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Tutorial 1 Corporate Financial Strategies

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Chapter 1

Questions

1. What is finance? What is corporate financial management? What are the three major questions that financial managers address?

Finance is a discipline concerned with determining value and making decisions. The finance function allocates resources, which includes acquiring, investing and managing the resources.

Financial management is an area of finance that applies financial principles within an organization to create and maintain value through decision making and proper resource management.

The first major question that financial managers deal with is investment decisions. These decisions are primarily concerned with the asset (left) side of the balance sheet. They answer such questions as should we buy new computers or a new warehouse? The second major question deals with financial decisions. These decisions are primarily concerned with the liabilities and stockholders’ equity (right) side of the balance sheet. They answer such questions as how much debt should we have and should the debt be short or long term or should we borrow in foreign currency? The third major question deals with managerial decisions. These decisions are primarily concerned with firm’s policies and day-to-day operating and financial decisions. They answer such questions as how large should the firm be, and how fast should it grow?

2. What are three problems associated with using profit maximization as the goal of the firm? What is shareholder wealth maximization? How does shareholder wealth maximization deal with these three problems?

The three problems associated with using profit maximization as the goal of the firm are the following: First, profit maximization is vague. Profit has many different definitions such as accounting profit based on book value or economic profit based on market value. Second, profit maximization

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