finance

Question 1

What is the financial objective of a business? Can maximize the shareholder wealth
be the only goal for managers?

Answer 1

• The financial objective of a business could be complex. First, the key part of running
  a business is to make the profit, keep the liquidity and therefore bring benefits back to
  its owners. Meanwhile, social responsibility is also very important.
• In fact, we can
  treat the corporate social responsibility (CSR) as a kind of strategic investment
  decision. For example, firms with significant CSR involvement may suffer fewer
  negative responses from their stakeholders and markets (CSR could be regarded as the
  risk insurance to adverse events here).
  As a firm manager, his/her main task is to maximize shareholders’ wealth.
• However, it
  could not be the only goal, since running a firm in a modern society needs
  comprehensive considerations rather than just focus on profit maximizing side.

Question 2

Discuss accounting as the language of business and the role of accounting in making
economic decisions.

Answer 2

Accounting is the means by which information about a firm is communicated and,
thus, is sometimes called the language of a business. Many different users have need
for accounting information in order to make important decisions such as research and
development, mergers and acquisitions.
- There users could be investors, creditors,
management, governmental agencies, labor unions. Because the primary role of
accounting information is to provide useful information for decision-making purposes,
it is sometimes referred to as a means to an end, with the end being the decision that is
helped by the availability of accounting information.

Question 3

Explain the importance of financial accounting information for external
parties-primarily investors and creditors-in terms of the objectives and the
characteristics of that information.

Answer 3

• The primary objectives of financial accounting are to provide information that is
  useful in making investment and credit decisions.
• For example, in assessing the
  amount, timing and uncertainty of future cash flows, and in learning about the firm’s
  economic resources, claims to resources, and changes in claims to resources.
• Some of
  the most important characteristics of financial accounting information are it is a
  means to an end, it is historical in nature, it results from inexact and approximate
  measures of business activity, and it is based on general-purpose assumption.

Question 4

What is the difference between primary and secondary capital markets? Why is the
existence of secondary markets important?

Answer 4

The term primary market refers to the initial sale of securities where the transaction
raises money for the corporation.
-The secondary market is the market where those
securities are bought and sold after the original sale. In the secondary market it is the
seller of the security who receives funds, and not the corporation.
- Although a
corporation is only directly involved in a primary market transaction, the secondary
markets are still critical to large corporations.
- The reason is that investors are much
more willing to purchase securities in a primary market transaction when they know
that those securities can later be resold if desired. Thus secondary markets facilitate
liquidity in the primary markets.

Question 5

What is the difference between primary and secondary capital markets? Why is the
existence of secondary markets important?

Answer 5

• The term primary market refers to the initial sale of securities where the transaction
  raises money for the corporation.
• The secondary market is the market where those
  securities are bought and sold after the original sale. In the secondary market it is the
  seller of the security who receives funds, and not the corporation.
• Although a
  corporation is only directly involved in a primary market transaction, the secondary
  markets are still critical to large corporations.
• The reason is that investors are much
  more willing to purchase securities in a primary market transaction when they know
  that those securities can later be resold if desired. Thus secondary markets facilitate
  liquidity in the primary markets.

Question 6

Who owns a corporation? Describe the process whereby the owners control the firm’s
management. What is the main reason that an agency relationship exists in the
corporate form of organisation? In this context, what kind of problems can arise?
Name some other areas of activity in which an agency relationship exists.

Answer 6

• In the corporate form of ownership, the shareholders are the owners of the firm.
• The
  shareholders elect the directors of the corporation, who in turn appoint the firm’s
  management.
• This separation of ownership from control in the corporate form of
  organisation is what causes agency problems to exist. Management may act in its own
  or someone else’s best interests, rather than those of the shareholders.
• If such events
  occur, they may contradict the goal of maximising the share price of the equity of the
  firm. An agency relationship exists in any situation where one person employs another
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  to act on their behalf, e.g. a person selling a house employs an estate agent, a person
  taking legal action employs a solicitor etc.