Created by David Moore, PhD
You have one lifeline to replace a question (cannot be used for Summary questions)
What are the three main questions facing a financial manager?
A financial manager is faced with deciding which long term investments to pursue, how to finance said investments, and how to run the day-to-day financial operations of the firm. The first question is often called capital budgeting. This is important as it is crucial for a firm to deploy its capital to value creating projects. Financial managers will evaluate all potential long-term investments, examples include building a new manufacturing plant, launching a new product, opening a new store, and decide whether this project creates value for shareholders.
The second question, often called capital structure, is essential a financing question. How will the firm choose to finance the projects from the first question. This means deciding between three sources of capital: internal funds (i.e., cash from retained earnings), debt, equity. A financial manager must weigh the costs of the different financing options and choose a capital structure that maximizes shareholder value.
The third and final question is often called working capital management and is related to how the firm decides to use current assets and liabilities to operate the firm on a day-to-day basis. The primary goal here is to ensure the firm has sufficient resources to operate without incurring any significant costs or interruptions. Some example decisions to be made are how much inventory to hold, payment terms given to customers, terms with suppliers. Essentially the goal of the manager is to make sure the firm has enough liquidity to operate smoothly without wasting any resources.
One can essentially relate the three questions to the balance sheet of the firm: Current assets and liabilities fall under working capital management, the remaining portion of the LHS of the balance sheet is capital budgeting (i.e, long-term assets), the remaining portion of the RHS of the balance sheet is capital structure (i.e long-term debt and equity).
There are three questions facing a financial manager. They are capital budgeting, capital structure, and working capital management. Capital budgeting is buying stuff, capital structure is related to debt and equity and working capital management is how you operate the firm. They are all important because they need to be answered. It is important to think about value when answering each question.
A response not hitting the bare minimum criteria or containing incorrect statements will result in a lower grade than bare minimum.