 Calculation 3a 1a,c 1a 16 Gearing (capital structure) 3c 1b,c BUSINESS VALUATIONS 17 Valuation of shares 1b,c,d 2a,c 1a 17 Valuation of debt 4b 1b ThiNganHang.com1819 RISK MANAGEMENTEfficient market hypothesis / practical considerationsCauses of interest rate / exchange rate fluctuations 2d 1c 2b 19 Hedging foreign currency risk 4c,d 4d 2a,c,d 20 Hedging interest rate risk 2a viii Introduction ThiNganHang.com
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Exam formulae Set out below are the formulae you will be given in the exam. If you are not sure what the symbols mean, or how the formulae are used, you should refer to the appropriate chapter in this Study Text. Chapter in Study Text Economic Order Quantity 5 2C D0 = CH Miller-Orr Model 6 1 Return point = Lower limit + ( spread) 3 1 3 3 transaction cost variance of cash flows Spread = 3 4 interest rate The Capital Asset Pricing Model 15 E(r) = R + ß(E (r ) R) i f i m f The Asset Beta Formula 16 Ve V (1d T) ß = e + d a (V V (1 T)) (V V (1 T)) e d e d The Growth Model 15 D (10 g) P = 0 (K g) e Gordons Growth Approximation 15 WWW.ACCAGLOBE.TKg = br The weighted average cost of capital 15 Ve Vd WACC = k + k (1T) V V e V V d e d e d ThiNganHang.comThe Fisher formula 9 (1 + i) = (1 + r)(1 + h) Purchasing Power Parity and Interest Rate Parity 19 (1 h )c (1 i )c S = S F = S 1 0 (1 h ) 0 0 (1 i ) b b Introduction ix ThiNganHang.com
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Financial management and financial objectives Topic list Syllabus reference 1 The nature and purpose of financial management A1(a), (b) 2 Financial objectives and the relationship with A2 (a), (b) corporate strategy 3 Stakeholders A3 (a), (b), (c) 4 Measuring the achievement of corporate objectives A3 (d) 5 Encouraging the achievement of stakeholder A3 (e) objectives 6 Not-for-profit organisations A4 (a), (b), (c) Introduction In Parts A and B of this study text we examine the work of the financialmanagement function and the framework within which it operates.WWW.ACCAGLOBE.TK In this chapter, after introducing the nature and purpose of financial management, we consider the objectives of organisations. We go on to examine the influence of stakeholders on stakeholder objectives. The final part of this chapter examines objectives in not-for-profit organisations. ThiNganHang.com 3 ThiNganHang.com
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Study guide Intellectual level A Financial management function 1 The nature and purpose of financial management (a) Explain the nature and purpose of financial management. 1 (b) Explain the relationship between financial management and financial and 1 management accounting. 2 Financial objectives and the relationship with corporate strategy (a) Discuss the relationship between financial objectives, corporate objectives 2 and corporate strategy. (b) Identify and describe a variety of financial objectives, including: 2 (i) shareholder wealth maximisation (ii) profit maximisation (iii) earnings per share growth 3 Stakeholders and impact on corporate objectives (a) Identify the range of stakeholders and their objectives 2 (b) Discuss the possible conflict between stakeholder objectives 2 (c) Discuss the role of management in meeting stakeholder objectives, 2 including the application of agency theory. (d) Describe and apply ways of measuring achievement of corporate objectives 2 including: (i) ratio analysis, using appropriate ratios such as return on capital employed, return on equity, earnings per share and dividend per share (ii) changes in dividends and share prices as part of total shareholder return (e) Explain ways to encourage the achievement of stakeholder objectives, 2 including: (i) managerial reward schemes such as share options and performance-related pay WWW.ACCAGLOBE.TK(ii) regulatory requirements such as corporate governance codes of bestpractice and stock exchange listing regulations 4 Financial and other objectives in not-for-profit organisations (a) Discuss the impact of not-for-profit status on financial and other objectives. 2 (b) Discuss the nature and importance of Value for Money as an objective in 2 not-for-profit organisations. ThiNganHang.comExam guide(c) Discuss ways of measuring the achievement of objectives in not-for-profitorganisations. 2 The material in this chapter is examinable as an entire discussion question or as a question involving calculations such as ratios and discussion. When doing a ratio analysis question, you must make sure you apply your answer to the organisation in the question. The organisation will not necessarily be a publicly quoted company with shareholders. 4 1: Financial management and financial objectives Part A Financial management function ThiNganHang.com
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1 The nature and purpose of financial management FAST FORWARD Financial management decisions cover investment decisions, financing decisions, dividend decisions and risk management. 1.1 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. 1.2 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 is here ensuring that working capital requirements 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. The financial manager contributes to decisions on the uses of funds raised by analysing financial data to determine uses which meet the organisation's financial objectives. Is project A to be preferred to Project B? Should a new asset be bought or leased? 1.3 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. Forecast data will have been prepared in the light of past performance (historical data) modified to reflect expected future changes. Future changes may include the effects of economic development, for example an economic recovery leading to a forecast upturn in revenues. 1.4 Financial management decisions WWW.ACCAGLOBE.TKThe financial manager makes decisions relating tomanagement of risk must also be considered. investment, financing and dividends. The Investments in assets must be financed somehow. Financial management is also concerned with the management of short-term funds and with how funds can be raised over the long term. 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 ThiNganHang.comneeds to be struck in addressing theout as dividends and how much should it retain for investment to provide for future growth and newinvestment opportunities? dividend decision: how much of its profits should the company pay We shall be looking at various aspects of the investment, financing and dividend decisions of financial management throughout this Study Text. Examples of different types of investment decision Decisions internal to the Whether to undertake new projects business enterprise Whether to invest in new plant and machinery Research and development decisions Investment in a marketing or advertising campaign Part A Financial management function 1: Financial management and financial objectives 5 ThiNganHang.com
