Question

What are the three types of financial management decisions and what questions are they designed to answer? • What are the three major forms of business organization? • What is the goal of financial management? • What are agency problems and why do they exist within a corporation? • What is the difference between a primary market and a secondary market?

Answer 1

Financial Management Decisions:

The three major financial decisions made by any organizations are as follows:

1. Investment Decisions: Investment decisions, generally include what are projects to be considered to invest which generate higher returns without compromising the risk factor and reputation of the organization. Major investment decisions are made in this process such as to invest in an asset or to invest in a project.

2. Financing Decisions: Financing Decisions are those how well the funds can be used to make optimum returns to benefit the shareholders and investors, Decisions such as weight of equity or debt are determined.

3. Dividend Policy Decisions: How do we distribute the profits to the shareholders, What dividends should be given to the shareholders and investors so that both the business and shareholders won't be affected.

Three major Business Organizations:

Sole Proprietor: It is the least complexed form of organization, the whole responsibility of the organization is taken care of the single person, The proprietor is the sole responsible for all business decisions. The individual proprietor enjoys all the profits or losses of the organization.

Partnership: It is a business enterprise which is owned by 2 or more people who will make the business decisions and share the profits according to the partnership proposition.

Corporation: It is a business enterprise which is set up by larger shareholders. The enterprise has a legal status of a fictional individual and treated as an individual. The shareholders elect the board of directors and they are responsible for the decision making in the organization.

The goal of Financial Management:

Finance plays a key role in any organization, the goal of the finance management is to make optimum utilization of the available resources and generating higher returns without compromising the risk factor and shareholders interest. Financial management includes decisions like investment decisions, Financing decisions, dividend payouts. It is essential to maintain a good relationship with the investors and shareholders by generating considerably higher returns with lower risk.

Primary Markets:

The primary market is a part of the capital markets in which the companies can sell asset-based securities directly to the investors, The primary markets create long term instruments through which corporate entities raise funds from the capital market.

Secondary Market:

A secondary market is a place where investors buy and sell securities they already own. It is typically known as the stock market. Ideally when the securities are first issued in the Primary market.