ICAG PROFESSIONAL EXAMINATIONS

APPLICATION LEVEL
2.4 FINANCIAL MANAGEMENT

INSTRUCTOR: JOHN KYEI

MODULE 1

THE NATURE
AND
ENVIRONMENT
OF FINANCIAL
MANAGEMENT
 OVERVIEW OF FINANCIAL MANAGEMENT

 It involves planning and controlling the financial affairs

of an organisation to achieve its financial objectives
 This involves
 How much finance the business needs for its day-to-day
operations
 How much finance the business needs for longer term
investment projects
 Amounts to be paid out as dividends
 Where the finance should be obtained and whether it
should be long term or short term
 How to manage short tem cash surpluses and deficits
 How to protect the organization against financial risks
 Relationship between the three fundamental
decisions
• The financing decision considers the source of the finance
required for the business operations
• The investment decision considers the benefits of investing
cash either in projects or in working capital or even in high
yield deposit accounts
• The dividend decision looks at how much of the surplus
cash generated should be paid out to the shareholders, and
how much retained for future investments
• The three decisions are, therefore, interrelated, thus the
financing decision will affect the cost of capital and this will
affect the net benefits from a project and dividend payment
• The dividend decision will affect the cash available for
investment, and the extent to which external sources of funds
will be sought
 Financial objectives and wealth
maximization- profit Org.
• The main objective of every organization is to
maximise shareholders wealth through
dividend payment and increase in share price
Stated Objective Link to weath maximisation
Financial objectives
To maximize profits Ability to pay out bigger
dividends and invest in favourable
projects
To increase earnings per share Positive market sentiment which
lead to higher demand for shares
thereby increasing share price
 Non-financial Objectives and Wealth
maximisation
Stated Objective Link to weath maximisation
Non-financial objectives
To pay staff competitive salaries This will motivate employees to work hard
which wil lead to higher earnings
To invest in staff training This will lead to staff with higher skills
leading to improved performance
To invest in new product This will lead to bigger profits I the future if
development it is successful
To seek the wefare of the society Good publicity, good image, customer
and preserve the environment loyalty which will increase profit

To establish good relationship with Reliable supplies thereby leading to higher

suppliers profit
 Measures of Wealth maximisation
 Return on capital employed = 𝑷𝒓𝒐𝒇𝒊𝒕𝑬𝒒𝒖𝒊𝒕𝒚+𝑳𝒐𝒏𝒈
𝒃𝒆𝒇𝒐𝒓𝒆 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝑻𝒂𝒙𝒆𝒔
𝒕𝒆𝒓𝒎 𝒅𝒆𝒃𝒕

 Return on shareholder capital= 𝑵𝒆𝒕𝑬𝒒𝒖𝒊𝒕𝒚

𝑰𝒏𝒄𝒐𝒎𝒆

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
 Earning per share =
𝑾𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝒂𝒗𝒂𝒆𝒓𝒂𝒈𝒆 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔

𝑻𝒐𝒕𝒂𝒍 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅
 Dividend per share= 𝑾𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝒂𝒗𝒂𝒆𝒓𝒂𝒈𝒆 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔

 Total shareholder return= 𝑫𝒊𝒗 +𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒔𝒉𝒂𝒓𝒆 𝒑𝒓𝒊𝒄𝒆

𝑰𝒏𝒕𝒊𝒂𝒍 𝑷𝒓𝒊𝒄𝒆
 Financial objectives-Not for Profit
• Full/partial cost recovery
• Budget maximization
• Client satisfaction maximization
• Stakeholders satisfaction maximization
• Value for money: getting the best possible
combination of services from the least resources
 Economy: this measures the acquisition of inputs at the
highest quality, at the lowest cost
 Efficiency: this measures the amount of resources used
to achieve a giving output. It also considers the
proficiency and appropriateness of the process used for
converting the input into output
 Effectiveness: this measures the extent to which stated
objectives are achieved
 Stakeholders and their Objectives
 Shareholders: Obtain a suitable return ad to maximize their
wealth
 Directors and senior managers: maximize their rewards
and compensations
 Employees: maximize their rewards and continuity in
employment
 Lenders: receive interest payments and the full amount by
the due date for repayments
 Government: regulate the activites of companies to comply
with existing laws and ensure payment of taxes
 Customers: demand high quality products with less health
risk
 Suppliers: receive constant orders and payments
 Society: preserving the environment and maximizing
societal benefit
 The Agency Problem
• Agency problem exist because of separation of
ownership and control
• Managers are likely to give priority to their personal
interests over those of the shareholders
 Possible causes are;
• Moral hazard
• Effort level
• Earnings retention
• Risk aversion
• Time horizon
 These conflicts come with its related costs such as costs
of monitoring, bonding costs termed as agency costs
 Solving the agency problems
Adequate compensation to match effort levels
Annual performance incentives tied to
performance such as cash bonus
Long term performance incentives such as
share awards and share options
Corporate governance
Internal audit effectiveness
Golden parachute
 Corporate Governance
• The system by which organisations are directed and
controlled-monitoring and controlling management decisions
• Codes of best practices: The companies act,1963, the lsting
rules of the GSE, SEC code of best practices
 Ghana code of best practices has six main pillars
• The mission, responsibilities and accountability of board of
directors
• Committees of the board
• Relationship to shareholders and stakeholders
• Financial affairs and auditing
• Disclosures in annual reports
• Code of ethics
• Ghana’s code is not ruled-based, it is a voluntary code
 Corporate governance issues
• The role and responsibilities of the board of
directors
• The composition and balance of the board of
directors
• Financial reporting, narrative reporting and
auditing
• Directors’ remuneration
• Risk management and internal control
• Shareholders rights
• Disclosure
 Corporate Social Responsibility

