Question

1. What are the three fundamental decisions the financial management team is concerned with, and how do they affect the company’s balance sheet?

2. What are the two basic sources of funds for all businesses?

3. What is capital structure, and why is it important to a company?

4. What are some of the working capital management decisions that a financial manager faces?

5. What are the three forms of business organisation discussed in this chapter?

6. What are the advantages and disadvantages of becoming a sole trader?

7. Whatisa partnership, and what is the biggest disadvantage of this business organisation? How can it be avoided?

8. Explain what is meant by shareholders’ limited liability.

9. Is profit maximisation is the best goal for a company? Explain why or why not.

10. What is the appropriate goal of financial managers? Can managers’ decisions affect this goal in any way? If so, how?

11. What ethical conflict does insider trading present?

Answer 1

As there are many questions

Every question is answered in brief

1. Three fundamental decisions financial management is concerned with are Capital budgeting decision, Working capital management, Financing decision. Capital budgeting impacts the assets side of balance sheet, working capital management impacts the current assets and current liabilities, financing decisions affect the capital structure of the entity.

2. Two basic sources of funds for any business are debt and equity. Equity means owners funds, share holders funds. Debt means outside liabilities in the form of loan from banks, debentures, bonds etc

3. Capital Structure is the combination in which the debt and equity are there in an entity. It is a mix of owners funds and liabilities. This is shown by using different ratios like Gearing ratio, debt equit ratio etc. This impacts the solvency of the entity.

4. Some of the working capital management decisions that a company may face include the credit period to be allowed to customers, the days within which we have to pay our supplier, quantity of inventory to be maintained in stock, whether to take bank overdraft or short term borrowings, maintaining current ratio and liquid ratio at desired levels etc

5. 3 main forms of business organisations are Sole proprietorship, partnership and corporation. Sole proprietorship is owned by a single person. Partnership is formed by a group of people who come together to do business. Corporation is formed as a seperate legal entity by a group of people as is recognised by law as different person.

6. Sole trader/ Sole proprietorship

Advantages :

No profit sharing

Sole decision making

Disadvantages :

Unlimited liability

No continuity is busines if sole trader expires

7. Partnership is owned by two or more people. When two or more persons come together to do a business and share profits and losses in predetermined ratio. It's major disadvantage is that the partners are jointly and severally liabile. Which means if one partner is unable to bring his share of loss then the remaining partnera has to bear that partners loss also being jointly and severally liabile. To avoid this, they may form Limited liability partnership where the liability of partners is limited.

8. Share holders limited liability means the share holders are liable only to the extent of his unpaid calls on the shares subscribed. He is not personally liable for the losses of the company which may exceed his uncalled capital amount.

9. Profit maximization should not be the best goal for a company. They have to strive for wealth maximization achieving sustainable development over a period of time. Profit maximization objective only concentrates on short term benefits but wealth maximization focus on long term benefits to the company. It takes into account the the growth in business, the future investment opportunities, etc

10. The appropriate goal for any financial manager is to maximise the current share price. Management decisions affect the current share price in many ways, let us take an example if management decides to invest in a low rate of return project then this will lead to decrease in the share price. Similarly if the management decides to take over a competitor then this may lead to synergy and increase in share price.

11. Insider trading is illegal and is unethical. The trading in the stock market needs to be done on an even playing field, no party must have a beneficial position due to his employment/other such position with company (he may have extra confidential information which may lead to future gain or loss in share price). Those persons with such information may take unfair advantage. Those persons must keep themselves away from trading using such confidential information. Thus the insider trading is an ethical issue.