Finanical Management Goals

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Date Submitted: 11/18/2012 10:51 PM

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Financial Management

There are financial management goals that firms try to meet which is to earn the highest possible profit for the firm. The decision would be evaluated on the basis of its overall contribution to the firm’s earnings. According to The Goals and Functions of Financial Management Foundations of financial management (13th ed.). New York, NY: McGraw Hill/Irwin. However there are problems that occur such as related to inflation and international currency transactions complicate the issue. The broad goal of the firm can be brought into focus if we say the financial manager should attempt to maximize the wealth of the firm’s shareholders through achieving the highest possible value for the firm. This is when they started to bring the internet into play. By the 1990’s there was hundreds of high-tech Internet companies raising capital through initial public offerings of their common stock. It helped to sell the stocks for higher than usual. Under certain circumstances, management may be more interested in maintaining its own tenure and protecting private spheres of influence than in maximizing wealth. Management may have been willing to maintain the status quo rather than to maximize stockholder wealth. Poor stock price performance relative to other companies often leads to undesirable takeovers and proxy fights for control. Management often has sufficient stock option incentives that will motivate it to achieve market value maximization for its own benefit. Third, powerful institutional investors are making management more responsive to shareholders. As a result of the separation between the managers and owners, managers may make decisions that are not in line with the goal of maximizing stockholder wealth. They benefit themselves in terms of salary and perks. The costs associated with the agency problem, such as a reduced stock price and various perks, is called agency costs. Several mechanisms are used to ensure that managers act in the...