2. Goal of Financial Management.

Maximization of return on investment and market value per share may be termed as official goals of
financial management.

 Profit Maximization. Profit maximization is a stated goal of financial management.

Profit is the excess of revenue over expenses. Profit maximization is therefore maximizing revenue
given the expenses, or minimizing expenses given the revenue or a simultaneous maximization of
revenue and minimization of expenses. Revenue maximization is possible through pricing and scale
strategies.

 Profitability Maximization.

Profit as an absolute figure conveys less and conceals more. Profit must be related to either sales,
capacity utilization, production or capital invested. Profit when expressed in relation to the above
size or scale factors it acquires greater meaning. When so expressed, the relative profit is known as
profitability. Profit per rupee sales, profit per unit production, profit per rupee investment, etc., are
more specific. Hence, the superiority of this goal to the profit maximization goal.

 EPS Maximization

Maximization Earnings Per Share (EPS) involves maximizing earnings after tax given the number of
outstanding equity shares. This goal is similar to profitability maximization in respect of merits and
demands. It is very specific both as to the type of profit and the base to which it is compared. One
disadvantage is that EPS maximization may lead to value depletion too, because effect of dividend policy
on value is totally discarded.

 Liquidity Maximization

Liquidity refers to the ability of a business to honor its short-term liabilities as and when these become
due. This ability depends on the ratio of current assets to current liabilities, the maturity patterns of
currents assets and ‘the current liabilities, the composition of current assets, the quality of non-cash
current assets; the relations with the short-term creditors; the relations with bankers.

3. Agency Problems. Who owns a corporation?

A shareholder is someone who owns shares in a corporation. Generally, corporations are owned by
several shareholders. For example, Google is a publicly traded corporation with almost half a million
shareholders. Other corporations are closely held, meaning that there are only a few shareholders.

4. Primary versus Secondary Markets.

The two financial markets play a major role in the mobilization of money in a country’s economy.
Primary Market encourages direct interaction between the companies and the investor while on
contrary the secondary market is where brokers help out the investors to buy and sell the stocks
among other investors. In the primary market bulk purchasing of securities does not happen while the
secondary market promotes bulk buying.

 The securities are initially issued in a market known as Primary Market, which is then listed on a
recognized stock exchange for trading, which is known as a Secondary Market.

 The prices in the primary market are fixed whereas the prices vary in the secondary market
depending upon the demand and supply of the traded securities.

 In the primary market, the investor can purchase shares directly from the company. In the
Secondary Market, investors buy and sell the stocks and bonds among themselves.

 In the primary market, security can be sold only once, whereas in the secondary market it can be
done an infinite number of times.

 In the Primary Market, the amount received from the securities is the income of the company,
but in the Secondary Market, it is the income of investors.

 The primary market is rooted in a specific place and has no geographical presence as it has no
organizational set up. Conversely, the Secondary market is present physically, as a stock
exchange, which is situated in a particular geographical area.

 Investment bankers do securities trading in the case of the Primary Market. Conversely, brokers
act as intermediaries while trading in the secondary market.

5 .Agency problem
Shareholders elect the board of directors, who are in charge of appointing the firm’s management. The
owners of the firm are not the ones who manage the firm which causes agency problems to exist.

6. International Firm Goal

Would our goal of maximizing the value of the stock be different if we were thinking about financial
management in a foreign country? Why or why not?

 Goal will be identical.

 Adjustment is essential due to diverse characteristics of foreign country.