lOMoARcPSD|19571698
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
lOMoARcPSD|19571698
CHAPTER
1
..
: ,
, .
N1'-TlJRE,.- PURPOSE AND
SCOPE OF FINANCIAL
-MANAGEMENT
•
·,
\'_
~(1ecfu/.f.earni»J Oufcomis
After studying Chapter I, you should be able to:
f. Describe the nature, goal,and basic scope of
financial management.
· 2. '~plain briefly the three ·major types of ·
decisions that the Finance Manager makes.
3. Discuss the importance or significonce of
financial mahagement.
·
4. Describe the relationship between Financial
.·Management and 'A ccountin:g. .
5.
Describe the relationship between Financial'
. Management and Economics. '
·
... .
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
---
lOMoARcPSD|19571698
CHAPTER 1
NATURE, PURPOSE AND SCOPE O~
FINANCIAL MANAGEMENT .
NATURE OF FINANCIAL MANAGEMENT
as
Financial Management, also r~ferred to
managerial finance, corporate
finance, _and business finance, is a decisio1,1 making process concerned with
planning, acquiring and utilizing funds in a manner *at achieves the firm's
desired ·goals. It is also described as the process for and the analysis of making
financial decisions in, the business context. Finam;ial management is part of a
larger discipline called FINANCE which is a body of facts, principles, and
th~ories r~lating to raising and using money by individuals, businesses,; and
goveniments. This concerns both financial management of profit-<lriented
business organizations particularly the corporate _form of business, as well as,
concepts and techniques that are applicable to individuals and to governments.
THE GOAL OF FINANCIAL MANAGEMENT
Assuming that we confine ourselves to for-profit businesses, the goal of financial
management is to make money and add value for the owners. This goal, however,
is a .,little vague and a more precise definition ·is needed in order to have an
objective basis for making and eyaluating financial decisions. The financial
manager in a busin_ess enterprise must make decision for the owners of the firm.
He must act in the owners' or s~are~olders' best interest by making aecisions
that increase the value of the firm or the value of the stoc½,
The appropriate goai ·for the financial manager can thus be stated as follows:
The goal offinancial management is .to maximize the current value per share
of the existing stock or ownership in a business firm.
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
lOMoARcPSD|19571698
4
Chapter I
·
1
The statei g~~r ~nsiders the fact that the shareholde~ in a flnn are the residual.
- owners. By this, we mean that they, are, en.titled only to what is left. after
employees, supplier, creditors and anyone el se with legitimate claim are paid
their due. Jf. any of thes.e groups go .,unpaid, the sharehold_e rs or owners ~et _
nothing:. So, if ·the shareholders are - benefiting in the .sense th~t the· residua:!
portion is growing, .it' mµst be true that everyone else is .being benefited too,
Be~ause the goal 1of ft rtancial · ma~agement is · lo maximii e the value· of the
slfare(s), there is a !Jeed_to learn how to identify investments, arrangements and
distribute ~tisfactory amount of dividends pr share i_n ·the ,profits that favorably ·
;
·
'
·,
·
.
impact the value of the share(s), ·
Finally, our goal does not impfy that the financial manager should take illegal o~ ,
unethical 11ctions in the hope of increasing the value of the equity in the firm. The ·
financial manager should best serve the owners of the busine.s s by identifying
goods and services that add value to the firm because they are desired and valued
in the free marled place.
·
·
·
SHARED PROSPERITY: NEW,.BROADER GOAL'Of BUSINESSES
I
Inequality and the
"Shared Prosperity: The Business Groups' Response
Pandemic" (EXCERPTS)
.
', ·
.
Philippine Inquirer, November 1-6, 2020 by Rex
Drillon I):
to-
c;.
A historic event in the ~nnals of, Philippine business happened on Nov, 5, 2020. In that
, event, 26 of 1/'Je country's largest business anq professional associations signed a
Covenant for Shared Prosperity.
