Lecture-1-Understanding+Public+Financial+Management

Acceptance how much credit should the firm grant to

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Unformatted text preview: rs? How • How should the firm obtain needed short-term financing? How 29 29 29 In summary, some of the more important concerns of In financial management can be distilled into three questions: questions: 1 What long-term investments should the firm What undertake? (Investment decisions) undertake? 2 How should the firm raise money to fund these How investments? (Financing decisions) investments? 3 How should the firm manage its short-term assets and How liabilities? (Working capital management decisions) liabilities? These decisions affect a firm’s success and ultimately These the overall economy. For example, misallocation of resources can affect a company’s prospects of survival and growth and can be detrimental to the economy as a 30 30 whole. 30 whole. At the heart of most financial decisions is the concern At about two specific factors: risk and return. An underlying assumption of finance is that investors An should demand compensation for bearing risk. According to the concept of risk aversion, investors should expect a higher return for taking on higher levels of risk. Although considerable debate exists over the precise Although model for estimating risk and return, few contest the notion of a risk–return tradeoff. of When making financial decisions, managers should When assess the potential risk and rewards associated with these decisions. In fact, the foundation for maximizing shareholder wealth In lies in understanding tradeoffs between risk and return. lies 31 31 31 To make effective decisions, the financial manager needs To a clear objective or goal to serve as a standard for evaluating performance and deciding between alternative courses of actions. Without such a criterion, the financial manager would be unable to keep score –that is, to measure better from worse. Although much division of opinion exists on the goal of Although financial management, two leading contenders are stakeholder theory and value (wealth) maximization. stakeholder Stakeholder theory is the main contender to value Stakeholder maximization as the corporate goal. maximization Stakeholder theory asserts that managers should make Stakeholder decisions that take into account the interests of all of a firm’s stakeholders. 32 2 32 3 Such stakeholders include not only financial Such claimholders but also employees, managers, customers, suppliers, local communities, and the government. government. The major problem with stakeholder theory is that it The involves multiple objectives. Telling the financial manager to maximize multiple Telling objectives, some of which may be conflicting, would leave that manager with no way to make a reasoned decision. decision. That is, corporate managers cannot effectively serve That many masters. Purposeful behavior requires the existence of a single-valued objective function. existence 33 33 33 Value or Wealth Maximization- Most corporate financial theorists agree that the primary corporate goal is to maximize long-term firm value or wealth. From the stockholders’ perspective, a good From management decision would l...
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This note was uploaded on 02/11/2014 for the course FIN 9891 taught by Professor Wu during the Fall '11 term at Kazakhstan Institute of Management, Economics and Strategic Research.

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