Lecture 1 - Overview of Financial Management

Question 1

Investment Decisions

Answer 1

Exchange of money and real assets between The Firm and The World

Question 2

Financing Decisions

Answer 2

Exchange of money and financial assets between The Firm and Investors, via Financial Markets

Question 3

Advantages of corporations

Answer 3

Limited liability, permanency, transferability of ownership, better access to capital markets.
Shareholders bear all RESIDUAL risk (hazard inherent in each investment).

Question 4

Goal of Corporations

Answer 4

Maximise value of owner’s equity.

Also manage risk, maximise share price, maximise profit

Question 5

Equity = ?

Answer 5

Equity = Assets - Liabilities

(value of asset - value of liabilities on that asset)

Question 6

Why is the goal to maximise shareholder wealth/share price of firm?

Answer 6

Shareholder wealth is better defined than profits. Share price/ Shareholder wealth considers timing of profits and risk differences between different courses of action.

Question 7

Does value maximisation justify unethical behaviour ie. child labour, environment, corrupt/repressive goverments

Answer 7

NO!

Question 8

Agency Problems

Answer 8

Conflict of interest between managers and owners. eg. banking crisis arguably caused by managers putting their own interests before stakeholders. No goal congruence.

Question 9

Stakeholders

Answer 9

Anyone with a financial interest in the firm.

Question 10

Achieving goal congruence.

Answer 10

Sack underperforming managers/directors
Sell shares/threaten takeover
Subject managers to specialist monitoring.
Link rewards to shareholder wealth improvement eg ESOPs (executive share option plans)