Foundations of Financial Management, 18th
Edition Latest Update 2024/2025
Questions And Answers With Rationale
Graded A+
How would finance managers increase profit through looking at margins?
- ANSWER-- Finance managers can increase profit by increasing their margins - This leads to
better buying and more efficient sales
- Does not involve increasing the asset base, nor borrowing or the issuance of greater share
capital
- Return on investment will rise
Describe the interaction with the financial markets by finance managers?
- ANSWER-- Shareholders interaction
- Determination of private equity vs venture capital
- IPO vs private listing
- Determination of which exchange to be listed on and the investment bank involved in
market-making
- Share splitting, bonus issue, rights issue, reacquiring shares and dividend policy
- Debtholder interaction - Determination of short-term loans, long-term debentures,
negotiation, interest, covenants, charges
- Hence requires a knowledge of the changing markets, financial instruments and
opportunities
What is interest? (5)
- ANSWER-- Interest is the charge involved for the use of money
,- It is expressed as a percentage of the original principle or compound value for a given
period
- Interest rates are positively associated with the rate of inflation for a given country
- The Central Bank monitors and directs the interest rates for a given country. This occurs
through monetary policy, which is implemented by the Open Market Operations, for
example, quantitative easing
- Principal + Interest = Compound Value
How would you deduce simple interest?
- ANSWER-- For an interest rate of 13% over a three year period:
- FV3 = £1,000 (1 + 0.10)^3 = £1,300
What is limited liability?
- ANSWER-- Limited liability indicates how the liability of the shareholders is limited to the
amount that they have invested in the company - If the company were to default on a loan,
then their investment would be vulnerable
- However, for proprietorships and partnerships, the liability is unlimited and if the business
defaults on a loan then the business owner's home could be at risk
What is a Proprietorship?
- ANSWER-- This is a company that is owned by one individual, and they are accountable for
all risks and liabilities
- It is the simplest form of organisation, and involves easy transaction details - Easy
Accounting and Finance
- Involves small/micro businesses and shops
- Unlimited liability, and challenges may arise in generating large quantities of capital for
expansion, managerial skill and time is also limited by the ability of the managers in position
What is a partnership?
- ANSWER-- This is a form of organisation developed by more than one individual/entity
,- They are held accountable for the liabilities and the risk incurred to the firm
- Simple form of business organisation
- Complex to decipher how to split the profits earned
What is a Limited Company?
- ANSWER-- This is a company that is owned by the shareholders and the manager is
involved in the day to day operations on their behalf
- It is seen as a separate legal entity and hence limited liability arises
- Can raise large sums of capital for expansion
- Can hire managers as needed - Skill can be rewarded through bonuses
- Not reliant on owners for success and continuity
- Complexity and cost involved in committing an accountant - This arises once having passed
a certain threshold
- Communication of information from managers to shareholders - Hence a requirement for
Financial Reports
- Under control from stricter regulation and legislation
What is a Private Limited Company?
- ANSWER-- These are small companies that is not listed on the stock exchange - Hence
cannot sell and buy shares in the open market
- Small number of shareholders that are mainly composed of family and close entities.
Hence effective communication between the management and stakeholders, and less of a
reliance on Financial Accounting
- For example, Wilko and Aldi
What is a Public Limited Company?
- ANSWER-- These are companies that are listed on the stock exchange, and whose shares
can be bought and sold on the open market
, - The shareholders are usually composed of a large group of small unrelated and diverse
entities - Hence there is a greater emphasis on the need for communication and the
production of Financial Reports, alongside governmental regulation
- For example, Tesco and Apple
What are Executive Directors?
- ANSWER-These are directors that are sourced from management that are responsible for
the day-to-day operations of the firm
What are Non-Executive Directors?
- ANSWER-These are directors that could be sourced from outside of the firm, and are
independent - Not accountable for the day-to-day operations of the firm
What is the Chairman of the Board?
- ANSWER-Heads the board of the directors, can be a non-executive director
How is a Dominant CEO Prevented?
- ANSWER-- The head of the company who acts as the head of the company cannot be the
same person as the chief executive officer (CEO) - This is the person who is in charge of
managing the day-to-day operations of the firm
- The Board are responsible for ensuring that the CEO acts in the best interests of the
shareholders
- They have to be prepared to hold the CEO accountable, and not to be controlled by senior
management
- For example, Richard Branson is the CEO of Virgin Group
What is the Agency Theory?
- ANSWER-- Formulated by Ross (1973), and states that there is a separation between
ownership and control
- Management must act as an agent for the shareholders and promote their best interests -
This is ensured through maximising shareholder value and making investments that
Edition Latest Update 2024/2025
Questions And Answers With Rationale
Graded A+
How would finance managers increase profit through looking at margins?
