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Published by Binay Singh

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Published by: Binay Singh on Jul 10, 2011
Copyright:Attribution Non-commercial

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07/10/2011

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Ø
 
Finance Functions
The
finance functions
can be divided into three broadcategories: (1) investment decision, (2) financing decision, and (3) dividenddecision. In other words, the firm decides how much to invest in short-termand long-term assets and how to raise the required funds.
Ø
 
Shareholders’ Wealth Maximisation (SWM)
In making financial decisions,the financial manager should aim at increasing the value of the shareholders’stake in the firm. This is referred to as the principle of 
Shareholders’ Wealth Maximisation (SWM).
Ø
 
 Wealth
Wealth is precisely defined as net present value and it accounts fortime value of money and risk.
Ø
 
 Agency Problem
 
and Agency Costs
Shareholders and managers have theprincipal-agent relationship. In practice, there may arise a conflict betweenthe interests of shareholders and managers. This is referred to the
agencyproblem
and the associated costs are called
agency costs
. Offeringownership rights (in the form of stock options) to managers can mitigateagency costs.

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