Redeeming bonds with a book value of $80m has reduced the financial risk of Bar Co, as shown by the significant reduction
in gearing from 89% to 20·5%, and by the significant increase in the interest coverage ratio from 4·9 times to 13·6 times.
Examiner’s note: full credit would be given to a revised gearing calculation (19·6%) that omits the loss due to buying back
bonds at a premium to nominal value.
(d) A key financial objective for a stock exchange listed company is to maximise the wealth of shareholders. This objective is
usually replaced by the objective of maximising the company’s share price, since maximising the market value of the company
represents the maximum capital gain over a given period. The need for dividends can be met by recognising that share prices
can be seen as the sum of the present values of future dividends.
Maximising the company’s share price is the same as maximising the equity market value of the company, since equity market
value (market capitalisation) is equal to number of issued shares multiplied by share price. Maximising equity market value
can be achieved by maximising net corporate cash income and the expected growth in that income, while minimising the
corporate cost of capital. Listed companies therefore have maximising net cash income as a key financial objective.
Not-for-profit (NFP) organisations seek to provide services to the public and this requires cash income. Maximising net cash
income is therefore a key financial objective for NFP organisations as well as listed companies. A large charity seeks to raise
as much funds as possible in order to achieve its charitable objectives, which are non-financial in nature.
Both listed companies and NFP organisations need to control the use of cash within a given financial period, and both types
of organisations therefore use budgets. Another key financial objective for both organisations is therefore to keep spending
within budget.
The objective of value for money (VFM) is often identified in connection with NFP organisations. This objective refers to a
focus on economy, efficiency and effectiveness. These three terms can be linked to input (economy refers to securing
resources as economically as possible), process (resources need to be employed efficiently within the organisation) and output
(the effective use of resources in achieving the organisation’s objectives).
Described in these terms, it is clear that a listed company also seeks to achieve value for money in its business operations.
There is a difference in emphasis, however, which merits careful consideration. A listed company has a profit motive, and so
VFM for a listed company can be related to performance measures linked to output, e.g. maximising the equity market value
of the company. An NFP organisation has service-related outputs that are difficult to measure in quantitative terms and so it
focuses on performance measures linked to input, e.g. minimising the input cost for a given level of output.
Both listed companies and NFP organisations can use a variety of accounting ratios in the context of financial objectives. For
example, both types of organisation may use a target return on capital employed, or a target level of income per employee,
or a target current ratio.
Comparing and contrasting the financial objectives of a stock exchange listed company and a not-for-profit organisation,
therefore, shows that while significant differences can be found, there is a considerable amount of common ground in terms
of financial objectives.