• Decision making by a business that is linked to

ethical values and respect for employees, society
and the environment
Effect on businesses
• Improve public relations image
• Means of marketing products
• Increase reputation
• Customer loyalty
 The economic environment
 Macroeconomic objectives
• Sustained real economic growth, full employment, Price level
stability, balance of payment equilibrium and income
redistribution
 To try to achieve these objectives, the following policies are
adopted by government
• Fiscal policy: relates to government spending, taxation and
borrowing
• Monetary policy: the use of interest rate and the money supply
to influence economic activities
• Exchange rate policy: controlling exchange rate to influence
imports and exports
• External trade policy: stimulating exports and reducing imports
to promote local businesses
 Fiscal Policy and Business
 Contractionary fiscal policy: increasing tax revenue
or cutting the level of government spending or
borrowing
• Reduction in sales revenue and consequently, profit
• Reduction in profit that can be reinvested
• Restriction on flexibility in taking credit decisions
• Reduction in profit of firms facing price elastic demand
• Reduction in loanable funds
• Companies transfer business operations to low-tax
countries to minimize tax liabilities
• Lower cost of capital to businesses as a result of
decrease in borrowing by government
 Expansionary fiscal policy: Reverse is true
 Monetary Policy and Business

 Changes in interest rates affect the cost of borrowing

 Higher interest rates deter companies from new
investments
 Changes in interest rates affect consumer spending
 A higher interest rate encourages savings at the expense
of consumer expenditure
 Higher interest rates will increase mortgage payments
and will thus reduce the amount of disposable income
in the hands of home buyers for discretionary spending
 Changes in the exchange rate affect companies ability
to sell or buy goods to and from other countries
 Regulatory Environment

Regulation is needed to
 Ensure that the markets operate efficiently
 Protect investors
 Protect individuals from financial malpractice
Regulatory bodies
• Bank of Ghana
• The Securities and Exchange Commission (SEC)
• The National Pensions Regulatory Authority (NPRA)
• The National Insurance Commission (NIC)
 Bank of Ghana
• Ensuring monetary and price stability
• Issuing legal tender currency
• Maintaining external reserves to safeguard the
value of the domestic currency
• Promoting a sound financial system
• Acting as banker and providing economic and
financial advice to the government
• Regulation of the banking sector to ensure that
the funds of depositors are safe, banks remains
solvent and profitable and there is fair
competition among banks
 Securities and Exchange Commission
• Regulating the securities markets and trading in
securities
• Registration, authorizing and regulation of
participants in the securities markets
• Maintaining the surveillance of the securities
markets
• Protecting the market against illegal activity
• Protecting the market against insider training and
resolving conflicts of interest
• Examination and approval of new issues of
securities
 The National Pensions Regulatory Authority
• Ensuring compliance with the National Pensions
Act 2008
• Registering private occupational pension schemes
and personal pension schemes and provident fund
• Approving, monitoring and regulating trustees of
pension schemes and fund managers
• Regulating and monitoring implementation of the
basic national social security scheme
 National Insurance Scheme
• Licensing participants in the insurance industry
• Taking action against any person carrying on insurance
business without a license
• Setting standards for the conduct of insurance business
• Facilitating codes of ethics
• Approving rates of insurance premiums and
commissions
• Providing dispute resolution service when dispute arise
• Supervision of the industry and enforcement of
compliance with regulations
 The World Bank
• Provide technical and financial support to help
developing countries reform particular sectors of
their economy
• Promoting and supplementing private foreign
investment
• Provide long-run capital to member countries fr
economic reconstruction and development
• To provide loan guarantee for loans granted to
small and large units of member countries
• To induce long-run capital investment fo assuring
balance of payments equilibrium
 International Monetary Fund

