BAFN200: Principles of Finance: Understanding Money - Assessment Answers

Introduction

Financial Management means the utilization of funds in an efficient manner. The funds are invested by the investors in a company in order to get returns. The investors will invest only if the rate of return given by the investment is higher or equal to the rate of return required by the investors. Therefore, the companies try investing in the projects that are expected to generate higher returns for the investors. The managers are appointed by the corporations in order to ensure that the correct financial decisions regarding investment and expenditure are made by the corporations. The funds of the company are invested in various projects by these managers after assessing the profitability of the various projects. The financial management activity is executed professionals and they advise the top management of the corporations who take financial decisions.

Shareholder’s Wealth Maximization

The main objective of financial management is to ensure that the funds of the investors are invested in projects that offer high rate of return on the invested capital (Managementstudyguide.com, 2016). All the proposed projects are assessed through various capital budgeting tools like NPV, Profitability Index and Internal Rate of Return. The projects that have a positive NPV are considered as viable projects for investment. If the company has to choose between two projects then Profitability Index Tool is used in order to determine the profitability of the project. The project with higher profitability index would be chosen for investment provided the PI of both the projects is exceeding 1. It is the duty of the corporations to ensure that the funds of investors are not invested in projects that are not considered as lucrative. Profit Maximization is the ultimate goal of financial management (Study.com, 2016).

In order to maximize the shareholders value it is important to generate profit, reduce cost and increase the market share of the company (Investopedia, 2012). Therefore, in order to attain the value maximization all the three factors would be taken into consideration. The corporations will try to control the operating costs that are incurred for the day to day operations of the business. If the operating expenses are controlled it will result in higher profit margins which will ultimately increase the profit of the corporation. If the corporations aim at increasing the market share, the revenue of the corporations will increase which will ultimately lead to higher profits. For increasing the market share of the corporation it is important to consistently search for the new opportunities that are prevailing in the market and materialize them. In addition to it, the corporations have to ensure that the products that are being offered are in conformity to the demand of the customers. The demands of the customers change with the passage of time and in order to meet the current demands of the customers the corporations have to regularly research for the current demands of the customers and the procedure of innovation. It is said that change is the only thing that is constant. Therefore, in order to sustain in the long term the corporations have to invest in research and innovation. Therefore, the firms strive to undertake all those objectives that aim at increasing the profit of the corporation and increase the shareholder’s value.

Sustainability and Social Responsibility

The concept of sustainability and social responsibility has gained popularity in the past few decades. The business operates within the society, it is important for the company to cater o its social responsibility. Sustainability means conducting the business in such a manner that it is in harmony with the environment and it is not at the cost of the stake o future generations.

The corporations conduct business activity and in some of the cases these activities are conducted in such a manner that they cause harmful effect to the environment. Therefore, it is the responsibility of the corporations to ensure that the business is not conducted at the cost of future generations. So, it is their responsibility to mitigate for the detriment activities that have been conducted by them. The business operates within the society and the people of the society are its stakeholders in the form of investors, employees etc. It is the responsibility of the business to conduct programmes for the betterment of the people of the society in the form of creating awareness and preventing the people of the society from the harms to which they are susceptible.

The business in the current world cannot operate in isolation. It needs the assistance of all the segments of the society in various forms for its existence.

Conclusion

From the above assessment it can be concluded that the financial management goal of maximization of shareholder’s value cannot be obtained in isolation rather all the responsibilities of the business would go in conjunction with it. In order to survive in the long-run it is important for the business to cater to its social responsibilities. The business operates within the society and cannot operate outside it. If the social responsibilities of the business are not fulfilled the business may lose the support of the society which would make the operating of the business impossible. Not catering to the social responsibilities would harm the reputation of the business and it may affect the long-term profitability and growth of the business. Therefore, in order to attain the financial goal of shareholder’s maximization business has to fulfill its social responsibilities.

For the attainment of the financial management goals in addition to the decision for investment in the correct projects and carrying out of the business efficiently it is also important that the business fulfills its social responsibility needs because in the long run for the attainment of financial goals and achieving shareholder’s value maximization it would be important. It might directly provide the benefit of enhancement in the value of the corporation but would indirectly provide the benefit in the form of improved goodwill of the corporation which would build the brand image and would resultantly lead to higher profit.