Question

What are the three types of financial management decisions and what questions are they designed to answer?

① What are the three major forms of business organization?

② What is the goal of financial management?

③ What are agency problems and why do they exist within a corporation?

④ What is the difference between a primary market and a secondary market?

Answer 1

The three types of decisions in Financial Management are :

• Capital Budgeting decisions: This decision relates to which projects should the business invest in.
• Capital structure : This decision relates to the decision to weather use debt or equity to finance the operations of the firm.
• Working capital budgeting : this decision related to managing the day to day finances of the firm.

The three major forms of business organization are :

1. Sole proprietorship : here is a single individual is the owner of his business.there is unlimited liability in a sole prorietorship.
2. Partnership: here two more individuals come together to form a firm. Each partner is personally liable for all the losses of the business in the case of general partnership.
3. Corporation : A corporation has a separate legal identity independent of its members. Members can come and go but a corporation will continue to survive.

The goal of financial management is :

The primary goal of financial management is to maximize the current value of share and maximize the profits of the firm.

Agency problems is the conflict of interests between the mangers and shareholders.

The agency problems exists when the managers who are appointed as agents of the shareholders think about their personal interests instead of the interest of the organization. Agency problems exists when managers try to put their personal interest ahead of the interest of the shareholders.

Primary market is the market where the shares are originally issued. This market, is where investors buys shares directly form the company.

Secondary market is the market where the traders trade shares which have been originally issued by the company. In this market, investors buy and sell stocks among themselves.