Financial Management Assignment Solution: Core Principles & Analysis

This document presents a comprehensive solution to a financial management assignment, addressing key concepts within the field. The assignment explores the role of a financial manager in effectively managing funds to achieve company goals, emphasizing the importance of financial decision-making and capital allocation. It delves into the conflict between shareholders and managers regarding dividend distribution versus retained earnings, proposing the wealth maximization approach as a resolution. Furthermore, the solution examines market efficiency across strong, semi-strong, and weak forms, analyzing how information impacts stock prices. It also discusses the real rate of interest and its influence on investment returns, including the factors affecting a firm's ability to achieve its required rate of return, such as technology improvements. Finally, the assignment analyzes marketability and liquidity of securities, explaining how these factors influence investor decisions and the ease with which securities can be converted to cash. The solution incorporates relevant references to support the analysis.

FINANCIAL MANAGEMENT

Answer 1.
Financial management means managing the funds properly and efficiently in order to achieve the
goals and objectives of a company. A company cannot run in the best possible manner if the
funds are not managed and used effectively. However, the responsibility of carrying out financial
management lies in the hands of the financial manager. (Atrill and McLaney, 2009)
The role of the financial is basically to take care of the financial health of a company. They play
a major role in taking any kind of financial decision..The decision should be taken after the
proper analysis of the cost of capital. He checks which is the best and most reasonable way in
which the funds could be raised and where these funds should be used and allocated based on
various factors.
Answer 2.
The shareholders invest their money and expect the company to perform excellently well so that
they could earn higher returns (Banks and Giliberti, 2008).There arises a conflict between the
shareholder and manager when the shareholders demand returns from the company in the form
of dividend but the company takes a decision to transfer the profits in the retained earnings and
not distribute them in the form of dividends. However, this conflict could be resolved a little
using the wealth maximization approach. (Berman, Knight and Case, n.d.)
According to the wealth maximization, a company would always aim to earn higher profits in
order to fulfil the expectations of the shareholder by providing them higher returns. It is equally
important to satisfy the shareholders along with the expansion of business.
Answer 3.
There are usually three versions which are taken into consideration while talking about the
market efficiency. They are strong form efficiency, semi strong form efficiency and weak form
efficiency. In the strong form all the information irrespective of whether private or public are
considered while accounting for the stock price. In case of semi strong efficiency only certain
public information is taken into consideration while accounting for the stock price. Weak
efficiency is itself clear from the name given to it. This implies that there is a requirement
fundamental analyze the financial statements if the company in order to check whether the stocks
are underpriced or over valued. Therefore, these are regarded as the three degrees of the market
efficiency.
Answer 4.
The real rate of interest depends on various external factors such as lending and borrowing
capacity in the economy (Berry and Jarvis, 2007). In the current scenario, the firm is will be able
to earn a good returns as the rate of return is exceeding the cost of capital but still it is not able to
earn the required rate of return. It would be able to earn the required return only if there is some

changes in the market or the economy or change in the internals of the company. The internal
factor that could bring a change is the change or improvement of technology in the business.
Answer 5.
Marketability and liquidity of a security is defined as the situation when the security can be
easily sold in the market and has the ability to convert into cash within a short span of time.
According to the given situation, the security which has been mentioned is easily marketable as
the price of the share has fallen and so people with bullish nature would like to invest in such
securities (Bhattacharyya, 2011). The investor is selling the security at a loss which could be
avoided if he waits for more time but this is completely on his opinion and his requirement for
cash. The investor may sell securities because of two reasons.Hence, we can conclude that the
security is easily marketable and liquefiable (Bruner, Eades and Schill, 2017).

REFERENCES:
Atrill, P. and McLaney, E. (2009). Management accounting for decision makers. Harlow,
England: Financial Times/Prentice Hall.
Banks, A. and Giliberti, J. (2008). Budgeting. North Ryde, N.S.W.: McGraw-Hill Australia.
Berman, K., Knight, J. and Case, J. (n.d.). Financial intelligence for HR professionals.
Berry, A. and Jarvis, R. (2007). Accounting in a business context. London: Thomson Learning.
Bhattacharyya, D. (2011). Management accounting. Noida, India: Pearson.
Bruner, R., Eades, K. and Schill, M. (2017). Case studies in finance. Dubuque, IA: McGraw-Hill
Education.