latest profits have been severely reduced by an exceptional loss arising from

Latest profits have been severely reduced by an

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latest profits have been severely reduced by an exceptional loss arising from the closure of an unsuccessful division. Y has a considerably higher level of financial gearing than X. The board focusing on the figures given below: X Y Share price 450c 525c Nominal value of shares 50c 100c Gross dividend yield 5% 4% Price / earnings ratio 15 25 Proportion of profits earned overseas 60% 0% In the course of the discussion a number of comments are made, including those given below. Required: Discuss comments (a) to (d), making use of the above data where appropriate. (a) There is something odd about the P/E ratios. Y has had a particular bad year. Its P/E should surely be lower than ours.’ (b) One of factors which may explain Y’s high P/E is the high financial gearing. (c) The comparison of our own P/E ratio and gross dividend yield with those of Y is not really valid. The shares of the two companies have different nominal values. (d) These figures will not please our shareholders. The dividend yield is below the return an investor could currently obtain on risk-free government bonds.
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___________________________________________________________________________________________________________________ Page 16 of 21 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by Susan Lim Email : [email protected] Part 4: Methods encouraging the achievement of stakeholder objectives (1) Managerial reward schemes (2) Regulatory requirement (1) Managerial reward schemes It is argued that management will only make optimal decisions if they are monitored and appropriate incentives are given. Rewards will only be given for good performance in achi eving the organisation’s goals. Rewards schemes, for example: (i) Performance-related pay Pay or salary or bonuses normally related to the profits earned. (ii) Rewarding managers with shares This may be happen when a private company ‘goes public’ and g ood performance managers are invited to subscribe for shares in the company at an attractive offer price. In that case, the manager will become owner-manager. Executive share options plans (ESOPs) In the share option scheme, only selected employees are given a number of share options, which give the holder the right after a certain date to subscribe for shares in the company at a fixed price. The value of an option will increase if the company is successful and share price increase. Advantages of rewards scheme and performance i. Performance-related pay does give individuals an incentives to achieve a good performance level ii. Effective scheme will attract and keep the employees valuable to an organisation. iii. Rewarding performance will give an effectives scheme and create an organizations focus on continuous improvement. iv. Schemes based on shares will motivates employees / managers to act in the long term interests of the organisation in which increase the organisation market value.
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___________________________________________________________________________________________________________________ Page 17 of 21 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by Susan Lim Email : [email protected] Disadvantages of rewards schemes i. Rewards schemes will encourage dysfunctional behaviour.
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  • Spring '17
  • JANE KDAL

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