·
·The signatories to this covenant included MAP, MBC, FINEX, PCCJ, BAP, AMCHAM,
ECCP, ICP, ISA and 16 other associations. They, are called the Ptiilippine Business Groups or PBGs. ·Coinbined, they ·represent thousands of businesses and an even
greater number of individual rnember-professionais committed.to national development.
Commitments of the PBGs
In the. Covenant for Shared Prosperity, the PBGs . then -pledged _and .signed the
co~tnitments to the following stakeholders: . ·
·
· · 1. Commitments to employees: Recruit, train and develop employees and
managers to be best that they can be irrespective of gender, alma matter, age,
ethnicity and religion; provide just compensation and benefits; promote
meritocracy and encourage work-life harmony;
-
"""I:
•
•
:..
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
---.:,ii
lOMoARcPSD|19571698
!{aiure, Purpose and Scop_,: ofFinancial Management
5
. 2. Co~m~nt to customers: Provide onl~ quality products and services.that are of
continuing value to customers;
·
3.
Commitment to suooliers:'Treat the goods, service· and funds providers fafrty,
. ethically and with respect as they, in tum, are expected to treat their own
suppliers
in their supply
·
.
. chain the same way;
4. · Con:imitment to the community: Be actively inVOlved in,the communities where
they operate- in, with particular attention to the needs of the disadvantaged in
those communities:
·
5.
Commitment to the environment Protect and preserve the environment for· the
benefit of current and future generations by employing environment-friendly •
technologies.in all aspects of business operations; and '
s: ,Commitment to stockholders: _Deliver reasonable and just returns to and fair
treatment of the controlling and noncontromng shareholder:i;.
In forthcoming year, the signatory associations and.their member companies shall 1ssue
policy statement that embody the commitments of these member-companies to their
respective six stakeholders, namely: Employ~s. Customers,-- Suppliers, Community
Environment and Shareholders.
·
.'
'
.. They were advised to adopt the 21 metrics on shared prosperity as developed by, the
Wor1d Economic Forum.
It has been said that the ultimate end of the corporate governance advocacy is sharing
the prosperity; that js·, to help companies create wealth ethically and to .share that wealth;
li~e good stewards, to eradicate poverty.
We all know that th.e ultimate solution to poverty is jobs, job and more-jobs. Corporations·
can _help create more jobs - by governing well because good governance· e11ables
companies to earn more and grow bigge~ faster,.thereby creating more jobs.
When people hpve jobs, they don't go hungry. When people have jobs, they can afford to .
go to school or send their children to school. When people have jobs, they don't despair they can hope, th,ey can dream. Jobs feed the stomach; i9bs fee~ the mind, and jobs feed
the-
. .
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
lOMoARcPSD|19571698
6
) .
ChaplC! _I_
Inequality, lncluslvity
Even before the pa~demic, many in the local business have been struggling with how the
cquntry, in general, and Philippine Business; in particular, sh~1,1ld respond to the glob~I
problem of inequality and inclusivity. As if this were not enoug.~, the COVID 19 pa~dem1c
came and has shaken the very foundations of the global society and economy with the
Philippines being one of the worst-hit.
0
In the country, hund~s of thousands had been affected and thousands h~ve died
because of COVID-19. Just as bad, if not worse, tens of, thousands of businesses,
particularly micro, small and (Tiedium enterprises, have closed ·down, millions have lost
their jobs and the economy received .a terrible beating, GQntracting by 16.5 percent .in the
second quarter alone.
It is safe to assume that proportionately, our country is not very far, if not worse, frorn the
terrible global problem of inequality. Our poverty incidence, for one, is among the highest
iri the region. The role of the Financ~ Function can not be overemphasized in attaining
those strategic objectives because an of these goals will require decisions on · proper
sourcing and allocation of funds.
Financial' Management and Public Responsibility
Finance is a very challenging and rewarding field. Financial managers are given the
responsibility to plan the future growth and direction of a firm which can greatly affect the
community in which it is based. The decisions reached by a financial ma,nager ultimately
represent a blend of theoretical, technical and judgmental matters that must reflect the
concerns of society.
