Question

1. What are the three basic questions Financial Managers must answer? 2.What is the goal of financial management? 3.What are agency problems, and why do they exist within a corporation?

Answer 1

1. The thee basic questions financial managers must answer are-

• Investment decisions- This includes deciding what types of long term investment should the company choose.
• Financing decision- This includes questions such as how should the firm raise funds for the investment
• Dividend decisions- How the profits of the firm to be divided between shareholders and firm.

2. The goal of the financial management is to manage the wealth of the firm in such a way that to maximize the profit of the firm and minimize the risk. But the ultimate goal may be to maximize shareholders wealth by increasing the market value of shares or equity.

3. Agency problem generally refers to the conflict in titerest between the two parties when one is responsible for the other. When one person is doing any work for two persons but there is difference in opinion or goals of the two.

If we talk about a corporation then there are two types of people first is managers (agent) and the second is shareholders (principals), the managers are the agents for the stockholders and hence they are expected to work in the interest of the shareholders and try to increase the shareholders wealth but the managers also work in such a way that it increases their own wealth. Since both have their own interest so the agency problem arises.