ACCA FM · Chapter 1
Financial management function MCQs with Answers
10 multiple-choice questions on Financial management function for ACCA FM Financial Management. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
For a listed company operating in the private sector, which of the following is generally regarded as the primary financial objective?
- A) Maximisation of shareholder wealth
- B) Minimisation of the corporate tax charge
- C) Maximisation of the number of employees
- D) Maximisation of annual revenue
Show answer & explanation
Answer: A) Maximisation of shareholder wealth
Financial management theory assumes that the primary objective of a listed company is to maximise the wealth of its ordinary shareholders, who own the company and bear its residual risk. Shareholder wealth is reflected in dividends received and in the market value of the shares. Revenue growth, employment and tax minimisation may support this objective but are not the primary objective in themselves.
Question 2
In the context of corporate finance, what is meant by the 'agency problem'?
- A) Directors, acting as agents of the shareholders, may pursue their own interests rather than maximising shareholder wealth
- B) Lenders may refuse to provide finance to companies that have high gearing
- C) Employees may join a trade union in order to negotiate higher wages
- D) Shareholders may sell their shares to a competitor without informing the directors
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Answer: A) Directors, acting as agents of the shareholders, may pursue their own interests rather than maximising shareholder wealth
The agency relationship arises because shareholders (principals) delegate the running of the company to directors (agents). Where ownership is separated from control, directors may act in their own interests, for example by awarding themselves excessive pay or avoiding risky but worthwhile projects. This conflict of interest is the agency problem.
Question 3
Which of the following remuneration schemes is MOST likely to encourage directors to act in a way that increases shareholder wealth over the long term?
- A) Share options that can only be exercised several years after they are granted
- B) A cash bonus based on revenue growth in the current year
- C) A fixed annual salary with no performance-related element
- D) A bonus linked to the number of new subsidiaries acquired in the year
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Answer: A) Share options that can only be exercised several years after they are granted
Goal congruence is improved when directors' rewards are linked to the value of the company's shares over a long horizon. Long-dated share options only reward directors if the share price rises over several years. A fixed salary provides no incentive, while bonuses based on revenue or acquisitions may encourage short-termism or growth that destroys value.
Question 4
A public sector hospital purchases its medical supplies at the lowest price available for the quality required. Which element of value for money does this illustrate?
- A) Economy
- B) Effectiveness
- C) Equity
- D) Efficiency
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Answer: A) Economy
Value for money is assessed using the three Es. Economy means acquiring resources of the appropriate quality at the lowest cost. Efficiency is the relationship between outputs and inputs, and effectiveness is the extent to which objectives are achieved. Equity is not one of the three Es.
Question 5
A local authority measures the number of households served per $1,000 spent on its waste collection service. Which aspect of value for money is being measured?
- A) Efficiency
- B) Profitability
- C) Economy
- D) Effectiveness
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Answer: A) Efficiency
Efficiency compares outputs (households served) with the inputs used to produce them (money spent). Economy concerns the cost of the inputs only, and effectiveness concerns whether the service achieves its objectives, such as reducing uncollected waste. Profitability is not usually a goal of a public service.
Question 6
An investor bought shares in a company for $4.00 each one year ago. During the year a dividend of $0.20 per share was paid, and the share price is now $4.60. What was the total shareholder return for the year?
- A) 5.0%
- B) 15.0%
- C) 17.4%
- D) 20.0%
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Answer: D) 20.0%
Total shareholder return = (capital gain + dividend) / opening share price = ((4.60 - 4.00) + 0.20) / 4.00 = 0.80 / 4.00 = 20.0% (rounded to 1 decimal place). Using only the capital gain gives 15.0%, using only the dividend yield gives 5.0%, and dividing by the closing price instead of the opening price gives 17.4%.
Question 7
A company's earnings per share (EPS) have risen from $0.32 to $0.41 over a three-year period. What is the average annual compound growth rate in EPS?
- A) 6.4%
- B) 8.6%
- C) 9.4%
- D) 28.1%
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Answer: B) 8.6%
Compound annual growth = (0.41 / 0.32)^(1/3) - 1 = 1.28125^(1/3) - 1 = 8.61%, which is 8.6% to 1 decimal place. Dividing the total growth of 28.1% by three gives the simple (not compound) average of 9.4%, while using a fourth root wrongly assumes four years of growth.
Question 8
Which of the following is NOT one of the three key decisions normally associated with financial management?
- A) The marketing decision
- B) The dividend decision
- C) The financing decision
- D) The investment decision
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Answer: A) The marketing decision
Financial management is concerned with three inter-related decisions: which projects to invest in (investment), how to raise the funds needed (financing) and how much of the earnings to return to shareholders (dividend). Marketing decisions are the responsibility of the marketing function, although they will have financial consequences.
Question 9
Which of the following stakeholder objectives is MOST likely to conflict with an objective of maximising shareholder wealth by investing in higher-risk projects?
- A) Lenders wishing to minimise the risk that interest and capital will not be repaid
- B) Shareholders wishing to receive capital growth
- C) Customers wishing to receive high-quality products
- D) Directors wishing to increase the share price to benefit from share options
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Answer: A) Lenders wishing to minimise the risk that interest and capital will not be repaid
Lenders receive a fixed return, so they gain nothing from the extra returns on riskier projects but bear more of the downside if the company fails. They therefore prefer the company to take lower risks, which can conflict with shareholders' willingness to accept risk for higher returns. Shareholders and directors holding share options both benefit from share price growth.
Question 10
A charity is a not-for-profit organisation. Which of the following is MOST likely to be its primary objective?
- A) To maximise the surplus of income over expenditure each year
- B) To maximise the wealth of its trustees
- C) To minimise the amount spent on its charitable activities
- D) To achieve its charitable aims as fully as possible with the funds available
Show answer & explanation
Answer: D) To achieve its charitable aims as fully as possible with the funds available
A not-for-profit organisation exists to achieve non-financial objectives, such as relieving poverty, so its primary objective is to deliver as much benefit as possible from limited funds (value for money). A surplus may be needed to remain financially viable but is not the main aim, and trustees are not owners entitled to wealth from the charity.