Roles and Objectives of Financial Management

Question 1

Define Finance

Answer 1

management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting. There are three main types of finance:
Personal
Corporate
Public/government

Question 2

At a personal level what is finance concerned with?

Answer 2

how much of their earnings they spend
how much they save
how they invest their savings

Question 3

At a corporate/business level finance is concerned with?

Answer 3

how firms raise money from investors
how firms invest money in an attempt to earn a profit
how firms decide whether to reinvest profits in the business or distribute them back to investors

Question 4

what is public finance?

Answer 4

is the management of a country’s revenue,expenditures, and debt load through various government and quasi-government institutions or councils.
Components of public finance
Tax collection (Income tax, property tax, GST, import duties, etc.)
Budget
Expenditure (Health care, Pensions or retirement, education, defense, infrastructure, etc.)
National Debt

Question 5

What is the difference between shareholder wealth maximisation and profit maximisation?

Answer 5

Maximisation profits focus on short term earnings while the wealth maximisation focus is on increasing the overall value of the business entity over time.

Question 6

what does agency relationship mean?

Answer 6

an agency relationship is a kind of fiduciary relationship this means that the relationship requires a degree of trust with both you and your partner having a duty to act in good faith.

Question 7

what does agency cost mean?

Answer 7

agency cost is a type of internal company expense which comes from the actions of an agency acting on behalf of a principal.

Question 8

Shareholder wealth maximisation

Answer 8

Considers the timing and risk of the benefits from stock ownership

Determines that a good decision increases the price of the firm’s common stock

Is an impersonal objective

Is concerned for social responsibility

Success is measured by market value of common stock

Question 9

Accounting v Finance

Answer 9

The main difference between accounting and finance is that those who work in finance typically focus on planning and directing the financial transactions for an organisation while those who work in accounting focus on recording and reporting on those transactions

Question 10

Challenges posed by wealth maximisation

Answer 10

Stakeholders: preservation of positive stakeholder relationships, often associated with “social responsibility”.

Corporate Governance: ethical and responsible governance to ensure sustainability.

Ethics: Maintaining high ethical standards both legally and morally.

Agency Problem: Management’s personal goals are being placed before corporate goals