·
The primary goal for mc1nagers of publicly owned companies implies that decisions should ·
be made to maximize the long-run value of the firm's equity shares. At the same time,·
managers know that this does not mean maximize shareholder value ."at all costs·.
Managers have the obligation to behave ethically and they must follow the law .and other
society-imposed constraints.
Financial managers have certa.in obligations to those who entrust them with the running of
the firm. They must have a clear sense of ethics and must avoid pay offs or other forms of
personal gain. Managers should not engage in practices that can damage the image of
Jhe firm but should particulate as much as possible in social activities to demonstrate that
they are cognizant of the importance of the community and those who buy their products
or services.
·
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
lOMoARcPSD|19571698
Nature, Purpose and Scope ofFin~ncia/ Man~g_ement
1
. In short, financial managers · must reconcile social and environmental
, requirements with profit-making ritot_ive. Adherence to social values may not
produce the most efficient use of assets or the lowest costs, but it will enhance
the image of the firm: Looking after the interest in· community;'-settirig up of
training facilities, casing for the safely and the ~elfare of the workers, providing
free college education for the depe!ldents of the employees C8f1 produce longtenn benefits in the form 9f higher productivity and more harmonious
,..;latiooships between labo,- and .......- . Although . _ moy he ,ooflict
between promoting socially responsible- programs and the- profit motive,
maintai~irig some concern for social needs when pursuing the goal of.
maximizing the wealth of the firm is a primary responsibility of a tirm.
SCOPE ·OF FINANCIAL MANAGEMENT
-'
Tradit~onally, financial -management is primarily concerned with acquisition,
financing and management of assets of business concern in order to maximize the
wealth of the firm for its owners. The basic responsibility ·of. the Finance
Manager is to acquire funds needed by the Jinn and investing those funds in
profitable ventures that will maximize the firm's wealth, as well as, generating
returns to the business concern. Briefly, the traditional view ·of Financial
Management looks into the followil)g functions that a financial manager of a
business firm will perform:
1. Procurement of short-term as well as long-term funds from financial
institutions
·
'
·
2. Mobilization of funds through financial instruments such as equity
shares; preference shares, debentures, bonds, notes, and so forth
3. -Compliance with legal and regulatory provisions relating to · funds
procurement, use and distribution as well as coordination of the finance
function with the accounting function .
1
,
With modem business situation increasing in, complexity, the r-ole of Finance
Manager whi_ch initially is just confined to acquisition of fun~s, e~pa~ded to
judicious and efficient use of funds available to t!'e firm, keepmg m view the
objectives 'ofthe firms and expectations of the providers offiulds.
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
lOMoARcPSD|19571698
8
Chapter I
,
Morll recently. though, with the globalization •and ,liberalization of world '
economy, tremendous reforms· in financial sector evolved in ·order to promote
more diversified, efficient and competitive financial system 1in the country:. The
finan'ci~I refonns · coupled with .the diffusion of infotml\tion' technology 'have
brought intense competiti~n, mergers, takeovers, cost management, quality
improvement, finllflcial, discipline and so forth .
Globalipttion has caused to integrate the_ nation~! economy ~ith t~e global
econonfy and- has created a new financial environment which brmgs new
opportunities and challenges to the business enterprises. This development has
also led to total .reformation of the finance function and its responsibilities in the
organizatioo. Financial management has assumed a much greater significance
and the role of the finance managers has been given a fresh perspective. ·
. In view of modem approach, the Finance Manager is expected to analyze the
business firm and determine the total funds requirements of the finn, the assets or ''
resou~ces to be acquired, the best pattern of financing the assets and how best to .
satisfy the investors' expected return on their investment.
-
.
TYPES OF FINANCIAL DECISIONS
The three major types of decisions that the Finance Manager of a modem '
.
business firm will be invo·lved in are:
I.
