FUNDAMENTALS OF

FINANCIAL MANAGEMENT

CHAPTER 1
An Overview of
Financial Management
 What is meant by goal maximation
of the shareholders wealth?

The principle of shareholder wealth maximization

(SWM) holds that a maximum return to shareholders
is and ought to be the objective of all corporate
activity. From a financial management perspective,
this means maximizing the price of a firm's common
stock. In pursuing this objective, managers consider
the risk and timing associated with expected earnings
per share to maximize the price of the firm's common
stock. When this is properly executed, management
will also have maximized the future stream of
dividends and capital gains that accrue to its
shareholders
 What are the drawbacks in considering that the
utmost goal of business entity is to yield the
highest profit possible for the firm?

 One drawback is that it can motivate the business's

leaders to prioritize profit over things like ethics,
the well-being of their employees, and the well-
being of their customers.

 Another drawback is that customers often prefer to

buy from companies who do not have profit as their
highest motive. One reason is because companies
that openly prioritize ethics,
 Categories of financial
Management

Valuation Approach
Maximation of Shareholders Wealth
Social Responsibility and Ethical Behavior
 What are the Functions of
Financial Management?

Cash Management
Inventory Management
Credit Management
Fund Receipt
Disbursement Management
 Forms of Business
Organization

Sole Proprietorship
 About 75% of all firms
Partnership

Corporation
 About 90% of all sales
 What issues does the Agency
Theory examine?

 Agency theory, then, examines the conflicts of

interest that can arise between principals and
agents. This is much more likely to be a problem
in a public corporation than in a private one. The
problem addressed in agency theory typically
arises when stockholders hire managers to run
their company.
 What control mechanism may be
employed to encourage managers to
perform in the interest of shareholders?

There are a number of ways to encourage managers to

perform for the interest of shareholders. Some of them are:

 Provide Performance-based incentives Plans

 Straight Involvement by Shareholders (Institutional)
 Takeovers