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Examples of different types of investment decision Decisions involving Whether to carry out a takeover or a merger involving another business external parties Whether to engage in a joint venture with another enterprise Disinvestment decisions Whether to sell off unprofitable segments of the business Whether to sell old or surplus plant and machinery The sale of subsidiary companies Question Disposal of surplus assets 'The financial manager should identify surplus assets and dispose of them'. Why? Answer A surplus asset earns no return for the business. The business is likely to be paying the 'cost of capital' in respect of the money tied up in the asset, ie the money which it can realise by selling it. If surplus assets are sold, the business may be able to invest the cash released in more productive ways, or alternatively it may use the cash to cut its liabilities. Either way, it will enhance the return on capital employed for the business as a whole. Although selling surplus assets yields short-term benefits, the business should not jeopardise its activities in the medium or long term by disposing of productive capacity until the likelihood of it being required in the future has been fully assessed. 1.5 Management accounting, financial accounting and financial management Of course, it is not just people within an organisation who require information. Those external to the organisation such as banks, shareholders, the Inland Revenue, creditors and government agencies all desire information too. Management accountants provide internally-used information. The financial accounting function provides externally-used information. The management accountant is not concerned with the calculation of earnings per share for the income statement and the financial accountant is not concerned with the WWW.ACCAGLOBE.TKvariances between budgeted and actual labour expenditure. Management information provides a common source from which are prepared financial accounts and management accounts. The differences between the two types of accounts arise in the manner in which the common source of data is analysed. Financial accounts Management accounts Financial accounts detail the performance of an Management accounts are used to aid ThiNganHang.comorganisation over a defined period and the state management to record, plan and control activities of affairs at the end of that period. and to help the decision-making process. Limited companies must, by law, prepare financial There is no legal requirement to prepare accounts. management accounts. The format of published financial accounts is The format of management accounts is entirely at determined by law and by accounting standards. management discretion: no strict rules govern the In principle the accounts of different organisations way they are prepared or presented. can therefore be easily compared. Financial accounts concentrate on the business as a Management accounts canfocus on specific areas of whole, aggregating revenues and costs from an organisation's activities. Information may aid a different operations, and are an end in themselves. decision rather than be an end product of a decision. 6 1: Financial management and financial objectives Part A Financial management function ThiNganHang.com
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Financial accounts Management accounts Most financial accounting information is of a Management accounts incorporate non-monetary monetary nature. measures. Financial accounts present an essentially historic Management accounts are both a historical record picture of past operations. and a future planning tool. As we have seen financial management is the management of finance. Finance is used by an organisation just as, for example, labour is used by an organisation. Finance therefore needs management in a similar way to labour. The management accounting function provides information to ensure the effective management of labour and, in the same way, the financial management function provides information on, for example, projected cash flows to aid the effective management of finance. 2 Financial objectives and the relationship with corporate strategy FAST FORWARD Strategy is a course of action to achieve an objective. 2.1 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 corporate strategy and financial strategy is the identification and formulation of objectives. Key term Financial strategy can be defined as 'the identification of the possible strategies capable of maximising an organisation's net present value, the allocation of scarce capital resources among the competing opportunities and the implementation and monitoring of the chosen strategy so as to achieve stated objectives'. WWW.ACCAGLOBE.TKFinancial strategy depends on stated objectives or targets. Examples of objectives relevant to financial strategy are given below. Case Study The following statements of objectives, both formally and informally presented, were taken from recent annual reports and accounts. ThiNganHang.comTate & LyleThe board of Tate & Lyle is totally committed to a strategy that will achieve a substantial improvement inprofitability and return on capital and therefore in shareholder value. To that end we will:('a global leader in carbohydrate processing') Continue to develop higher margin, higher-value-added and higher growth carbohydrate-based products, building on the Group's technology strengths in our world-wide starch business. Ensure that all retained assets produce acceptable returns. Divest businesses which do not contribute to value creation, and/or are no longer core to the Group's strategy. Conclude as rapidly as practicable our review of the strategic alternatives available to us in our US sugar operations. Part A Financial management function 1: Financial management and financial objectives 7 ThiNganHang.com