Investment decisions
2.
Financing decision~
3.
Dividend decisions
All these decisions aim to maxiniize the shareholders' wealth through
maximization of the firm's wealth.
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
lOMoARcPSD|19571698
Nature, Purpose and Scope of Financial Ma11ag_emenl
9
INVESTMENT DECISIONS
The investment decisions are those which detennine how scarce or limittld.
resources in terms of funds of the· business finns are committed to projects.
Generally, the firm should select only those capital investment•proJ>9S3l_s whose
net present value is positive and the·rate of return exceeding the marginal cost of
capital'. It should also consider the profitability of each individual project
proposal that will contribute to the overall profit'ability of the firm and lead to-the
creation of wealth:
FINANCING DE<i:ISIONS .
Financing decisions assert that the mix of debt and equity chosen to finance
investments_should maximize the value of inves_tments made.
The finance decisions should consider the cost of finance available in different
fonn's and the risks attached to it: The principle of financial leverage or trading
on the equity shoulqibe considered when selecting the debt-equity mix or capital
structure decision. If the cost of capital of each component is reduced, the overall
weighted average cost of cap'ital and minimization of risks in financing will lead to the profitability-~~ prganization 1111d create wealth to the owner.
DIVIDEND DEC.ISIONS
The dividend decision is concerned with the determination of quantum of profits
to be distributed .to-the'owners, the frequency of such payments and the amounts
to be·retained by the firm.
The dividend distribution policies and· retention of profits will have ultimate
effect on the firm's wealth. The business ijrm should retain its profits in the form
of · appropriations· or • reserves for financing .its · future· growth and expansion
schemes:· If -the fil"!ll, ho~ever, adopts a very cQnservative dividend payments
policy, the firm'-s share prices in the market could be adversely affected .. An
optimal dividend distribution policy therefore will lead to the maximization -of
shareholders' wealth.
·
To summarize, the basic objectivt:· of the ·investment, financing and dividend
decisions is to- maximize the firm's wealth. If the firm enjoys the stability and·
growth, its share prices in the market will' impfOVe and will lead to capital
appreciation of shareholders' investment and ultimately maximize the
shareholders' wealth.
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
lOMoARcPSD|19571698
ro
Chapter I
SIGNIFicANCE OF FINANCIAL MANAGEMENT
The importance of financial m1'nagement is known for the following aspects:
BROAD APPLICABILITY
Any organization whether motivated with earning profit or not having cash flow
requires to be viewed from the angle of fi~anciaf discipline. The principles of
finance are appiicable wherever there is _cash flow. The concept of cash flow is ·
one of the central elements of financial analysis, planning, control, and resource
allocation decisions. Cash flow is important' because ·the financial health of the
firm depe~ds on its · ability to generate sufficie.nt amounts of cash to pay its
employees, suppliers, creditors, and owners.
Financial management is equally applicable ·to all, forms of business like sole
traders, partnerships, and corporations. It is also. applicable to "onprofit
organizations like trust. societies, government organ'izations, public sectors, and
so forth.
.
,,
- ,'
~·
REDUCTION OF CHANCES OF FAILUR.E
'
A firm having latest technology, sophisticated machinery, high caliber marketing and technical experts, and so forth may still fail unless its finances are managed
on sound principles of financial management. The strength of business lies in its
financial discipline. Therefore, finance function is treated as primordial which
enables the other functions like production, marketing, purchase, and personnel
to be effective in the achievement of organizationa_l goal and objectives.
'
· ,. t,,
MEASUREMENT OF RETURN ON INVESTMENT
Anybody who invests his money will expect to earn a reasonable ret~rn on his
investment. The owners of business try to maximize their ·wealth. Finaricial
management studies the risk-return perception of the owners and the time value
of money. It considers the ~ount of cash flows expected to be generated for the .
benefit of owners, the timing of these cash flows and the risk-atta~hed to these
cash flows. The greater the time and risk associated with the e_x pected cash flow,
the greater is the rate of return required by the owners.
