This lesson establishes the foundational principles of financial management, including the primary objective of the firm and the role of the financial manager.

1.1 The Goal of Financial Management

The primary objective of financial management is to maximise shareholder value. This is typically operationalised as maximising the market value of the firm’s equity . This objective provides a clear, measurable goal for financial decision-making and aligns the interests of management with those of shareholders. It reflects the residual claim of shareholders on the firm’s assets and cash flows.

1.2 The Agency Problem

A central challenge in corporate finance is the agency problem—the conflict of interest between shareholders (principals) and management (agents) . Managers may pursue their own interests (e.g., empire-building, excessive compensation) at the expense of shareholder value. The agency problem is addressed through corporate governance mechanisms, including board oversight, executive compensation structures, and market discipline .

1.3 The Financial Manager’s Role

The financial manager is responsible for making three key decisions :

• Investment Decisions: Allocating capital to productive assets and projects.

• Financing Decisions: Determining the optimal mix of debt and equity to fund investments.

• Dividend Decisions: Deciding how much profit to distribute to shareholders versus reinvesting in the business.