Question

David Lee was elected as a new Director of financial. He controls and manage the funds of the company in a very efficient way. He is seeking your help to develop the below content or write-ups, so that he can share it with board of Director and the Executive chairman.

i. Ways in which the shareholders of a company can encourage its manager to act in a way which is consistent with the objective of maximization of shareholder wealth.
ii. What other objective may be important to a public limited company which are in-line with the primary objective of shareholder wealth maximization.
iii. What is the purpose or benefits of published financial statements for companies and the ratio analysis?
iv. Ways the company can manage its financial risk.
v. What are the short term and long-term financing available for companies to generate funds for operating their business. Discuss the reason for acquiring these funds.

Answer 1

David Lee can guide his company to align with shareholder interests by adopting performance-based incentives and ensuring transparency. Companies prioritize objectives that support long-term shareholder value and use published financial statements for transparency and informed decision-making. Effective financial risk management and diverse financing options facilitate sustainable business operations and growth.

Step-by-step explanation:

David Lee, as the new Director of Financial at a company, is responsible for managing the funds and ensuring that the company's financial strategies align with the objective of maximizing shareholder wealth. To address this, shareholders can encourage management to act in their interests through various methods such as performance-based compensation, active engagement in company affairs, and ensuring transparent communication channels between management and the shareholders. As a governing body, the board of directors is instrumental in bridging the gap between executive decisions and shareholder interests. Other than wealth maximization, a public limited company may have additional objectives such as corporate social responsibility, sustainable development, and maintaining a positive corporate image. These objectives support the primary aim since they can lead to a sustainable business model that potentially enhances long-term shareholder value. Published financial statements serve several purposes and offer numerous benefits. They provide transparency, strengthen investor confidence, and facilitate informed decision-making. Ratio analysis, derived from these financial statements, is a tool that helps in assessing a company's financial health, operational efficiency, and profitability. Financial risk management can be conducted in several ways, such as through diversification, hedging, maintaining optimal debt levels, and proper cash flow management. Implementing a robust risk management framework ensures business sustainability and protects the company's financial position. When considering financing, companies have access to various short-term and long-term funding options. Short-term financing includes instruments like trade credit, bank overdrafts, and commercial paper, while long-term financing can involve issuing stocks and bonds, loans, and leases. Companies typically acquire these funds to invest in capital projects, support business operations, and pursue growth opportunities.