·
''
,,r
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
---
lOMoARcPSD|19571698
Nature, Purpose and Scope of Financial Management
II
RELATIONSHII> BETWEEN FINANCIAL MANAGEMENT
ACCOUNTING AND ECONOMICS
'
FINANC!AL MANAGEMENT AND ACCOUNTING
~ust marketing and f!r°!11'~tion a~ major functions in an enterprise, finance too
1s an independent specrahzed function and is well knit with other functions.
.
Financial management is a separate management area. ln many organizations,
accounting and finance functions are intertwined and the finance function is.often
considered as part of the functions of the accountant Financial management is
however, something more . than an art of accounting and bookkeeping.
Accounting function discharges the fonction of systematic- recording of
transactions relating to the firm's activities in the books of accounts and
summarizing the same for presentation in the financial statements such as the
. Statement of Comprehensive fhcome, the Statement of Financial Position, the
· Statement ofChanges in Shareholders' Equity and the Cash flow Statement.
.
-
,.
Financ,ial statements help managers to make business decisions involving the best
. use of cash. the attainment of efficient operations, the optimal allocation of funds
among assets, and the effective financing ·of investment and operations. The
interpretation of financial statements is achieved partly by using financial ratios,
pro fonna and cash flow statement.
· The finance manager will make use of the accounting infonnation in the analysis
and review ofthe firm's business position in decision making. In addition to the
analysis of financial information available from the books of accounts and
records of the finn, a finance manager uses the other methods and techniques like
capital budgeting techniques,- statistical and mathematical models, and computer
applications in _decision making· to maximize .the value of the finn's wealth and
value of the owner's wealth: In view of the above, finance function is considered
a distinct and separlrte function rather than simply an extension of accounting
function.
It should be pointed out that the managers of a firm are supplied with more
. detailed statistical infonnation than appears in published financial statements.
These data are , especially important in developing cash flow concepts for
evaluating the relative merits of different investment projects.
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
lOMoARcPSD|19571698
. 12
Chapter I
This informati~n permits ~anagers to ·determine.. incremental c~sh flows . (an
approach that looks at the net returns a ·given •proJect generates 111 comparison
with ·alternative investments), thus enabling them _to m~ke more ac~u_r~te
assessments ·of the profitabilities of specific inve~tments. It is the respon.s1b1hty
of managers to direct their accountants to prepare infernal stat~~ents th~~ include
· this information so that they can make the best investment decisions_possible.
Firancial mana"gement is the key function a~d many firms prefer t~ centr~lize the
· function to keep constant control on the finances ?fthe fir~. A~y inefficiency in
financial management will be concluded with a disastrous s1tuat1on, But; as. far as
the routine matters are concerned, the financ·e function could be decentralized
with adoption of responsibility ac,counting concept. It . is advantageous to
decentr:alize accounting function to speedup the processing of inforll}atio~. But
since the accounting information is used in making financial decisions, proper
controls should be exercised in processing qf accurate and reliable information to
the needs of the firm . The centralization or decentralization of accounting and ·
finance function~ mainly depends on the attitude of the top level management . .
FINANCIAL MANAGEMENT AND ECONOMICS
Financial managers can make better decisions if they apply thes~ basic economic ·
principles. For example, economic theory teaches us to seek the best allocation of ·
resources. To this end, financial managers are given the responsibility tci find the
best and least expensive sources of funds and to invest these funds into the best.
and most efficient mix of assets. ·111 doing so, they 'try to find the mix of ~yailable . ·
resources that will achieve the highest retur·n at the least risk within the ~onfines
of an expected change in the economic climate. Good financial management has
a sound grasp of the way economic and financial principles impact the
profitability of the firm .
Financial managers do a better job when they understand how to re~po.nd
effectively to changes in supply, demand, and prices (firm-related micro factors),
as weH as no more general and ·overall economic factors (macro factors) ..
