BUS FPX 3062 Assessment 1 Financial Management and Markets BUS-FPX3062 Fundamentals of Finance Understanding Financial Management and Ethical Considerations in Markets
Financial management is a crucial aspect of any business, influencing decision-making and ethical practices within the market. In this article, we will delve into various facets of financial management, including ethical considerations highlighted by the case of Martha Stewart, the importance of wealth maximization over profit maximization, market classifications, the yield curve, and risk premium calculations.
The Martha Stewart Case: Insider Trading and Ethics
Martha Stewart’s involvement in insider trading raises significant ethical questions within the realm of financial management. Although Stewart was accused of selling ImClone stocks shortly before their value plummeted, the charges of securities fraud were ultimately dismissed. Instead, she faced a five-month prison sentence for obstruction of justice and lying to investigators.
Was Insider Trading Unethical?
The ethics of Stewart’s actions remain debatable. Her broker informed her that ImClone’s CEO was selling shares, which suggested that she should do the same. This advice was based on publicly disclosed information, so it’s not inherently unethical. However, the subsequent actions she took to conceal her decisions reflect a clear ethical breach, highlighting that transparency is paramount in financial management.
Wealth Maximization vs. Profit Maximization
The Case for Wealth Maximization
Wealth maximization is often viewed as a superior goal compared to profit maximization. While profit maximization may boost shareholder equity in the short term, it can lead to decisions that jeopardize long-term returns. According to financial expert Cornett (2021), a long-term focus not only secures the best returns but also fosters sustainable growth.
In contrast, prioritizing profit can encourage risky behaviors, ultimately diminishing value. A company that adopts wealth maximization as its guiding principle aligns its strategies with the long-term interests of its shareholders, ensuring stability and growth.
Primary vs. Secondary Markets: Classifying Transactions
Understanding market classifications is vital for effective financial management. Below are examples of transactions categorized into primary and secondary markets.
| Transactions | Primary Market | Secondary Market |
|---|---|---|
| IBM issues $200 million of new common stock. | X | |
| The New Company issues $50 million in an IPO. | X | |
| IBM sells $5 million of GM preferred stock. | X | |
| The Magellan Fund buys $100 million of previously issued IBM bonds. | X | |
| Prudential Insurance Co. sells $10 million of GM common stock. | X |
Understanding Market Dynamics
Primary markets are where new securities are created, while secondary markets deal with the trading of existing securities. This classification helps investors understand where their capital is flowing and the lifecycle of securities in the financial ecosystem.
Classifying Financial Instruments: Money Market vs. Capital Market
Financial instruments can also be categorized into money market securities or capital market securities. Below are classifications for various instruments:
| Financial Instruments | Money Market | Capital Market |
|---|---|---|
| Federal Funds | X | |
| Common Stock | X | |
| Corporate Bonds | X | |
| Mortgages | X | |
| Negotiable Certificates of Deposit | X | |
| U.S. Treasury Bills | X | |
| U.S. Treasury Notes | X | |
| U.S. Treasury Bonds | X | |
| State and Government Bonds | X |
Significance of Market Classifications
Understanding these classifications is essential for making informed investment decisions, as they impact liquidity, risk, and return potential.