Question

Write a short note on the following Financial Management Axioms:

It’s hard to find really profitable projects.

Efficient capital markets.

The agency problem.

Taxes bias business decisions.

All risk is not equal.

Ethical dilemmas are everywhere in finance.

Answer 1

1.it is hard to find really profitable projects because there are risks associated with projects in the form of macro risclk which cannot be predicted in advance and it is not easy to find profitable projects so various kinds of capital budgeting methods are used.

2. Efficient capital markets are those capital markets in which publicly available information and privately available information has already been discounted into the stock price and there is no scope for making any excess rate of return.

3. The agency problem is a problem existing between principal and his agent and when agent is acting in his own interest rather than acting in the best interest of the principal because an agent is always required to act in the best interest of the principal.

4. Tax biased business decisions will be generally referred to such business decisions which are made in order to save taxes and help the company in proper management of taxes through decision making in business activities.

5. All the risk are not equal in nature because some risk can be very destructive like an event of blacks swan in which the market can be erasing the entire portfolio value while other risk which are mostly unsystematic are diversifiable.

6. Ethical dilemmas relates to to all such decisions which are leading the business into to a conflict between profit maximization or value maximization because businesses will always be trying to maximize it's profit but maximization of value is a different thing which will be involving ethics and there would be a dilemaae on the part of decision making in business.