a financial manager’s task would be to acquire funds needed by the firm and direct these funds into projects to maximize the value for its stockholders. Your first question is the following: Use other resources such as the internet and explain in a sentence or two what the field of Finance is about. You can also write about the four basic areas; Corporate Finance, Investments, Financial Institutions and International Finance Thus, the financial manager is solely hired to maximize the shareholder wealth (after all the objective of the firm is to maximize profit). But sometimes, conflict of interest arises between shareholders (the principal) and the financial manager (the agent). That is instead of maximizing shareholder interest, the financial manager maximizes his or her own interest. This conflict is known as the principle-agent problem. The textbook gives a simple example. Let’s say you want to sell your car and find an agent and offer him to pay a flat fee upon sale. In this case, the agent will only be concerned about selling your car and not necessarily at the highest price possible. But instead, if you offered him a percentage then the agent would then try to sell the car at the highest possible. In fact, the principle-agent problem is so common that we observe this in our daily lives. Here is your second question: What would be some other examples of the agency problem you observe? (Again here it might be useful to search the internet or perhaps you can readily think of an example that you would like to share with your classmates)/ The financial manager has three major tasks. These involve making decisions about capital budgeting, capital structure and working capital management. As I indicated earlier, “the acquiring funds” part or “the finding the lowest cost funds” part corresponds to capital structure decision. Should the firm borrow money from the bank, issue bonds or stocks to generate funds? This would be a capital structure decision. Finding profitable investments part of “finding those investment projects with the highest return adjusted for risk” part belongs to capital budgeting decisions. Working capital management decisions refer to doing both in the short-term, managing short-term assets such as inventories and short-time liabilities such as paying cahs to suppliers. Your third question is the following: Briefly explain the three major tasks of the financial manager. Be sure to use examples that are original to your answer. Having discussed task of a financial manager now we can skip to the forms of Business Organization. There are three different legal forms of organization; Sole proprietorship, partnership and corporation. Here the critical part is the form of liability in case the firm business organization goes out of business. Sole proprietorship is owned by a single person. The partnership is owned by two or more individuals and a corporation is separate entity from its owners and has rights, obligations as an actual person would have. Here is your fourth question: Which one of these firms have limited liability and which would have unlimited liability? Please explain why. Your fifth question is: What are some advantages and disadvantages of forming a corporation? Finally, a market is any type of arrangement where buying and selling takes place. Financal markets is comprised of two different markets; capital Markets and money markets. In capital markets long-term securities are traded (those that have a maturity of more than one year, such as 30-year government bonds, stocks, etc.). In money markets, short-term securities are traded (those have a maturity of less than one year such as 1-month Treasury bills, certificate of deposits, etc.). In a primary market, the security issued is traded for the first time through public offerings and private placements. In secondary markets, those already existing securities are traded. For example, if a company is going public for the first time, the securities would be sold to the underwriter in the primary market. Then the underwriters would sell it to the general public in the secondary market. There are two kinds of auction secondary markets; auction market and dealer markets. When you sell and buy for yourself you are in the dealer market but when you buy and sell commodities you do not actually own you are in the auction market. Here is your sixth question that has actually three short sections: What does the expression over-the-counter refer to and Which market auction or dealer has a physical location? New York Stock Exchange is what type of market?
Corporate finance is one of the most important subjects in the financial domain. It is deep-rooted in our daily lives. All of us work in big or small corporations. These corporations raise capital and then deploy this capital for productive purposes. The financial calculations that go behind raising and successfully deploying capital is what forms the basis of corporate finance.
Money committed or property acquired for future income is called investments
Private (shareholder-owned) or public (government-owned) organizations that, broadly speaking, act as a channel between savers and borrowers of funds (suppliers and consumers of capital)
The economic and monetary system that transcends national borders. The field of international finance concerns itself with studying global capital markets and might involve monitoring movements in foreign exchange rates, global investment flows and cross-border trade practices.
- Creditors decide to loan money to a corporation based on the riskiness of the company, its capital structure and its potential capital structure. All of these factors will affect the company’s potential cash flow, which is a creditors’ main concern.
- Stockholders, however, have control of such decisions through the managers.
- Since stockholders will make decisions based on their best interests, a potential agency problem exists between the stockholders and creditors. For example, managers could borrow money to repurchase shares to lower the corporation’s share base and increase shareholder return. Stockholders will benefit; however, creditors will be concerned given the increase in debt that would affect future cash flow