A firm's primary objective Flashcards
What is financial management about?
Financial management is about the financial decisions of firms and individuals
What are the types of stakeholders?
- Owners (shareholders,partners etc)
- Managers
- Creditors (banks,investors etc)
- Clients
- Employees
- The government
- Society
What is the primary objective of the owners?
The objective of the owners is to own a more valuable company
What is the objective of managers?
The objective of the managers is to increase a firm’s profits/assets/sales
What is the objective of the creditors?
The creditor’s objective is to increase the firm’s credit rating
Also known as creditworthiness
How should a firm’s objectives be?
- Clear
- Measurable
- They need to lack negative externalities
What are the fundamental objectives of a firm?
A firm’s fundamental objective is to:
* maximize the firm’s value
* maximize the stock price
* maximize the net income/profit
* maximize the market share
What is a principal-agent problem?
A principal-agent problem is the situation in which the owner of an asset (named principal) is not also the manager of this asset (called agent)
Ex: shareholder = principal , manager = agent
The problem lies in the difficulties in motivating the agent to work in the principal’s interest.
This leads to information asymmentry, meaning that the agent holds more information about the asset compared to the principal.
What could be some problems within the board of representatives?
- Its members are not failiarized with the firm’s activity
- Its members are part of too many boards
- The members avoid arguments to the CEO’s view
- The members have a close relationship with the CEO
- The members are not holding any shares in the firm’s stock
Solution: board diversity
What is the cause of the conflict of interest between shareholders (managers) and creditors?
The conflict stems from the different nature of the cash flow received by the two parties
Creditors supply the firm with debt (managed by shareholders via managers) and expect interest in return, compared to shareholders they hold higher priority in the firm cashflows but do not participate to any super-profits.
What are some solutions for defending the creditor’s rights?
- To issue restrictive clauses for shareholders
- To issue puttable bonds
Limiting the dividends to x% of the net income)
What are stakeholders?
Stakeholders are different parties that share an interest in the firm
Different categories of stakeholders have different objectives that can sometimes be contradictory.
What is market capitalization?
Market capitalization represents the firm’s market value
Computed as: no. of shares x stock price = N * P
What are some advantages of having the stock price as an objective?
- its easily observable
- it reflects the long term effects of managerial decisions
- using the daily price we can test the impact of different events on the firm’s value
How can a firm maximize their market share?
- increase sales relative to the competition (better quality, higher discounts, aggresive prices etc)
Market share = sales (firm) / total sales = assets (firm)/ total assets
The market share increase is limited by the anti-trust regulations that prevent the formation of monopolies or oligopolies (Consiliul Concurentei)
