Home work
Real assets are the ones that can be seen and touched. This means that real assets are the investments that people are able to see and touch with their hands. In this regard, the real assets have an intrinsic value in themselves. Example of real assets includes real estates and gold. On the other hand, financial assets cannot be seen or touched. They are usually represented by other items as a prove of their existences. Bond certificates, money and paper certificates represent the financial assets. Examples of financial assets include bonds and shares. Usually, financial assets lack intrinsic value as opposed to real assets.
Maximizing the value of the business is one of the major objectives of the business. It is a logical goal in various scenarios. Achieving this objective is usually difficult but it is very important. A conflict of interest usually exists between the various stakeholders of the organization and all these conflicts can be solved by aiming at value maximization of the organization. This objective usually benefits all the stakeholders in the organization. In the first place, the shareholders benefit in that their investment grows if the value of their organization is high. Therefore if they sell their shares, they get capital gains. The customers also benefit in that they are assured that the organization is stable and will continue supplying the goods and services to them. The management gains in that their reputation increases and therefore their rewards can be increased due to the good performance. With increased value, an organization can benefit a lot in case it is sold. Generally, all the stakeholders in an organization benefit from value maximization and hence conflict of interest ends.
Investment decision is usually aimed at improving the value of the firm. The managers usually consider the costs and the expected future revenue. Investment decisions usually have long term consequences on the firm and therefore should be made carefully. Example of investment decision include building a bigger housing structure to facilitate greater output, buying a vehicle that is able to save fuel, buying a new machine to increase production or replacing an old machine that involve greater costs.
A financial decision usually has short term effect on the firm. Examples of financial decisions include a forecast on the cash needed by the organization in a given financial year and how the funds can be obtained. Budgeting the cash available in a given financial year is a financial decision. A forecast of the future sales in an organization is also a financial decision. Generally, financial decisions relate to a given year.
The goal of finance is wealth maximization. This is the most logical objective in that it is a long term goal that benefits all the stakeholders in an organization. Both the internal and external stakeholders in an organization benefit from the objective. Profit maximization is a short-term goal that may not benefit all the stakeholders in an organization. Sometimes high profits can affect the future of the organization negatively. Therefore profit maximization is not a good objective. With wealth maximization of an organization, the reputation of the organization is enhanced and its goodwill also improves. Generally, wealth maximization is advantageous to any organization in that it benefits all the stakeholders in the organization and the satisfaction of these stakeholders is important. This is why the major financial goal of any organization should be wealth maximization and not profit maximization.