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Continue to improve efficiency and reduce costs through our business improvement projects which include employee development and training programmes. Kingfisher ('one of Europe's leading retailers concentrating on market serving the home and family') Customers are our primary focus. We are determined to provide them with an unbeatable shopping experience built on great value, service and choice, whilst rapidly identifying and serving their ever- changing needs. This goal is pursued through some of Europe's best known retail brands and increasingly through innovative e-commerce channels which harness our traditional retailing expertise. By combining global scale and local marketing we aim to continue to grow our business, deliver superior returns to our shareholders and provide unique and satisfying opportunities for our people. 2.2 Corporate objectives FAST FORWARD Corporate objectives are relevant for the organisation as a whole, relating to key factors for business success. Corporate objectives are those which are concerned with the firm as a whole. Objectives should be explicit, quantifiable and capable of being achieved. The corporate objectives outline the expectations of the firm and the strategic planning process is concerned with the means of achieving the objectives. 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 2.3 Financial objectives FAST FORWARD Financial targets may include targets for: earnings; earnings per share; dividend per share; gearing WWW.ACCAGLOBE.TKlevel; profit retention; operating profitabilityThe usual assumption in financial management for the private sector is that the primary financial objective. of the company is to maximise shareholders' wealth. 2.3.1 Shareholder wealth maximisation 12/08 If the financial objective of a company is to maximise the value of the company, and in particular the value ThiNganHang.comof its ordinary shares, we need to be able to put values on a company and its shares. How do we do it?Three possible methods for the valuation of a company might occur to us.(a) Statement of financial position valuation Here assets will be valued on a going concern basis. Certainly, investors will look at a company's statement of financial position. If retained profits rise every year, the company will be a profitable one. Statement of financial position values are not a measure of 'market value', although retained profits might give some indication of what the company could pay as dividends to shareholders. 8 1: Financial management and financial objectives Part A Financial management function ThiNganHang.com
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(b) Break-up basis This method of valuing a business is only of interest when the business is threatened with liquidation, or when its management is thinking about selling off individual assets to raise cash. (c) Market values The market value is the price at which buyers and sellers will trade stocks and shares in a company. This is the method of valuation which is most relevant to the financial objectives of a company. (i) When shares are traded on a recognised stock market, such as the Stock Exchange, the market value of a company can be measured by the price at which shares are currently being traded. (ii) When shares are in a private company, and are not traded on any stock market, there is no easy way to measure their market value. Even so, the financial objective of these companies should be to maximise the wealth of their ordinary shareholders. 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 his or her shares If a company's shares are traded on a stock market, the wealth of shareholders is increased when the share price goes up. The price of a company's shares will go up when the company makes attractive profits, which it pays out as dividends or re-invests in the business to achieve future profit growth and dividend growth. However, to increase the share price the company should achieve its attractive profits without taking business risks and financial risks which worry shareholders. 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 Po D1)/P0 Where P0 is the share price at the beginning of the period WWW.ACCAGLOBE.TKPD11 is the share price at the end of periodis the dividend paid Management should set targets for factors which they can influence directly, such as profits and dividend growth. A financial objective might be expressed as the aim of increasing profits, earnings per share and dividend per share by, say, 10% a year for each of the next five years. ThiNganHang.com2.3.2 Profit maximisation In much of economic theory, it is assumed that the firm behaves in such a way as to maximise profits, where profit is viewed in an economist's sense. Unlike the accountant's concept of cost, total costs by this economist's definition includes an element of reward for the risk-taking of the entrepreneur, called 'normal profit'. Where the entrepreneur is in full managerial control of the firm, as in the case of a small owner-managed company or partnership, the economist's assumption of profit maximisation would seem to be very reasonable. Remember though that the economist's concept of profits is broadly in terms of cash, whereas accounting profits may not equate to cash flows. Part A Financial management function 1: Financial management and financial objectives 9 ThiNganHang.com
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