Overview
Respond to five questions about finance and financial management.
This assessment addresses various terms used in finance and financial management. After completing this assessment, you will have demonstrated your understanding of the following;
• The role of a finance manager in an organization.
• The finance manager’s goals and objectives.
• The challenges faced by a finance manager on a daily basis.
• Why ethical behavior is so important in this field.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
• Competency 1: Evaluate the global financial environment.
o Explain the concept of shareholder wealth maximization.
• Competency 2: Define finance terminology and its application within the business environment.
o Define the terms “finance” and “finance management.”
o Identify major sub-areas of finance.
o Define the forms of business ownership.
o Define the term “agency relationship.”
o Define the term “agency problem.”
• Competency 3: Evaluate the financial health of an organization.
o Explain why ethical behavior is especially important in the field of finance.
Context
Financial managers are known as the agents of owners who are the stockholders in a company. The goal of financial managers is to maximize the shareholders’ wealth. Shareholders have many options to invest their money. Financial markets bring investors and borrowers together for transfer of funds from investors to firms. For the markets to be efficient, proper rules and regulations are necessary.
Assessment Instructions:
Respond to the following five questions. Write your responses in a Word document, and number them 1–5.
1. Define the terms finance and financial management. What are the major sub-areas of finance?
2. Identify and define the three basic forms of business ownership. Describe the advantages and disadvantages of each.
3. Define the terms agency relationship and agency problem. Explain three different approaches to minimizing the agency problem.
4. Explain why ethical behavior is so important in the field of finance.
5. Explain the concept of shareholder wealth maximization. Is there a conflict between the goal of shareholder wealth maximization and the financial manager’s need to act in an ethical manner? Why or why not?
Use references to support your answers as needed. Be sure to cite all references using the correct APA style. Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills.
Suggested Resources
The following optional resources are provided to support you in completing the assessment or to provide a helpful context.
Library Resources
The following e-books or articles from the Capella University Library are linked directly in this course:
• Weaver, S. C., & Weston, J. F. (2001). Finance and accounting for nonfinancial managers. New York, NY: McGraw-Hill.
• Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). New York, NY: American Management Association.
Course Library Guide
You are encouraged to refer to the resources in the BUS-FP3062 – Fundamentals of Finance Library Guide to help direct your research.
Other Resources
• Cornett, M., Adair, T., & Nofsinger, J. (2019). M: Finance (4th ed.). New York, NY: McGraw-Hill. Available in the courseroom via the VitalSource Bookshelf link.
Financial Management
Question 1: Finance and Financial Management
Finance is the study of the specific value assigned to things that people own, services used, and decisions made, while finance management involves the process and analysis of the decision-making process in a business context (Sherman, 2011). Financial management plays a crucial role in ensuring that businesses generate returns on investment for owners and shareholders. The four sub-areas of finance management are investments, financial management, financial institutions and markets, and international finance. Investment is concerned with decision-making regarding the securities to purchase or own and how to pay back shareholders their returns on investment. Financial management addresses decision-making in businesses regarding the acquisition and use of financial investments to pay returns. Financial institutions and markets are the facilitators of capital flow between businesses and investors (Weaver & Weston, 2001). International finance uses finance theory to understand operations in the global market setting. The four sub-areas interact in business decision-making, especially in investment decisions for companies and shareholders in a global business environment.
Question 2: Basic Forms of Business Ownership
A sole proprietorship is one of the forms of business ownership, characterized by single business ownership and management. Some of the advantages include the ease with which a sole proprietor can form and run the business, few regulations and paperwork, faster decision-making, and tax benefits, such as pass-thru rules (Cornett et al., 2016). However, the business ownership model has some drawbacks, such as sole ownership of liabilities and risk to personal assets, such as to cover debts and challenges in raising capital due to the high risk.
Another type of business ownership is a partnership with multiple owners who run and manage the business by a majority decision-making process (Cornett et al., 2016). Some advantages of a partnership include shared liability and risks based on ownership percentage and ease with which they can raise capital through the partnership of external lending. However, decision-making may take time due to the voting process, while personal assets can be affected when paying for the outstanding debts.
The third type of business ownership is a corporation, which is a legally separate entity from its owners. Shareholders own a corporation, but they elect a board of directors to make strategic decisions while managers are employed to run the business (Cornett et al., 2016). Some advantages of a corporation include limited liability and the ability to raise huge capital from investors. However, decision-making takes time, and owners have a limited role in running the business.
Question 3: Agency Relationship and Agency Problem
An agency relationship occurs when a firm (entity) hires another firm to work for them. An agency problem occurs when managers decide in a self-serving manner instead of maximizing returns on investment for shareholders (Cornett et al., 2016). For example, an agency problem could occur if a manager selects an expensive insurance plan that caters to personal needs instead of protecting shareholders’ interests. One way of dealing with an agency problem is to ignore such an engagement if the amount of money in question is not significant. Another strategy to address the problem is through monitoring managers’ actions and spending. The final tactic is making managers part of the ownership to ensure that their self-interests are aligned with those of other shareholders. The solution is beneficial to all since the manager will work in a majority interest.
Question 4: Ethical Behavior in Finance
Ethics are critical in finance and finance management since individuals in this area manage other people’s finances. Ethics ensures that finance managers act most responsibly and serve others’ interests, such as shareholders (Weaver & Weston, 2001). For example, it is unethical and irresponsible for managers to compensate themselves high perks when finances are not enough to provide returns on investment. Thus, ethics improve decision-making and strategies that ensure the interests of other stakeholders are also met. A code of ethics in finance management is necessary to guide finance managers in their activities and decisions. Unethical behaviors involving finances can have detrimental effects on companies and even the economy in general, such as the 2008 financial crisis that resulted from unethical decisions in the real estate sector. Thus, it is necessary to observe ethical decision-making and operations, such as transparency and responsibility.
Question 5: The Concept of Shareholder Wealth Maximization
The concept of shareholder wealth maximization suggests that a manager’s responsibility falls under the shareholders, including making all the decisions (Sherman, 2011). Managers are the custodians of shareholders’ wealth. For example, the manager should maximize the share’s price to increase the shareholder’s equity. In ethics, it suggests that the manager has a responsibility to maximize shareholders’ income due to their investment into the business. There could be a conflict of interest in the pursuit of shareholder wealth maximization and ethical practice since managers can engage in unethical and fraudulent activities to achieve the goal. Thus, managers should remain within ethical confines and generate warranted returns on investment depending on market performance instead of going out of their way to maximize shareholder wealth. They should create and generate sustainable wealth through ethical means.
References
Cornett, M., Adair, T., & Nofsinger, J. (2016). M: Finance (3rd ed.). New York, NY: McGraw-Hill.
Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). New York, NY: American Management Association.
Weaver, S. C., & Weston, J. F. (2001). Finance and accounting for nonfinancial managers. New York, NY: McGraw-Hill.
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