- ANSWER-- Finance managers can increase profit by increasing their margins - This leads to
better buying and more efficient sales
- Does not involve increasing the asset base, nor borrowing or the issuance of greater share
capital
- Return on investment will rise
Describe the interaction with the financial markets by finance managers?
- ANSWER-- Shareholders interaction
- Determination of private equity vs venture capital
- IPO vs private listing
- Determination of which exchange to be listed on and the investment bank involved in
market-making
- Share splitting, bonus issue, rights issue, reacquiring shares and dividend policy
- Debtholder interaction - Determination of short-term loans, long-term debentures,
negotiation, interest, covenants, charges
- Hence requires a knowledge of the changing markets, financial instruments and
opportunities
What is interest? (5)
- ANSWER-- Interest is the charge involved for the use of money
,- It is expressed as a percentage of the original principle or compound value for a given
period
- Interest rates are positively associated with the rate of inflation for a given country
- The Central Bank monitors and directs the interest rates for a given country. This occurs
through monetary policy, which is implemented by the Open Market Operations, for
example, quantitative easing
- Principal + Interest = Compound Value
How would you deduce simple interest?
- ANSWER-- For an interest rate of 13% over a three year period:
- FV3 = £1,000 (1 + 0.10)^3 = £1,300
What is limited liability?
- ANSWER-- Limited liability indicates how the liability of the shareholders is limited to the
amount that they have invested in the company - If the company were to default on a loan,
then their investment would be vulnerable
- However, for proprietorships and partnerships, the liability is unlimited and if the business
defaults on a loan then the business owner's home could be at risk
What is a Proprietorship?
- ANSWER-- This is a company that is owned by one individual, and they are accountable for
all risks and liabilities
- It is the simplest form of organisation, and involves easy transaction details - Easy
Accounting and Finance
- Involves small/micro businesses and shops
- Unlimited liability, and challenges may arise in generating large quantities of capital for
expansion, managerial skill and time is also limited by the ability of the managers in position
What is a partnership?
- ANSWER-- This is a form of organisation developed by more than one individual/entity
,- They are held accountable for the liabilities and the risk incurred to the firm
- Simple form of business organisation
- Complex to decipher how to split the profits earned
What is a Limited Company?
- ANSWER-- This is a company that is owned by the shareholders and the manager is
involved in the day to day operations on their behalf
- It is seen as a separate legal entity and hence limited liability arises
- Can raise large sums of capital for expansion
- Can hire managers as needed - Skill can be rewarded through bonuses
- Not reliant on owners for success and continuity
- Complexity and cost involved in committing an accountant - This arises once having passed
a certain threshold
- Communication of information from managers to shareholders - Hence a requirement for
Financial Reports
- Under control from stricter regulation and legislation
What is a Private Limited Company?
- ANSWER-- These are small companies that is not listed on the stock exchange - Hence
cannot sell and buy shares in the open market
- Small number of shareholders that are mainly composed of family and close entities.
Hence effective communication between the management and stakeholders, and less of a
reliance on Financial Accounting
- For example, Wilko and Aldi
What is a Public Limited Company?
- ANSWER-- These are companies that are listed on the stock exchange, and whose shares
can be bought and sold on the open market
, - The shareholders are usually composed of a large group of small unrelated and diverse
entities - Hence there is a greater emphasis on the need for communication and the
production of Financial Reports, alongside governmental regulation
- For example, Tesco and Apple
What are Executive Directors?
- ANSWER-These are directors that are sourced from management that are responsible for
the day-to-day operations of the firm
What are Non-Executive Directors?
- ANSWER-These are directors that could be sourced from outside of the firm, and are
independent - Not accountable for the day-to-day operations of the firm
What is the Chairman of the Board?
- ANSWER-Heads the board of the directors, can be a non-executive director
How is a Dominant CEO Prevented?
- ANSWER-- The head of the company who acts as the head of the company cannot be the
same person as the chief executive officer (CEO) - This is the person who is in charge of
managing the day-to-day operations of the firm
- The Board are responsible for ensuring that the CEO acts in the best interests of the
shareholders
- They have to be prepared to hold the CEO accountable, and not to be controlled by senior
management
- For example, Richard Branson is the CEO of Virgin Group
What is the Agency Theory?
- ANSWER-- Formulated by Ross (1973), and states that there is a separation between
ownership and control
- Management must act as an agent for the shareholders and promote their best interests -
This is ensured through maximising shareholder value and making investments that