• To improve international monetary cooperation

• To promote exchange rate stability
• Provide temporary financial assistance to
countries with balance of payments difficulties
• To help countries to achieve balance of
payments
 The World Trade Organisations
• Negotiating the reduction or elimination of obstacles to
trade
• Agreeing on rules governing the conduct of international
trade
• Administering and monitoring the application of the
WTOs rules for trade
• Monitoring and reviewing the trade policies of members
• Ensuring transparency of regional and bilateral trade
agreements
• Building capacity of developing countries in international
trade matters
• Settling disputes among members on interpretation and
application of the agreements.
 Past Questions
1. Explain the term Agency problem in relation to a Public
Limited Liability Company?

2. As a Finance expert, explain THREE practical steps to

manage agency problem in public limited liability companies.

3. Profit maximization is the core objective of shareholders in

Public limited Liability Companies. Identify and explain FIVE
other non-financial objectives that can be pursued by a Public
limited liability Company.

4. Shareholders are risk-takers but Directors are risk averse.

Explain THREE approaches that corporate governance has
identified for addressing conflict of interest between
shareholders and Directors. Reference can be made to
Companies Act 1963, (Act 179)
 Past Questions
5. Governments take certain measures with a view to influencing
aggregate demand in their economy.
Required:
i) Distinguish between fiscal policy and monetary policy
ii) Explain TWO adverse effects a contractionary fiscal policy could
have on businesses.

6. Pure Gold Ltd is engaged in mining in a deprived farming community

a) How will the company maximize or satisfy stakeholders
expectations
b) What will be objective of each stakeholder identified to the
company?

7. Identify and explain FOUR (4) essential roles performed by a Finance

Manager in order for a corporate body to achieve its objectives.
 Past Questions
8. Discuss the concept of shareholder value maximization, explaining why
it is considered more appropriate than profit maximization

9. Explian the role of the financial manager in public sector organisations

10. There is a growing concern in the corporate world that organisations

need to be socially responsible in order to enhance shareholders value.
However others are of the view that social responsibility leads to erosion
of profit.
You are required to briefly explain whether value maximization is
inconsistent with social responsibility

11. Choosing a corporate objective of a firm is extremely important and

has a determinant factor to the success or failure of a corporation in
controlling the market.
Required:
Explain FOUR (4) objectives of not-for-profit organisations.
 Past Questions

12. Bhim is a not-for-profit non-governmental organisation

aimed at supporting alleged witches to have an empowered
livelihood. The organisation is developing a proposal to the
Ministry of Gender and Social Protection to secure funding to
improve basic healthcare and sanitation at three alleged witches’
camps. They have consulted you to help them develop the
section on value for money (VfM) in their proposal.
Required:
i) Briefly explain the following value for money concepts :
• Economy
• Efficiency
• Effectiveness
ii) Compare and contrast value for money and corporate value
maximization
 Past Questions
13. Adenta Municipal Assembly (AdMA) has established an ultra-modern
library and internet facility for its inhabitants. It intends to subsidise the
costs of using this facility for its inhabitants. This facility is to be
evaluated by the local assembly (AdMA) to assess amongst other things,
whether it is financially sound and offers value for money.
• Required:
• Suggest THREE (3) appropriate measures each of Financial,
Economy, Efficiency and Effectiveness that could be set for the
facility based on targets

14. a) The financial sector is one of the most highly regulated sectors of
any country. Notably, each industry under the financial sector has a
special regulatory framework consisting of statutes to shape the conduct
of participants in the industry and a regulator to foresee compliance and
promote fairness and efficiency.
Required:
i) Describe THREE (3) functions the Securities and Exchange
Commission of Ghana (SEC) is expected to perform towards achieving
fairness and efficiency in the securities industry.
 Past Questions
• ii) Explain TWO (2) implications of the regulatory functions of the SEC for
corporate investing and financing activities. 10 marks (Nov,2019)

15. K-Force Ltd, a newly established security company, has constituted its first
board of directors. The directors are expected, among others, to take financial
decisions in the areas of investment, financing, and dividend payment. A
consultancy firm has been engaged to run an orientation program for the directors
in the coming week.
You work with the consultancy firm that has been engaged to run the orientation
program for the new directors. You have been asked by your boss to prepare
briefing notes on the specific roles the directors are expected to play in the three
fundamental decision areas and the constraints that government policies might
impose on them.
Required:
Prepare a briefing note on the nature of the three fundamental decision areas.
Specifically, the briefing notes should cover the objective of each class of
decision; TWO (2) specific decisions the directors are expected to take in each
class of financial decisions; and TWO (2) factors in the external environment
they should consider when making financial decisions.
10 MARKS (MAY, 2020)