MASTERS IN BUSINESS ADMINISTRATION

MAY/2015

BMMF5103

MANAGERIAL FINANCE

Q1:
The role of a financial manager requires both an understanding of how the business functions as a whole and specialized financial knowledge. The head of the financial operations is called the chief financial officer (CFO). Financial managers develop strategies that will implement the long-term goals of a corporation. Their main goal is to maximize the value of stock shares. Stockholder wealth maximization is the appropriate goal for management decisions. The risk and timing associated with expected earnings per share and cash flows are considered in order to maximize the price of the firm’s common stock. Maximizing shareholder wealth is maximizing purchasing power or maximizing the flow of discounted cash flow to shareholders over a long term period.

This is because under wealth maximization, more importance is given to cash flows rather than profitability. A basic principle is that ultimately wealth maximization should be discovered in increased net worth or value of business. So, to measure the same, value of business is said to be a function of two factors – earnings per share and capitalization rate. For a business, it is not necessary that profit maximization should be the only objective; it may concentrate on various other aspects like increasing sales, capturing more market share etc, which will take care of profitability. Some factors in profit comparison does not allow for are:
(a) Future prospects;
(b) Risk; and
(c) Accounting problems.

Q2: A financial manager is expected to maximize the value of a firm to shareholders. The financial manager is an intermediary between capital markets and the firm’s operations, responsible for both financing decisions (decisions that involve raising money) and investment decisions (decisions that involve