Question

Describe the goal of financial management?

Identify the three main areas of concern in corporate finance?

Explain the advantages and disadvantages of conducting business as a corporation?

Answer 1

Goal of financial management

1. Profit maximization: The first goal of the financial management is to manage the money of the firm in such a way that leads to the profit maximization. The first goal of the shareholder is to gain profit over investment.
2. Cost minimization: The second goal of the financial management is to minimize the cost which can be done in many ways. Financial manager’s makes financial strategy such as inventory management, cash management, optimum use of the cash, dividend policy like these things leads to cost minimization.
3. Liquidity: On of the goal of financial management is insure that company have sufficient short term fund to manage daily activities.

Three main areas of concern in corporate finance

1. Capital Budgeting: The first area of the concern of the corporate finance is to decide in which project the firm must invest. There could be multiple project which could independent or dependent to each other in which company must decide the criteria to choose the project. Company can use NPV, Profit index, IRR or any other method of selection.
2. Capital structure: Second most important concern for the company is to decide the source of finance for example company should raise equity from the market or use reserved money for the investment or go to market for the debt. In capital structure it must be decide what should be the right mix of equity and debt , raise equity which reduce the ownership or raise debt which a cheap source of finance but can lead to bankruptcy.
3.     Working capital management: It means to insure that company have sufficient short term fund to manage daily activities. What should be the source of fund in short term what should be the credit sales, how should term be raise.

Advantages and disadvantages of conducting business as a corporation

Advantages

1. Limited liability: the first advantage of the corporation is that it has limited liability
2. Money: A large corporation can raise fund from IPO or issuing bond.
3. Ownership transfer: under corporation it is easy to transfer the ownership through sale of share.

Disadvantages

1. In large corporation, decision making is very slow since there lot of stakeholder in which consensus building is very slow
2. Legal: There is lot of legal binding which corporation have to maintain which might be taxes and other things. There lot strict laws which a corporation must follow.
3. High tax: A corporation pays a high tax rate.
4. Costly: To run a corporation required large funds for building, infrastructure, salaries.