Financial Management The Role of Financial Management 1. What is financial management?

Ans: Concerns the acquisition, financing, and management of assets with some overall goal in mind. 2. What are the three major functions of the financial manager? How are they related? Give an example. 1. The Investment Decision 2. Financing Decision 3. Asset Management Decision 3. What is the goal of the firm? 1. Wealth Maximization 2. Profit Maximization 4. Do you think profit maximization could be a better objective of a firm? Explain.

Ans: Three major functions are:

Ans: Two major goal of the firm:

Ans: If the firms objective is profit maximization then if not would be a better objective because if it is the firms goal then sometime the firm may take some unethical activities or sometime it may take some awful decisions. 5. Do you think earning per share maximization could be a better objective of a firm? Explain. 1. It does not specify the timing or duration of expected return. 2. Risk of the cash flow. 3. It does not allow for the effect of dividend policy on the market price of the stock. 6. Ans: What do you mean by agent and principal? Corporation Shareholders Management

Ans: Per share maximization is not an appropriate goal because:

Management acts as an agent for the owners (Shareholders) of the firm. An agent is an individual authorized by another person called principal.

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What do you mean by agency theory and agency problem?

Ans: Agency theory is a branch of economics relating to the behavior of principal such as owners & their agents such as manager. The separation of ownership & control in the corporation results in potential conflicts between owners & management. The objective of the management may differ from those of the firms shareholders, when management act in its own best interest rather then those of the shareholders, agency problem creates. 8. What are stakeholders? Who are the parties under stakeholders? Is there any difference between stockholder and stakeholder?

Ans: stakeholders are all constituencies with a stake in the fortunes of the company. 9. What do you mean by social responsibility? Give some example.

Ans: Protecting the customer, paying fair wages to employee, supporting education , Environment friendly products etc. 10. Assume that a firm is concerned highly about the social responsibility. Will this attitude help increasing the firms value? Explain. Assume a firm is evaluating an investment proposal and found that it is profitable in the short run but will not create value to the firm in the long run. Will the firm accept this investment proposal? Is there any difference between controller and treasurer? What are the functions they perform?

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