Financial Management: Sub-areas, Forms of Business Organizations, Agency Relations, Ethics, and Shareholder's Wealth Maximization

This article covers various topics related to financial management, including sub-areas of finance, the three basic forms of business organizations, agency relations, ethics, and shareholder's wealth maximization. It also includes references for further reading.

Running head: Financial Management
Financial Management

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Table of Contents
Question 1.............................................................................................................................................3
Question 2.............................................................................................................................................3
Question 3.............................................................................................................................................5
Question 4.............................................................................................................................................5
Question 5.............................................................................................................................................6
References:............................................................................................................................................7

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Question 1
Finance means applying specific value to the things we own, decisions we make and services
we use.
Financial management is the known as the process of effective and efficient utilisation of
funds of the organisation in such a manner as to accomplish the objectives and goals of the
organisation (Van Horne James, 2002).
The major sub areas of finance are:
 Investments
 International Finance
 Corporate Finance
 Financial institutions and markets
The term risk means the possibility of inadequate and uneven losses due to uncertainties.
Question 2
The three basic forms of business organisations are:
1. Sole proprietorship
Advantages:
o It is easy to start and stop
o No profit sharing
o The owner has sole decision making power

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Disadvantages:
o The owner have unlimited liability to repay the debts.
o The owner’s personal assets can be confiscated
2. Partnership:
Advantages:
o There is profit sharing and the ratio is fixed.
o All the partners are jointly liable for the debt repayment.
o Easy to make less legal formalities involved.
Disadvantages:
o The owners are personally liable for the repayment of debt.
o Conflicts among the partners (Zimmerer, Scarborough & Wilson, 2005).
3. Corporation:
Advantages:
o The members and owners have limited liability
o Separate legal entity of the company
Disadvantages:
o Double taxation.
o The profit is shared between the members.
 Sole proprietorship has very limited access to capital as the owner only can raise the
capital.
 Partners can only contribute the capital and cannot raise the capital by issuing shares.
 Company can raise the capital from outsiders and have very easy access to capital
(Bryman & Bell, 2015).

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Question 3
Agency relation means the relation between two people in terms of principle and agent that
mean agent work for the principle. Agency problem arises when the principle and agent are
having the conflicting interests and does not share the same interest (Brigham & Houston,
2012).
The three approaches to deal with such problems are:
 Ignore it
 Monitor the actions
 Changing the ownership
Corporate governance is the termed as the process of monitoring the companies process as
they are in line with the benefits of its employees and shareholders or not. The companies
aim is not only to earn profits but also to provide benefits to the shareholders.
Question 4
Ethical behaviour is important in the field of finance because finance is all about the
management of the funds of other persons and there need to be ethical in managing the funds
of the investors to provide them maximum benefits. As no investor wants that their
investment would not generate any return over the span of time.
The major financial scandals are of Enron, Wells Fargo and WorldCom.

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Question 5
The major goal of shareholder’s wealth maximisation is to ethically provide the benefits to
the shareholders in the long run. Shareholder’s wealth maximisation does not at all affect the
ethical behaviour of the company.
The term invisible hands describe that the individual who are seeking economic self- interests
will actually benefit the society as a whole if they join hands together.

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References:
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage
Learning.
Bryman, A., & Bell, E. (2015). Business research methods. Oxford University Press, USA.
Van Horne James, C. (2002). Financial Management & Policy, 12/E. Pearson Education
India.
Zimmerer, T. W., Scarborough, N. M., & Wilson, D. (2005). Essentials of entrepreneurship
and small business management. Upper Saddle River, NJ: Pearson/Prentice Hall.