Podcast
Questions and Answers
What is the primary goal of financial management?
What is the primary goal of financial management?
The primary goal of financial management is to maximize shareholder wealth.
Which of the following are considered financial market instruments?
Which of the following are considered financial market instruments?
What are the two main components of the financial market?
What are the two main components of the financial market?
The two main components of the financial market are the money market and the capital market.
Briefly explain the difference between the primary market and the secondary market in the context of financial markets.
Briefly explain the difference between the primary market and the secondary market in the context of financial markets.
Signup and view all the answers
Profit maximization is always the most appropriate goal for a firm.
Profit maximization is always the most appropriate goal for a firm.
Signup and view all the answers
What are the three major forms of business organization?
What are the three major forms of business organization?
Signup and view all the answers
What is the main advantage of a corporation over a sole proprietorship or partnership?
What is the main advantage of a corporation over a sole proprietorship or partnership?
Signup and view all the answers
What is the agency problem in corporate governance?
What is the agency problem in corporate governance?
Signup and view all the answers
Study Notes
Introduction to Financial Management
- Financial management is the art and science of managing money and assets.
- It's a process to effectively and efficiently obtain and allocate financial resources to achieve a firm's objectives.
- The primary goal of a firm is to maximize shareholder wealth by maximizing share price.
Objectives and Goals of a Firm
- Maximize sales
- Minimize costs
- Maximize profits
- Achieve consistent and steady earnings growth
- Ensure survival
- Avoid financial distress and bankruptcy
- Outperform competitors
Wealth Maximization vs. Profit Maximization
- Wealth maximization considers the timing of returns and the time value of money.
- Profit maximization is usually a short-term approach.
- Wealth maximization takes into account the owners' desires to receive dividends rather than just maximizing profit.
- Profit maximization often overlooks the risk associated with potential returns
Financial Management Functions
- Planning: Developing and evaluating firm goals and strategies to achieve stated objectives.
- Controlling: Analyzing causes and responsibilities related to the activities of the firm.
- Investment decisions: Determining the asset structure of a firm.
- Financing decisions: Determining the financial structure of a firm.
Financial Management Decisions
- Capital budgeting: Determining which long-term investments or projects a business should undertake.
- Capital structure: Determining how much to borrow to pay for assets, and the optimal mix of debt and equity.
- Working capital management: Managing the day-to-day finances of the firm.
Financial Market
- Facilitates allocation of financial resources within the economy.
- Financial intermediaries (e.g., banks, credit unions) reduce transfer costs and risk for investors and borrowers.
Investment Process
- Individuals are typically suppliers of funds.
- Businesses are typically demanders of funds.
Financial Market Components
- Money market: Handles marketable securities that mature within one year or less. Characterized by low default risk, short maturities, high liquidity and marketability.
- Capital market: Handles long-term securities such as bonds, common stocks, and preferred stocks.
- Primary market: Deals with newly issued securities.
- Secondary market: Deals with previously issued securities.
Forms of Business Organization
- Three major forms: Sole Proprietorship, Partnership (General and Limited), and Corporation (Limited Liability Company & Limited Liability Partnerships).
Corporation Advantages and Disadvantages
- Advantages: Limited liability, unlimited life, easy transfer of ownership, and easier to raise capital.
- Disadvantages: Separation of ownership and management, potential for double taxation (in some jurisdictions).
Agency Problem
- Agency problems relate to the control of a corporation when ownership and management are separate.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Explore the fundamentals of financial management, including the objectives and goals of a firm. Understand the key differences between wealth maximization and profit maximization, and learn about the essential functions of financial management. This quiz is perfect for those looking to gain insights into effective financial strategies.
