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Managerial Finance Assignment

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FINANCIAL MANAGEMENT ASSIGNMENT

(S1309012890)
Open University Malaysia Semester 2, Sept 2013
BMFM 5103 – Financial Management

Question 1

If the goal of a firm is to maximize the shareholder wealth does it mean profit is not important at all? Explain your answer. (5 marks)

Maximizing the shareholder’s wealth is long term process. Shareholder wealth is maximized by maximizing the difference between the market value of the firm’s stock and the amount of equity capital that was supplied by shareholders (Brigham & Ehrhardt: 2011). In order to maximize the value of the firm the managers should make all decisions to increase the total long run market value of the firm. Therefore the managers will invest in projects that would not only maximize profit and control cost but also add value to the company through processes that reflects the prices of the stock; as maximizing share price will maximize owner wealth. On the other hand, profit maximization refers to how much dollar profit the company makes. It is a short term approach which can fulfill objective of earning profit but may not help in creating wealth. Hence, financial management emphasizes on wealth maximization rather than profit maximization. As profit maximization is a short term objective of the firm which does not achieve the objectives of the shareholders; wealth maximization is better than profit maximization. However, it does not mean that profit maximization is not important, as it can be said that profit maximization is a subset of wealth and being a subset, it facilitates wealth creation.

What are the advantages and disadvantage of the three principal forms of business organization? (5 marks)

The three principle forms of business organizations are sole proprietorship, partnership and corporation.
A sole proprietorship is a business

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