TUTORIAL 1

1) What are the primary responsibilities of a corporate financial staff?

Answer:
The primary role of a Financial staff/manager is to make
 Financing decisions
This is essential to the continuity of the business over the long term.
Access to financing is closely related with maintaining a constant inflow of
capital since the savings margin will not allow operations to continue for
much longer without the support of additional liquidity. The Financial
Manager must define several aspects of the financing strategy. He has to
decide on how to finance the assets required by firm and also determine
composition of liabilities, which is proportion of debt, equity and retained
earnings. (Cost of capital and dividend policy)
The Financial Manager can also design a mixed financing strategy for
efficient financial management: this is called the company’s “financing
mix”. Sometimes the company can benefit from a combination of short and
long term financing to meet investment and financial strategy objectives.
 Investment decisions
In the investments area, the Financial Manager is responsible for defining
the optimal size of the company. In this regard, it is important to have a
market study in place and be clear on the objectives that the company
needs to meet. It is important to have properly studied the demand,
technology and equipment, financing methods and human resources
available. In second place, the director must analyze whether the
resources adapt to the optimal size desired for the company. If they don’t,
it is necessary to define the types of assets that the company must
acquire, how much assets to buy, or otherwise sell or get rid of, in order to
achieve efficient management.
  Asset Management decision.
Asset management is one of the main aspects for a company to
adequately meet its obligations and in turn to position itself to meet the
objectives or growth targets that have been laid out. In other words, the
Financial Manager must stipulate and assure that the existing assets are
managed in the most efficient way possible. Generally, this manager must
prioritize current asset management before fixed asset management.
Current assets are those that will become effective in the near future, such
as accounts receivable or inventories. By contrast, fixed assets lack
liquidity since they are needed for permanent operations. This includes
offices, warehouses, machinery, vehicles, etc.

2) What is the primary goal of the corporation?

Answer:
Maximizing shareholder value:
Maximizing shareholder value means essentially the same thing within a publicly-
owned corporation as a sole proprietor operating a business on his own with a
goal of making as much income as possible. Shareholders are part owners in a
public corporation, and they invest in the company to make money on growth in
share price and/or dividends. Company leaders must generally satisfy
shareholder desire for profits to maintain and grow share price and company
value.
Stockholder wealth maximization is a long run goal. Companies, and
consequently the stockholders, prosper by management making decisions which
will produce long term increases in earnings. Actions that are continually short
sighted often "catch up" with a firm and, as a result, it may find itself unable to
compete effectively against its competitors
3) Do firms have any responsibilities to society at large? Is stock price maximization
good or bad for society?
Answer:
While arguing against making profits as the primary goal of a publicly-owned
company is difficult, pointing out that many public companies now balance that
objective with renewed emphasis on social objectives is fair. Corporate social
responsibility (CSR) has evolved significantly in the early 21st century. In the
mid-20th century, CSR meant making money for shareholders. It now means
balancing profits with social obligations to customers, communities, partners and
employees, along with meeting environmental expectations.
Firms have an ethical responsibility to provide a safe working environment, to
avoid polluting the air or water and to produce safe products. However, the most
significant cost-increasing actions will have to be put on a mandatory rather than
a voluntary basis to ensure that the burden falls uniformly on all business.
Is stock price maximization good or bad for society?
The same actions that maximize stock prices also benefit society. Stock price
maximization requires efficient, low-cost operations that produce high quality
goods and services at the lowest possible cost. Stock price maximization
requires the development of products and services that consumers want and
need, so the profit motive leads to new technology, to new products, and to new
jobs. Also, stock price maximization necessitates efficient and courteous service,
adequate stock of merchandise, and well-located business establishments; all
factors that are necessary to make sales which are necessary to make profits.
Students are expected to discuss either on the good side or on bad side of stock
price maximization towards society which may include the followings, but not
limited to the list:
Good:
• Produce high quality goods and services with efficient and lowest possible
cost business
• Develop products and services that society want and need
• Lead to new technology and new products
 • Increase job opportunities
Bad:
• Fraudulent accounting
• Exploiting monopoly power
• Violating safety codes
• Failing to meet environmental standards

4) What is an agency relationship?

Answer:
Agency relationships underpin any governance situation, in which there is a
separation of ownership and control of an organization. An Agency relationship is
the fiduciary relation which results from the manifestation of consent by one
person to another that the other person shall act in his behalf and is subject to his
control; and consent by the other so to act.

In other words, one person (the agent) agrees to do something for another party
(the principal), subject to the control of the other party, and the other party (the
principal) also agrees to the agreement.
It simultaneously means the principal is bound (normally) by what the agent
does, since the agent is acts as if the principal were there him/herself.
It is a fiduciary and consensual relationship between two “persons” where one
person acts on behalf of the other person and where the agent can form legal
relationships on behalf of the principal.

As one appointed by a principal to manage, oversee or further the principal’s

specific interests, the primary purpose of agency is to discharge its fiduciary duty
to the principal
An agency relationship exists whenever a principal hires an agent to act on their
behalf.

5) Describe agency cost to an organization

 Answer:
An agency cost is a cost incurred by the shareholder (the principal) in monitoring
the activities of company agents (i.e. directors).
Agency costs are normally considered as ‘over and above’ existing analysis
costs (such as those involved in making an initial investment
decision) and are the costs that arise because of compromised trust in agents
(directors).
Agency costs can include:
o Paying for the services of independent experts and advisers;
o External auditor’s fees; and
o transaction costs associated with managing the shareholding
o The time and expense of reviewing published information, and then
attending meetings to monitor and scrutinize the board’s performance;

6) What agency relationships exist within a corporation?

7) What mechanisms exist to influence managers to act in shareholders’ best
interests?
8) Should shareholders (through managers) take actions that are detrimental to
bondholders?
9) Who are board of directors and what role do they play in an organization.
10) Is maximizing stock price the same thing as maximizing profit?