Financial Management



Financial Management

Question No.1

In Finance term, the major goal of the firm basically is to maximize profits and returns of the share holders and also to decrease the risk involved in the firm. Generally the goals of the managers and employees remain the same as of the firm. As a matter of fact, the managers and employees who are working in a firm works under the same perspective so we can say that the goal of the managers and employees working inside the firm is to work according to the firm's own objective or according to firm's goals. The achievement of the firm's goals can be measured by the amount for change in return on assets (ROA) and by the firm's goal achievement, which shows that either company is doing well in achieving its goals or not (Dayananda et al, 2002)Conclusion

I agree with the goals and achievement of the firm, as the main objective of the firm is to maximize the profit of the firm and to maximize the wealth of the share holder, while tackling the risks involved. These goals are appropriate in my opinion. The first main goal of the firm that I mention above is to maximize the profit, I agree with this goal because firms are usually inaugurated for the purpose of earning profit. The second main objective of the firm also mention above is to maximize share holders wealth, so I also agree with this goal as well because the share holders are those who invest in the firm. Thus, to maximize share holders wealth as well is also an essential goal for the firm to achieve. Third main goal of a firm is to minimize the cost that is also an appropriate, and a necessary goal for the firm to achieve as this goal helps the firm to decrease its extra expenditures and also helps the firm to increases its profit margins.

Question No.2

Efficient Market Hypothesis

An efficient market hypothesis is the theory that states “beating the stock market is impossible because efficiency of stock market causes all the existing stock prices to reflect the relevant information. The investors could not sell overvalued stock or purchase undervalued stock because according to the Efficient Market Hypothesis (EMH) shares or stocks are always trade at their fair values. Thus, it became impossible for the investor to obtain any sought of incentive related to the stock prices. The only way that investor left with in case of earning higher profit is by investing in the riskier assets (Malkiel, B. G., 2003).

Efficient market price associated with the random walk model. By a random walk, we mean that information in the market is coming in random order, so its future direction cannot be predicted. This is because stock prices immediately reflect to the upcoming information in the market. By this, we mean that tomorrow's news will be independent of today's price change. Thus, it makes impossible for the investor to predict upcoming price change. In these circumstances, investor can earn ...