Question

Consider the agency relationship between a corporate financial manager and the shareholders of the corporation. As a corporate financial manager, you have the opportunity to manage the company's cash on behalf of its owners (shareholders).

In the second half of your paper, imagine yourself in the role of Apple's financial management team. Describe what types of measures you would take to ensure that any decisions made with regards to the company's cash faithfully represent the wishes of the shareholders.

Answer 1

• Following points should be taken into consideration by the financial managers in order to fulfill the responsibilties towards the shareholders:

Financial Manager Responsibility # 1. Forecasting and Planning:

The financial manager must interact with other executives as they look ahead and lay the plans which will shape the firm’s future.

Financial Manager Responsibility # 2. Major Investment and Financing Decisions:

A successful firm usually has rapid growth in sales, which requires investments in plant, equipment and inventory.

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It is the task of the financial manager to help determine the optimal sales growth rate, and he (she) must help decide what specific assets to acquire and the best way to finance those assets. For example, should the firm finance with debt, equity, or some combination of the two, and if debt is used, how much should be long term and how much should be short term?

Financial Manager Responsibility # 3. Coordination and Control:

The financial manager must interact with other executives to ensure that the firm is operated as efficiently as possible. All business decisions have financial implications, and all managers financial and otherwise need to take this into account.

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For example, marketing decisions affect sales growth, which, in turn, influences investment requirements. Thus, marketing deci­sion makers must take account of how their actions affect (and are affected by) such factors as the availability of funds, inventory policies and plant capacity utilisation.

Financial Manager Responsibility # 4. Dealing with the Financial Markets:

The financial manager must deal with the money and capital markets. Each firm affects and is affected by the general financial markets where funds are raised, where the firm’s shares and debentures are traded, and where its investors either make or lose money.

Financial Manager Responsibility # 5. Risk Management:

All business face risks, including natural disasters such as fires and floods, uncertainties in commodity and share prices, changing interest rates and fluctuating foreign exchange rates. However, many of these risks can be reduced by purchasing insurance or by hedging.

The financial manager is usually responsible for the firm’s overall risk management programmes, including identi­fying the risks that should be hedged and then hedging them in the most efficient manner.

In short, financial managers make decisions regarding which assets their firms should acquire, how those assets should be financed, and how the firm should manage its existing resources. If these responsibilities are performed optimally, financial managers will help to maximise the values of their firms, and this will also maximise the long-run welfare of consumers and employees.