Leaming to deal with these factors provides iniportant tools for effective
financial planning.
·
The finance manager must be familiar with
macroeconomic environment aspects of business.
the
microeconomic and ·
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
,.,
lOMoARcPSD|19571698
Nature, Purpose and Scope of Financial Management
13
When making investment decisions, financial managers .consider the effects of
changing supply, d~mand, , and price conditions on the finn's performance.
Understanding the nature of ·these factors helps managers. make the most
advantageous operating decisions. Also, managers should detennine when it is
best to issue equity shares, bonds or other financia.1instruments.
The sale of products at a profit depends heavily on how· II
·
. interpret
•
we managers
analyze
and
supply and demand conditions Supply
'd are
· able to
·
cons, erat1ons re 1ate
'fi II
spec, 1ca y t9 the con_trol of production costs, where the key element is to hold
costs down so that prices can be set at competitive levels. The best machinery
?1ust be bought; and the ~ost produ~t workers available must be hired'. The goal
1s t_o s~~eeze out the biggest possible profit under given suppTy conditions.
M~mtainm~ a low-cost operati~n ~ill. enable the .finn to ·charge <;ompetitive
prices for 1~ products and mamtam. its market share while still obtaining a
reasonable return.
,
_
Knowledge of economic principles can be useful in generating the-highest sales
possible. Understanding and appropriately responding to changes in demand
allows financial managers to take full advantage· of market conditions. To
accomplish this, the best managers develop and adopt reliable, workable
statistical techniques that forecast demand and pinpoint when directional .changes
iJJ sales take place.
Microeconomics deals with the economic decisions of individuals and firms. It '
focuses on the optimal operating strategies . based on the economic data of
individuals and firms. The concept of microeconomics helps the finance manager
in decisions like pricing, taxation, detennination of capacity and operating levels,
break-even analysis, volume~cost-profit analysis, capital structure decisions,
dividend distribution decisions, profitable product-mix decisions, fixation of
levels of inventory, setting the optimum cash balance, pricing of warrants and
options, _interest rate structure, present value of cash flows, and so forth.
Macroeconomics looks at the economy as a·whole in which a particular business
concern is operating. Macroeconomics provides insight into policies by which
economic activity is controlled. The success of the business finn is influenced-by
the overall performance of the· economy and is dependent upon the money a~d
capital markets, since the investible funds are to be procured from t~e financial
markets. A firm is operating within the institutional framework, which operates
on the macroeconomic theories.
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
lOMoARcPSD|19571698
13A
Chapter I
T_he government's . fiscal and monetary policies will influence the str~tegic
financial planning of the enterprise. The finance manager shoul~ also, l90k into .
the other macroeconomic factors like rate of inflation, real interest rates, level of
'economic activity, trade cycles, market competition both from new entrants and
substitutes, intematio~al business conditions, foreign exchange rates, bargaining
power of buyers, unionization of labor, domestic savings rate, depth of financial'
markets, availability of funds in capital · markets, growth · rate of eqonomy
government's foreign policy, financial intennediation, banking system, and s~
fo~ .
.
The concepts of financial management are equally applicable to bpth private
sector undertakings and public sector enterprises, but the rules,· procedures and
accountability of financial decision are more rigid in PSEs as they are financed .
by the government out of taxes collected from the public. The majority of the
public sector industries are budget financed by the government ;tnd are subject to
a high degree of direct and indirect regulation as regarding funding _and pricing
policies. The public sector accounting information system is also quite different
from. that adopted by the private sector because of the need to prepare more
information as per requirement of the Commission on Audit and other diverse
group of interested parties.
'
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
·~A
lOMoARcPSD|19571698
Nature, Purpose·and Sc<Jpe of Financial Manag_ement
13B
REVIEW QUESTIONS AND PROBLEMS
Questions
I.
What is the- purpose of financial ·management? Describe the kinds of
ac_tivities that fina_ncial management deals with. ·
2. What is the difference in perspective between finance and accounting?
3.
