Define the terms finance and financial management, and identify the major sub-areas of finance.
Finance is the study of applying specific value to things individuals own to include services used and decisions determined [Finance by Cornett, M. M., Adair, T. A., & Nofsinger J. (2014). M: Finance (2nd ed.)]. In simple words, finance is how much value is attributable to goods and services and the basis of such attribution.
Financial management may be defined as the management of the finances of a business or an organization in order to achieve the financial objectives. It includes creation, effective utilization of funds to ensure the smooth functioning of the business. It encompasses planning, administration and controlling.
The various
An agency relationship is where a principal hires another person (called an agent) to carry out the work of the principal in a fiduciary capacity. In case of a corporation, the board of directors who constitute the top management are the agents elected by the principals (stockholders) to carry on the business.
An agency problem is where there is a conflict between the agent and principal in terms of functioning and in terms of interest.
There are many ways to minimize the conflict of interest. However the three most important are as follows:
1. Ignore the challenge on hand:
This is the least preferred way of resolving the problem. The stakeholders may resolve to ignore the problem on hand. The disadvantage is that the problem continues to remain a problem and is never solved. In this case, the problem may go out of control.
2. Monitor manager’s action:
The shareholders may monitor the management’s action closely to ensure that the situation is not going out of control.
3. Make manager’s take ownership
By giving the managers a portion in the capital of the company in the form of say ESOP, the manager will also have a moral responsibility imposed on him to make decisions and act in the best interests of the company.

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