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profit maximization, is the firm’s goal and how the agency issue is related to it. The goal of the financial manager is to maximize the owners’ wealth,
as evidenced by stock price. Profit maximization ignores the timing of returns, does not directly consider cash flows, and ignores risk, so it is an inappropriate goal. Both return and risk must be
assessed by the financial manager who is evaluating
decision alternatives. The wealth-maximizing actions of financial managers should also reflect the
interests of stakeholders, groups who have a direct
economic link to the firm. Positive ethical practices
help the firm and its managers to achieve the firm’s
goal of owner wealth maximization.
An agency problem results when managers, as
agents for owners, place personal goals ahead of
corporate goals. Market forces, in the firm of shareholder activism and the threat of takeover, tend to
prevent or minimize agency problems. Firms incur
agency costs to monitor managers’ actions and provide incentives for them to act in the best interests
of owners. Stock options and performance plans are
examples of such agency costs.
Understand the relationship between financial
institutions and markets, and the role and
operations of the money and capital markets.
Financial institutions serve as intermediaries by
channeling into loans or investments the savings of
individuals, businesses, and governments. The
financial markets are forums in which suppliers and
demanders of funds can transact business directly.
Financial institutions actively participate in the
financial markets as both suppliers and demanders
In the money market, marketable securities
(short-term debt instruments) are traded, typically
through large New York banks and government
securities dealers. The Eurocurrency market is the
international equivalent of the domestic money
In the capital market, transactions in long-term
debt (bonds) and equity (common and preferred
stock) are made. The organized securities exchanges
provide secondary markets for securi...
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This document was uploaded on 01/19/2014.
- Fall '13