Explain the shareholder wealth maximiz.ation goal of the firm and how it
can be measured. Make an argument for why it is a better goal than
maximizingpr~fit. ·
-
4. Name and describe as many corporate stakeholders as you can.
5. . What conflicts of interest can arise between managers and stockholders?
6. What are the three types of _financial management decisions? For each
type of decision, give an example of a business transaction that would be
relevant.
7.
What goal should always motivate the action of a firm ' s financial
manager?
-
8. What do financial managers try to maximize, and what is their second
objective?
9. In trying to achieve optimum profits, what may a firm, ignore?
I 0. State the-kinds of assurances that investors and creditors seek from a
firm.
11 . What environmental considerations prevent the firm from achieving the
best results in terms of cost control and profitability? Explain 'what this
means.
12. What are some of the micro- and macro-economics factors that influence
the decisions of a firm?
-
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
,, __ ,..
lOMoARcPSD|19571698
JJC
Chapter I
.
.
.
----:-
,
l3. What "three accounting, statements help the manager monitor a finn•s
performance? What can the balance sheet tell the firm about its assets
and financial structure?
·
14. What are some of the nonfinancial aspects of. the manager's role in
society, such· as responsibility toward workers, treatn'!ent of monitories
and dealing with gender problems?
'
J5. Besides maximizing the wealth of the firm, what are some of the. other
goals of financial man~gement?
- Mu/Jiple Choice Questions
I.
What is the primary goal of financial management?
a.
Increase earnings
b.. Maximizing cash flow
c.
Maximizing shareholders' wealth .
· d.
Minimizing risk of the firm
2.
Proper-risk return management means that
a.
the firm should t.ake as few risks as ·possible.
b. consistent with the objectives of the firm, .an appropriate trade- .
off between risk andieturn should be determined.
.
.
c.
the firm should earn highest return possibie.
d. the firm should value future profits more highly than current . 'l
profits.
1:,.
3.
Which of the following is not a major atea of concern and emphasis
in modem financial management?
ii·
Inflation and its effect on profits
b.
Stable short-term "interestrates
c.
Changing international environment
d.
Increased reiiance on debt
4.
Which of the following is not a major a~ea of concern and emphasi_s
in modem financial management? .
·
a.
Marginal analysis
b.
Risk-return trade0 off
c.
Commodity trading
d.
Changing financial institutions.
C, .
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)
lOMoARcPSD|19571698
/,/ature, Purpose and Scope oLFinanclal Management
5. •
13D
A financial ·manager's goal of maximizing current or short-term
L , ,earnings maynot be"appropnate tieciiuse _! --
·1
.
a. t . it.fai!s tq t9nsider1th~ timing of the benefits. ,
b.
increased earnings may be accompanied by unacceptably higher
. • ,,
•.
, I ' 1·· f. k
,, , .eveso rrs. . _ ._·• 1 , ·
· .
• . •-, .~
.
c. , ~ ings are subjective; they can be defined in vanous ways
•'sucn'as accounting or ~nomic-eamings.
d.
All of the given choices.
6 . . AH of the following _are functions of the financial,manager except
a. . Analyzing and planriing'the compa~y's 'performance.
b. · Anticipating the company's financial needs. ,
c. Assigning the market price of the company' s stock.
d. -Allocating the funds to the most profitable asset.
7. Which of the following statements is false?
a. The financing decision involves the process of allocating funds for
.
investment in competing assets.
b, The treasurer would be. responsible for activities such as managing
cash bala~ces, granting credit to customers and managing the process
of issuin·g new securities. ·
c. The optimal capital structure is the best combination ,of long-term
debt equity. ·.
·
.
·
d,- ft ' is necessary. to determine the appropriate risk-return trade-off to .
· '
maximize the market value of the firm for its shareholders.
;.
Downloaded by Gintoki The Troll (jayrsoriano16@gmail.com)