FM Tutor meeting 1

Which of the following is a sign that a company is failing to maximise shareholder wealth?

• 1. Management has challenging performance bonuses

• 1. Investment decisions are evaluated on the basis of their net present value

• 1. The company has not diversified its operations

• 1. Financing of the company is via equity finance alone

Which of the following is LEAST likely to solve the agency problem between shareholders and managers?

• 1. Giving managers profit-related rewards

• 1. Using external auditors to gauge company performance

• 1. Writing restrictive covenants into loan note contracts

• 1. Monitoring managers’ actions

Which of the following statements about Value for Money is correct?

• 1. Economy is minimising the input costs of the organisation

• 1. Efficiency is minimising the output/input ratio

• 1. Effectiveness is minimising the costs of meeting the organisation’s objectives

• 1. Enhancement is maximising the input/output ratio

Which of the following statements concerning the payback method is correct?

• 1. It does not consider the time value of money

• 1. It is the time required for profits to recover the initial cost of investment

• 1. It considers the whole life of a project

• 1. It is reliable for project selection decisions

Which of the projects will achieve payback within three years?

• 1. Projects A, B, and C

• 1. Projects B and C only

• 1. Project B only

• 1. Projects A and C only

Which investment appraisal method is most likely to result in the maximisation of shareholder wealth?

• Payback period

• Return on capital employed

• IRR

• Net Present Value

A company is considering an investment of $340,000 in equipment for a project which will have a life of five years. The equipment can be sold at the end of the five-year period for $55,000.

What is the average investment to be included in the calculation of ROCE?

• 1. $340,000

• 1. $197,500

• 1. $170,000

• 1. $142,500

Which of the following is NOT an advantage of the ROCE method of investment appraisal?

• 1. It is based on profits rather than cash flows

• 1. It is simple to calculate and understand

• 1. It uses readily available accounting information

• 1. It is often used by financial analysts to appraise performance