ACCA Applied Skills · Financial Management

Stakeholders and impact on corporate objectives: formula sheet

Full chapter guide

Key formulas

Shareholder return: Total shareholder return = (Closing share price − Opening share price + Dividend) ÷ Opening share price; Shows how dividend and share price growth together measure the return to shareholders.
Dividend and retention link: Retained earnings = Profit after tax − Dividends; A higher dividend means less internal finance for investment.
Investment acceptance rule: Accept if NPV > 0 (return exceeds the cost of capital); Links the investment decision to the financing decision through the discount rate.
Shareholder return for a period: Return = Dividend received + (Closing share price − Opening share price); Gives the total gain in money per share. Use the same period for both parts.
Total shareholder return (TSR): TSR = [D1 + (P1 − P0)] ÷ P0; P0 is the opening price, P1 the closing price, D1 the dividend in the period. Give the answer as a percentage.
Capital gain yield: (P1 − P0) ÷ P0; Part of TSR from share price change.
Dividend yield: D1 ÷ P0; Part of TSR from dividends. TSR = dividend yield + capital gain yield.
Share value from dividends: P0 = PV of expected future dividends, discounted at the shareholders' required return; Explains why share price reflects the size, timing and risk of cash flows.
Economy: Economy = spending less on inputs of the right quality (compare actual input cost with budget or benchmark); Concerned with inputs only. Cheaper is not better if quality falls.
Efficiency: Efficiency = outputs ÷ inputs (or cost per unit of output); Concerned with the link between inputs and outputs, for example cost per patient treated.
Effectiveness: Effectiveness = actual outcome achieved compared with the objective set; Concerned with whether the objective is met, for example the percentage of patients cured.
Value for money: VFM = economy + efficiency + effectiveness (the 3Es); All three must be considered together. A fourth E, equity (fairness), is sometimes added.
Mendelow matrix: high power, high interest: Key players → manage closely and involve in decisions; Examples: major shareholders, main lenders. Their support is vital.
Mendelow matrix: high power, low interest: Keep satisfied; Example: a regulator. Do not bore them, but do not upset them.
Mendelow matrix: low power, high interest: Keep informed; Examples: employees, local community. They can become powerful if they organise.
Mendelow matrix: low power, low interest: Minimal effort; Monitor only. Their position can change over time.
Stakeholder classification: Internal = managers, employees; Connected = shareholders, lenders, customers, suppliers; External = government, community, pressure groups; Use this split to structure any list of stakeholders.
Agency cost: Agency cost = cost of lost value from agent's own goals + cost of monitoring and incentives; A concept to state, not a calculation. Show both parts when you explain it.
Goal congruence: Manager's goals = shareholders' goal (maximise shareholder wealth); The target state. Do not confuse it with the conflict that stops it.
Share option value at exercise: Gain per option = market price at exercise − exercise price (if positive; otherwise zero); Options have no downside for the holder, which can encourage excess risk taking.
Shareholder wealth: Shareholder return = (P₁ − P₀ + dividend) ÷ P₀; A pay measure based on share price links managers to this return.
ROCE: ROCE = Profit before interest and tax ÷ Capital employed × 100%; Capital employed is usually total assets less current liabilities, or equity plus long-term debt. Use the definition the question gives.
Earnings per share: EPS = (Profit after tax − Preference dividends) ÷ Number of ordinary shares; Use earnings attributable to ordinary shareholders only.
Dividend per share: DPS = Total ordinary dividends ÷ Number of ordinary shares; Dividend cover = EPS ÷ DPS.
Dividend growth: Growth % = (Dividend this year − Dividend last year) ÷ Dividend last year × 100%; Over several years, use the compound rate: g = (D_n ÷ D_0)^(1/n) − 1.
Total shareholder return: TSR = (P₁ − P₀ + D₁) ÷ P₀ × 100%; P₀ is opening share price, P₁ is closing price, D₁ is dividend received in the period. It is a return for one period.
Earnings retention: Retention ratio = 1 − (DPS ÷ EPS); Useful when judging whether growth is funded by retained profit.

Quick revision

The three finance decisions are investment, financing and dividend.
The main financial objective is maximising shareholder wealth, which comes from dividends and share price growth.
Profit maximisation ignores risk, timing of cash flows and cash versus accounting profit.
Non-financial objectives include welfare of employees, customer service, and environmental and social responsibility.
Not-for-profit organisations aim at value for money: economy, efficiency and effectiveness.
Stakeholders are connected to the company, such as shareholders, lenders, employees, customers, suppliers and government, and their aims can conflict.
The agency problem arises because managers (agents) may act in their own interests rather than the shareholders' (principals).
Controls include monitoring, audit, governance rules and remuneration linked to performance such as share options or bonuses.
Reward schemes can backfire by encouraging short-term focus or excess risk.
Measures include EPS, ROCE, dividend growth and total shareholder return.
Total shareholder return = (change in share price + dividend) ÷ opening share price.
Compare measures with targets, past years or competitors before drawing a conclusion.

Common mistakes

Calling a share or bond issue an investment decision. Fix: Raising funds is a financing decision. Investment is about how the funds are used.
Treating the three decisions as independent. Fix: Always state the link, for example dividends reduce retained earnings, and the cost of finance sets the required project return.
Dividing by the closing price instead of the opening price when calculating TSR. Fix: Return is measured on the amount invested at the start. Always divide by P0.
Leaving out the dividend and giving only the capital gain. Fix: Wealth has two parts. Add the dividend to the price change every time.
Saying NFP organisations have no financial objectives at all. Fix: State that NFPs must still control costs, stay within budget and survive. Money is a constraint, not the goal.
Confusing efficiency with effectiveness. Fix: Efficiency is output per unit of input. Effectiveness is whether the objective was achieved. Cheap but wrong is efficient and ineffective.
Listing stakeholders with no link to the scenario. Fix: Name the group and attach the specific aim from the scenario, such as the lender wanting covenant compliance.
Treating shareholders as the only group that matters. Fix: Explain that other groups can restrict the company, so secondary objectives often limit profit pursuit.
Treating goal congruence and agency conflict as the same thing. Fix: Agency conflict is the divergence of goals. Goal congruence is when goals align. Controls aim to move you from conflict to congruence.
Saying share options always align managers with shareholders. Fix: Add the flaws: options reward rising markets, not skill; the holder cannot lose, so may take excess risk; and managers may manipulate short-term share price.

Exam tips

In objective questions, first label the decision type. Most wrong answers swap investment and financing.
In written answers, always connect the decision to shareholder wealth, then add stakeholder points if the scenario mentions them.
Use scenario facts, such as the company's gearing or growth plans, rather than generic statements.
If the organisation is a charity, public body or similar, switch to value for money and service objectives.
In Section A, check whether the question wants a percentage or a money amount before you calculate.
In written answers, give a definition, a reason and a link to the scenario. Do not list points without explanation.
For profit versus wealth, use the four points: timing, risk, cash flow and capital invested.
Keep time under control: a TSR calculation takes less than a minute if you set it out as dividend plus gain over opening price.