The General Principles of Financial Management Essay

The General Principles of Financial care - Essay ExampleProfit maximization is the main aim for which the whole organization put in efforts too but it not the only stopping point of the self-colored as discussed above. The change in the take to be of degene count coffin nail be measured by the change in Earnings/Share which shows the per helping return to investors. (Gitman, 2006) Managers and their co-workers can not only depend on the main aim of an organization which is to maximise its profits. It is because of the timing of the cash received is important as the t soon as it is received is expose because of the concept of time value of money. Owners receive cash in form of dividend and t indeed higher EPS doesnt necessarily mean that there will be an addition in dividends as managers may increase their feature bonuses instead. Maximizing profit might result in more jeopardizey investments made and hence increasing the beta of the firm so profit maximization is not the only main goal of firm. (Gitman, 2006) Question2 Total risk of any firm can be bifurcated into cardinal categories a) Diversifiable risk b) Non-diversifiable risk The diversifiable risk is one that can be diversified by taking nigh crude actions and making sure that firm doesnt lose anything as a whole. This is a kind-hearted of risk that is just specific to a firm such as fire at a warehouse. This type of risk can be diversified if special precautionary measures are taken and hence it is in control of the firm to reduce such kind of risk. The chances of fire at workplace can be reduced by placing special notifications at flammable spots in the factory and separate working areas. thus, this kind of risk is usually referred to as firm-specific-risk or nonsystematic risk. The non-diversifiable risk is the one that is out of firms own control and affects all firms in the industry with the same effect on each of them. This kind of risk is not avoidable and hence no contingency pl anning can help any firm in this case. The example of this kind of risk is when government increases the tax rate of the firms, they all have to acquire it and none can take any step to avoid such an alteration in law. so these kinds of risks are known as market risk or unsystematic risk as well. Therefore it is said that if you cant do anything about something you just anticipate with it and hence nonsystematic risk is usually considered to be irrelevant while making long-term decisions. (Niehaus, 1999) Question3 Weighted marginal approach of capital is the court of borrowing/financing next extra dollar. The graph that portrays the cost of capital of a firm can be used to identify WMCC. The graph shows the discount rate that is applicable at each point or dollar of financing that is required. Marginal cost of capital is the rate that the firm will pay in return to its financings achieved through a particular source. WMCC is weighted average cost of all the financings done by t he firm through several sources like debt, preferred stock, common stock, debentures, loans etc. each financing activity has different cost attached to it like common stock bear high cost then debentures or bonds because the holders of common stock have the right to vote for the plectrum of board of directors and also bear a risk of not attaining anything in terms of dividends if the problem attain loss in any year. Bonds on the other hand have a fixed rate of interest that is to be paid to the bondholders at the end of every year regardless of the fact that business made any profit or not.