Fin/200 Week 1 Checkpoint-Scored 100%

Week 1 CheckPoint – Financial Management Goals

When examining a firm’s financial management goals, one may think that the most important goal is to earn the most profit possible for the firm. Unfortunately it is just not that easy. There are some drawbacks to this line of thinking. Although maximizing profit is very important to a firm, “the ultimate measure of performance is not what the firm earns but how the earnings are valued by the investor” (McGraw-Hill, 2009, p. 11). An investor will take in consideration several factors while analyzing a firm. Some of these factors include the firms inherent risks of operation, the time patterns of the increases or decreases of its earnings, and the quality and reliability of its reported earnings. (McGraw-Hill, p. 11, 2009)

Another goal of financial management is to maximize shareholder wealth. For a financial manager this may be difficult because it is impossible to determine exactly how the stock market will do. Therefore, a financial manager must focus on the desires of the shareholders. Stock prices are affected by the current and future economic environment which financial management cannot control. So they must keep up with whatever the investor expectations are currently as well as what they may be in the future.

Stockholder wealth can be affected by the decisions of management because sometimes each may have different goals. In some cases management can decide to maintain its own tenure, rather than maximizing stockholder wealth. It is now evident that it is in everyone’s best interest to remain sensitive to shareholder concerns in order to maintain its position in the long run. In order to stay away from decisions that could lead to takeovers or proxy fights for control, management is given stock option incentives to achieve market value maximization for their own benefit. Also, investors from powerful institutions are trying to keep management responsive to shareholders.