Question

7. What should be the goal of the financial manager of a corporation? Does it mean that financial managers have to do anything and everything to achieve that goal? Explain your answer.

 8. Briefly explain the assumptions associated with the constant dividend growth formula. What are the components of the required rate of return on a share of stock? Briefly explain each

Answer 1

7)

Goal of a financial manager is to manage the financial affairs of the company (operational, financing and investing decisions) in a way that will ultimately maximise the wealth of its owners/ shareholders (by maximisng the share price of the company).

No, financial managers shouldn't do anything and everything to achieve that goal, they must be ethical and legally sound in carrying out business practices and take sustainable financial decisions which will ensure long term standing of the company in market.

8) Constant dividend growth model assumes the following:

- dividends are a good measure to arrive at the stock value

- required return on equity and dividend growth rate will remain constant forever

- required return on equity > expected growth rate in dividend

required return on stock= Rf + (Rm-Rf) Beta of stock

Rf= risk free rate (rate at which investor can invest and get fixed certain returns; eg- govt bonds)

Rm= market rate of return

Rm-Rf= risk premium; premium to compensate the investor for taking risk

beta= sensitivity of stock to changes in the market rates of return