Question

① What is the goal of financial management?

② What are agency problems and why do they exist within a corporation?

③ What is the difference between a primary market and a secondary market?

Answer 1

(1). Goal of financial management;

Following are the main role of financial management;

·        More focus on survival in the market

·        Helps in financial distress of the firm

·        Helps in solving the problem of bankruptcy

·        Help in facing the competition in the market

·        Help in maximizing sales of the firm

·        Help in maximizing market share

·        Help in minimizing financial costs of the firm

·        Help in maximizing profits of the firm

·        Help in maximizing earnings of the firm etc.

(2). Agency problem;

Agency problem refers to conflict of various stakeholders in the corporation. Such conflict can be between shareholder and management. And agency problem can be between shareholders and creditors of the corporation also.

In other words we can say that agency problem refers to the conflict of different interest between various stakeholders.

Agency problem arise due to differences of interest of various stakeholders. For example; Shareholder wants more eranings on their investment whereas managers want more salaries and economic benefits so there will be a confliction of interest between these groups, this condition is known as agency problem.

(3). Difference between a primary market and a secondary market;

Primary market refers to the market in which securities are sold first time. So we can say that when companies are selling its securities first time in the security market then this market is known as primary market. Normally we see that companies issue securities first time like; shares, bonds with the help of IPO.

Secondary market refers to the market of securities where existing shares, bonds are traded for liquidity purpose. In other words we can say that when already issued securities like; shares, bonds are buying and selling by the investors then such market is known as secondary market. Examples of secondary market are; New York Stock Exchange (NYSE), London Stock Exchange or Nasdaq etc.