Financial Management Goals
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Questions and Answers

What is the primary goal of a financial manager appointed by shareholders?

  • Maximize the wealth of shareholders (correct)
  • Minimize the value of the firm
  • Maximize debt level of the firm
  • Maximize the number of shares on issue

    • Why is cash an important factor in financial decision-making?

  • Because it can be used to purchase things and pay debts (correct)
  • Because it has no time value
  • Because it is the only form of currency
  • Because it is the most liquid asset

    • What is the significance of time in financial decision-making?

  • It is only important for long-term investments
  • It affects the value of a dollar received in the future (correct)
  • It only affects the value of cash flows
  • It has no impact on the value of money

    • What is the effect of uncertainty on the value of a future cash flow?

    <p>It decreases its value</p> Signup and view all the answers

    What is a characteristic of a liquid market?

    <p>It has a high volume of trades</p> Signup and view all the answers

    What is the relationship between the value of the firm and the number of shares on issue?

    <p>The value of the firm is equal to the number of shares on issue times the share price</p> Signup and view all the answers

    What is the primary objective of a financial manager in terms of share price?

    <p>Maximize the share price</p> Signup and view all the answers

    Why is risk an important consideration in financial decision-making?

    <p>Because it can decrease the value of an investment</p> Signup and view all the answers

    What is the primary goal of a financial manager in a corporation?

    <p>Maximising the value of the firm</p> Signup and view all the answers

    What is the main difference between a real asset and a financial asset?

    <p>Real assets are used for production, while financial assets are used for investment</p> Signup and view all the answers

    What is the main advantage of a corporation as a type of firm?

    <p>Limited liability</p> Signup and view all the answers

    What is the purpose of a financial manager's day-to-day cash flow management?

    <p>To manage liquidity and reduce risk</p> Signup and view all the answers

    What is the main difference between a private company and a public company?

    <p>Private companies are not listed on a stock exchange, while public companies are listed</p> Signup and view all the answers

    What is the main goal of a financial manager when making investment decisions?

    <p>To maximise the value of the firm</p> Signup and view all the answers

    What is the main disadvantage of a sole trader as a type of firm?

    <p>Unlimited liability</p> Signup and view all the answers

    If you submit a 'market order' to buy a stock, what price will you pay?

    <p>The offer price</p> Signup and view all the answers

    What is the primary objective of a financial manager in a corporation?

    <p>Maximizing shareholder value</p> Signup and view all the answers

    What is a characteristic of a liquid market?

    <p>Easy conversion of assets into cash</p> Signup and view all the answers

    What is the main difference between a primary market and a secondary market?

    <p>Primary market is for new issues, secondary market is for existing issues</p> Signup and view all the answers

    What is the bid price in a stock exchange?

    <p>The highest price at which a buyer is willing to buy</p> Signup and view all the answers

    What is the ASX, and what did it stand for in the past?

    <p>Australian Securities Exchange, formerly Australian Stock Exchange</p> Signup and view all the answers

    What is one of the three critical factors in finance, and why is it important?

    <p>Risk, because it affects the required rate of return</p> Signup and view all the answers

    What is one of the three main ways to issue shares, and what is its advantage?

    <p>Rights issue, allows existing shareholders to purchase new shares at a discounted price</p> Signup and view all the answers

    What is the main advantage of a corporation, compared to a sole trader or partnership?

    <p>Limited liability, which protects shareholders' personal assets</p> Signup and view all the answers

    Study Notes

    Financial Management Goals

    • The goal of the financial manager is to maximize the wealth of shareholders, which is equivalent to maximizing the value of the firm and share price.
    • The financial manager is appointed by the shareholders to manage the firm and make decisions on their behalf.

    Critical Factors in Finance

    • There are three critical factors in finance: cash, time, and risk.
    • Cash is important because only cash can be used to purchase things, pay debts, and satisfy consumption preferences.
    • Time is important because money has a time value, and the value of a dollar is different depending on when it is received.
    • Risk is important because the future is uncertain, and the probability of receiving a future cash flow determines its value.

    Market Liquidity

    • A market is "liquid" if it allows for the easy and quick conversion of securities into cash.
    • A liquid market is necessary for the efficient allocation of resources.

    Australian Stock Exchange (ASX)

    • ASX stands for Australian Securities Exchange.
    • In the past, ASX stood for Australian Stock Exchange.
    • The change took place to reflect the broader range of securities traded on the exchange.

    Primary and Secondary Markets

    • A primary market is where new securities are issued, and companies raise capital from investors.
    • A secondary market is where existing securities are traded, and investors buy and sell securities among themselves.

    Bid and Ask Prices

    • The bid price is the highest price at which a buyer is willing to buy a security.
    • The ask price is the lowest price at which a seller is willing to sell a security.
    • The ask price is higher than the bid price.

    Types of Firms

    • There are three types of firms: sole traders, partnerships, and corporations.
    • Sole traders are the most common type of firm in terms of the number of businesses.
    • Corporations dominate the economy in terms of total revenue generated.

    Financial Assets

    • Financial assets are securities that can be easily converted into cash.
    • Examples of financial assets include cash, accounts receivable, and ordinary shares.

    Financial Decisions

    • The two main types of decisions made by a financial manager are investment decisions and financing decisions.
    • Investment decisions involve deciding on the allocation of funds to different projects or assets.
    • Financing decisions involve deciding on the source of funds, such as debt or equity.

    Real and Financial Assets

    • Real assets are physical assets, such as buildings, machines, and inventory.
    • Financial assets are securities that can be easily converted into cash.

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    What is the primary goal of a financial manager? Maximizing shareholder wealth, firm value, or share price?

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