Financial Management and Macroeconomic Policies

This assignment explores the importance of financial management in organizations and its relationship with macroeconomic policies. It delves into agency theory, highlighting its advantages and limitations. The assignment also examines various macroeconomic policy instruments, including fiscal, monetary, and exchange rate policies. It concludes that fiscal policy is particularly effective in achieving desired macroeconomic objectives.

FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Discussing role of management to meet stake-holder's objectives with application of agency
theory ..........................................................................................................................................1
Impact of agency theory on different financial decisions............................................................1
TASK 2............................................................................................................................................2
Discussing role of fiscal, monetary, interest rate and exchange rate policies with
accomplishment of macroeconomic policy targets......................................................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Financial management is referred as vital activity in business entity. It is considered as
process of organizing, planning, monitoring and controlling financial resources with aspect of
attaining organizational objectives and goals. The present report will discuss about role of
management to meet objectives of stakeholders along with application and limitation of agency
theory. Further, this report will articulate about role of fiscal, interest rate, monetary and
exchange rate policies with accomplishment of macroeconomic policy targets.
TASK 1
Discussing role of management to meet stake-holder's objectives with application of agency
theory
The fundamental financial objectives of business entity are :
Maximize profit: This objective has been emerged through century of economic theory
and in traditional economic theory and typical business entity was small where owner competed
and managed with numerous similar organization.
Maximize wealth: It is replicated as increment in net present value as financial action
with presence of positive net present value with creation of wealth and desirable.
Maximise value: The market value of equity shares of business entity must be
maximised as it must serve as indices of organization's performance.
Other objectives: In the similar aspect, sales, growth and return on investment is
increased (O'Connor & Shaikh, 2018, July).
Agency theory is replicated as useful framework for purpose of designing appropriate
governance and control is particular organizations. This concept directly offers effective
introduction related to topic through proper evaluation of its strengths and weakness. It has
application of case study for demonstrating that how theory is applied in various industries.
Agency theory could be defined economic and management theory which attempts for
explaining self interests and relationships among delegation of control and principals/agents. It
elaborates that how best for managing relationships in which a principal identify work and other
agent takes decision or perform on basis of principal (Banks & et.al., 2018).
Impact of agency theory on different financial decisions
Agency theory helps in accomplishing financial objectives where shareholders act via
management and has presence of incentive for inducing business entity to take innovative
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projects with huge risk which was anticipated through creditors of company. The risk would be
increased along with required rate of return on it debt as in turn it will impact decrements in
value of different outstanding bonds. In the similar context, if risky capital investment project
attains success then each benefit will go to stockholders of organization due to fixed return on
bondholders at original low risk rate. However, if projects doesn't work well than shareholders
are forced to contribute in losses (Maestrini & et.al., 2018).
The firm's debt level is increased through managers with absence of changes in assets as
an effort to leverage up on return of equity of stockholders. In case old debt is not replicated as
senior to debt which is issued newly then it will reduce its value due to large number of creditors
will claim against cash flow and asset of business entity. Both riskier asset and increment in
leverage transactions with effect of wealth transferring through bondholders of business entity to
its stockholders.
The conflict of stakeholder agency could give outcome in different situations where total
value of business entity declines along with increment in stock price. This incurs when
outstanding value of firm decreases by more than compared to increment in its value of common
stock. In case stockholders directly attempt for expropriate wealth through its creditors then
bondholders will get protection themselves by placing with restrictive covenants on basis of debt
agreements of future.
The limitations of agency theory are stated below:
 This theory is considered as less powerful as compared to explanation.
 It is replicated as another explanation about behaviour of people with application of
social power.
 It is more of a particular description.
 It has absence of explanation about more detail than its definition (Parker & et.al., 2018).
TASK 2
Discussing role of fiscal, monetary, interest rate and exchange rate policies with accomplishment
of macroeconomic policy targets
Fiscal policy is replicated as mean through which government adjusts its level of
spending along with monitoring tax rate and influence on economy of nation. It influences level
of macroeconomic productivity with increment or decrement of public spending along with tax.
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The employment is raised by maintaining healthy value as it is very important for managing its
economy (Svensson, 2018).
Monetary policy is macroeconomic which is laid through central bank. It has huge
involvement of management for interest rate and money supply along with demand side of
application of economic policy through government for accomplishing macroeconomic
objectives such as consumption, liquidity and growth. With the increment of interest rate, it has
objective to bring down inflation, expensive borrowing, decreasing money supply in market,
promotes saving of money and for unfavourable spending. The tweak in interest rate has
presence of cascading effect on entire economy (Mankiw & Reis, 2018).
The macroeconomic goals are not directly confined for full employment, rapid growth,
price stability, balance of payment equilibrium along with stability in foreign exchange rate. On
this basis, macroeconomic policy instruments consists of fiscal, income and monetary policy in
narrow aspect. However, these instruments comprises policies on basis of tariff, agriculture,
labour and anti-monopoly along which directly influences macroeconomic objectives of country.
It might be directly pointed with presence of conflicts in various macroeconomic objectives as
policymakers are facing dilemmas that policy to accomplish desired objectives. The aim reflects
political, social and economic value judgements which does not enter the analysis of mainstream
economic (Exchange rate policy, 2018).
CONCLUSION
From the above study it had been concluded that financial management plays very
important role in any organization. It had shown that agency theory helps in providing
appropriate understanding related to relationship among principals and agents. Though it had
both pros and cons related to financial objectives but its advantages has strong point as compared
to limitations. It had also articulated various macroeconomic policy instruments as monetary,
fiscal, interest and exchange rate policies for influencing in positive aspect on basis of
macroeconomic goals of particular country. It could be summarised that fiscal policy provides
high effectiveness for attaining desired macroeconomic objectives and similar aspect is of
monetary policy.
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REFERENCES
Books and Journals
Banks, G. C. & et.al., (2018). A meta‐analytic review of tipping compensation practices: An
agency theory perspective. Personnel Psychology. 71(3). 457-478.
Maestrini, V. & et.al., (2018). Effects of monitoring and incentives on supplier performance: An
agency theory perspective. International Journal of Production Economics. 203. 322-332.
Mankiw, N. G., & Reis, R. (2018). Friedman's presidential address in the evolution of
macroeconomic thought. Journal of Economic Perspectives. 32(1). 81-96.
O'Connor, G., & Shaikh, I. (2018, July). Motivating Radical Innovation: An Agency theory
exploration. In Academy of Management Proceedings (Vol. 2018, No. 1, p. 17725).
Briarcliff Manor, NY 10510: Academy of Management.
Parker, D. W. & et.al., (2018). Agency theory perspective on public-private-partnerships:
international development project. International Journal of Productivity and Performance
Management. 67(2). 239-259.
Svensson, L. E. (2018). Monetary policy and macroprudential policy: Different and
separate?. Canadian Journal of Economics/Revue canadienne d'économique. 51(3). 802-
827.
ONLINE
Exchange rate policy. 2018. [Online] Available through
<http://www.economicsonline.co.uk/Managing_the_economy/Exchange_rate_policy.html>
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