exam notes

1. MOHAMED RAUFIK TAJUDDIN | MBA PAPER | May 1, 2015
FINANCIAL MANAGEMENT
IN A CORPORATION, SHAREHOLDERS ARE THE TRUE OWNER AND WHAT IS
THE PRINCIPLE GOAL THAT NEEDS TO BE ACHIEVED BY FINANCE MANAGER.

2. PAGE 1
Table of Contents
INTRODUCTION.........................................................................................................................................2
Goals of Finance Managers ......................................................................................................................... 4
Maximizing Profits ....................................................................................................................................5
Analyzing Data...........................................................................................................................................5
Managing Risk...........................................................................................................................................5
CONCLUSION............................................................................................................................................. 6

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INTRODUCTION
In carrying out these tasks, the financial managers must be aware that they are ultimately working for the
firm’s shareholders, who are the owners of the firm, and that the choices they make as financial managers
will generally have a direct impact on their shareholders’ wealth.
The shareholders, ranging from individuals who purchase stock for a retirement fund to large financial
institutions, have a vested interest in a company. Hence, the shareholders are their true owners; companies
commonly have a principle goal described as maximizing shareholders wealth, which is achieved by
maximizing the stock price.
Fig. 1 type of shareholders/stakeholders
Fig 2. Various shareholders relationship
rrrrelationship

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The financial activities of a firm’s management in terms of three important functions within a firm:
a)Making investment decisions
(capital budgeting decisions).
b)Making decisions on how to finance
these investments
(capital structure decisions)
c) Managing funding for the company’s day
to day operations
( working capital management )
-introducing news ideas, products, or systems.
-how to finance the development and production of the
news ideas, products, or systems.
-decision regarding how much inventory to hold.
Maximizing return to shareowners and being trustworthy of the overall responsibilities given by the
shareholder is the rightful concern of the financial managers. By maximizing the wealth of the shareholders
and doing the right thing will surely secure the financial managers job. The return will truly increase the
value of their shares in the long-terms. By making decisions that have long term positive effects.
Objectives of financial managers, in the sense of a goal or decision criteria, for the three decisions involved
in financial management;
a) Making investment decisions (capital budgeting decisions).
b) Making decisions on how to finance these investments (capital structure decisions)
c) Managing funding for the company’s day to day operations (working capital management )
The goal of the financial manager is to maximize the owners/shareholders wealth as reflected in share prices
rather than profit/EPS (Earnings Per Share serves as an indicator of a company's profitability) maximization
because they ignores the timing of returns and does not directly consider cash flows and risk.
But as key determinants of share price, both return and risk must be assessed by the financial managers when
evaluating decision alternatives. The EVA (Economic Value Added , is an estimate of a firm's economic
profit – being the value created in excess of the required return of the company's investors (being shareholders
and debt holders), a popular measure to determine whether an investment positively contributes to the owners
wealth.

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Lastly, financial managers cannot afford to ignore the facts that shareholders want to see the value of The
investment may rise, if not they will sell their shares if it doesn’t. This in turn will cause the company’s share
price to fall, jeopardizing the managers’ jobs, if they are seen excessively short-term focus.
Financial managers develop strategies that will implement the long-term goals of a corporation.
Their duties include preparing financial reports, directing investment activities and implementing cash
management activities.
The main goal of financial managers is always to maximize the value of stock shares first. Financial managers
may have different responsibilities and focus on different goals according to their title.
Goals of Finance Managers
Financial managers in a corporation consider a wide range of financial goals with the overall goal of
increasing the value of stock shares. The financial managers will take steps to ensure the survival of the
company by avoiding financial distress and bankruptcy. To achieve this goal, they may implement procedures
to minimize costs, maximize profits and maintain a steady earnings growth.
Fig. 3: shareholder’s wealth maximization

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Financial managers are aware of the activity of the competition and make sure the company is aggressive in
the marketplace. They manage exposure to risk and advise key managers about financial matters.
Maximizing Profits
According to "Introduction to Corporate Finance," an important goal of financial managers is to maximize
profits. To achieve this goal, managers must define their objectives clearly. There may be a difference
between maximizing profits for only this year and maximizing profits for the long term.
For example, maximizing profits for the year may simply be a matter of implementing short-term solutions,
such as letting inventory run down. This type of solution may work for the short term but is not necessarily
a cost-cutting measure that is desirable for long-term profits.
Analyzing Data
According to the Bureau of Labor Statistics, financial managers act as liaisons to top management to advise
them of profit-maximizing ideas. These suggestions are backed up by financial data. Often, the financial
manager works on a team to produce financial reports and analyze data. Because of technological advances,
these reports have become much easier to produce.
Managing Risk
According to the Bureau of Labor Statistics, financial managers oversee programs that minimize risk for a
corporation. They monitor situations that arise from financial transactions as well as business operations that
might result in losses to the company. For example, the financial managers specializing in insurance will
limit the company’s potential losses by obtaining insurance. Risk managers might control financial risk
through the use of hedging. This limits the company’s risk related to future currency and commodity pricing
changes.
Fig 4. Relationship of financial manager

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CONCLUSION
In short, maximizing return to shareowners while being mindful of the overall responsibilities. By
maximizing the wealth of the shareholders and doing the right thing can go hand in hand. The return will
truly increase the value of their shares in the long-terms. By making decisions that have long term positive
effects.
Lastly, managers cannot afford to ignore the facts that shareholders want to see the value of the investment
rise, if not they will sell their shares if it doesn’t. This in turn will cause the company’s share price to fall,
jeopardizing the managers’ jobs, if they are seen excessively short-term focus.