‘CHAPTER 1 THE FINANCE FUNCTION 46 In the UK, corporate governance:has been addressed by a number of reports, resulting in the Combined Gode. In the USA, corporate governance is addressed by the Sarbanes-Oxley Act. SELF-TEST QUESTIONS. “Answers to these questions can be found on pages 439-40. 4 Explain how the concept of the time value of money can assist a financial manager in deciding between two investment opportunities, 2 Calculate the following values assuming 2 discount rate of 12 per cent: (2) £500 compounded for ive years; (®) the present value of £500 to be received in five years’ time; (©) the present value of £500 received each year for ever; (@) the present value of £500 to be received each year forthe next five years. 8 What are the functions and areas of responsibility under the controt of the financial manager? 4. Give examples to illustrate the high level of interdependence between the decision areas ‘of corporate finance. 5 Given the following corporate objectives, provide a reasoned argument explaining whic! cof them should be the main goal of the financial manager: (2) profit maximisatlo (b) sales maximisation; (© maximisation of benelit to employees and the local community; (@) maximisation of shareholder wealth. 6 Explain how a financial manager can, In practice, maximise the wealth of shareholders. 7 What is meant by the ‘agency problem’ in the context of a public limited company? How is it possible for the agency problem to be reduced in a company? 8 Which of the following will not reduce the agency problem experienced by shareholders? (2) increased monitoring by shareholders; (6) salary bonuses for management based on financial performance; (© the granting of share options to management; (d) the use of restrictive covenants in bond deeds; (©) the use of shorter contracts for management ©. What goals mightbe pursued by managers instead of maximisation of shareholder wealth? 410 Do you consider the agency problem to be of particular relevance to UK public limited companies? 30CHAPTER 1 THE FINANGE FUNCTION 92 Questions with an asterisk (+) are at an advanced.level 4 Discuss ways in which the shareholders of a company can encourage its managers to act ia way which is consistent with the objective of maximisation of shareholder wealth. 2 The primary financial objective of corporate finances usually taken to be the maximisation of sharcholder wealth. Discuss what other objectives may be important to a public limited company and whether such objectives ate consistent with the primary objective of shareholder wealth maximisation, 3 _ Discuss whether recent UK initiatives in the area of corporate governance have served to diminish the agency problem with respect to UK listed companies. 4. Giitically evaluate the differing approaches taken by the US and UK governments to solve the shortcomings of thelr corporate governance systems, References puter He and Rbstein,L. (2006) The Sarbanes-Orley Debacle: What we've lame; how to ft ‘Washington: AE! Pes. Cadbury Commitee (1982) Commitee on the Financial Aspects of Corporate Coveinance: Final Report, December. Financia Reporting Counc (2005) Review of te Turnbull Guidance on Internal Conte, June. Financial Reporting Counc (2010) The UK Stewardship Code, Jy Financial Reporting Counclt (2010) The UK Carpaate Governance Code, June Friedman, M. (1970) The social responsibilty of busines sto increase Is profs’, New York ‘Magazine, 30 September, Grant Thomton (2010) A Chonging kandscape: Are you ready? Evolving withthe Code, December. Gaeenbury, R (1995) Directors" Remuneration: Report of a Study Group chaled by Si Richard Greenbury, London: Gee & Co. Hampel Commitee (1998) Fn! Report, Jnuary- Hayek, F.(1960) The corporation na democratic society: In whose interest ought itand shoul i ‘asain Ashes tan Bach, (eds) Monagenent and Corporations, New York: McGraw-Hill. bigs Repors (2003) Reve ofthe Role and Efectivenes of Nomexective Decors january. Jensen, M. and Mecking, W. 1976) “Theory ofthe fr manageral behaviour, agency costs and “Sumetship structure’ ournal of Financial Economics, vol. 3, pp. 305-60. Piotrost, |, and Sinvasan, 5. 2008) ‘Regulation and bonding: the Sarbanes-Osley Ac and the ‘low of international Utingy”,Jouralof Accounting Research, vol M6, no. 2, May, Pp. 383-425. ‘smith Report (2003) Aut Commites: Combined Code Guidance, nvary. “Turnbull Report (1999) Internal Control: Guidance for Directors on the Combined Code, London: Inaitute of Chartered Accountants in England and Wee. “json Report (2003) Jon Report onthe Recruitment and Development of Non exectve Dien, Tune, London Business School.ince: aility, Answers to these questions can be found on pages 440-1 Describe the factors that influence the relative proportions of internal and external used In capital investment. ‘What isthe relevance of the efficient market hypothesis for the financial manager? \Which of the following statements about the efficient market hypothesis is not correct? (2) If astock market is weak form efficient, chartists cannot make abnormal returns. (b) Ifa stock market Is strong form efi make abnormal returns. 3, only people with insider information can (©) Ina semistrong form efficent market, fundamental analysis witl not bring abnormal returns, (@) Ifa stock market Is semi-strong form efficient, all past and current publicly available information is reflected in share prices. (©) If a stock market is weak form efficent, all historical information about a share is, reflected in its current market price. Explain the meaning of the following terms: allocational elficiency, pricing efficiency and, operational efficiency. ‘Why i t difficult to test for strong form efficiency? Describe three anomalies in share price behaviour, Describe benchmarks that can be used when assessing financial performance. Describe the five categorles of ratios, list and define the ratios in each category and, without referring to the calculations in the text, calculate each ratio for Boater. What are the potential problems associated with using ratio analysis to analyse the financial health and performance of companies? Explain the meaning of economic value added. How can EVA help financial managers to create value for shareholders?