Overview Of Financial Management

An Overview Of Financial Management

Examine ethical behavior within firms in relation to financial management. Provide two (2) examples of companies that have been guilty of ethics-based malfeasance related to financial management and determine why their comeuppance was deserved. From the scenario, recommend two (2) actions that Trevose Fitness Center (TFC) could take in order to raise capital that will, in turn, enable it to reach its expansion goals. Defend your response. Support your recommendation with two (2) real-world examples of successful implementations of these actions. THE KEY QUESTION: WILL YOUR DECISION CREATE VALUE? A project is financed by either shareholders, who provide equity capital, and/or debt holders, who provide debt capital. The firm’s owners want management to increase the firm’s value, and for that, a business proposal’s expected return must exceed its financing cost. Before deciding to go ahead with a business proposal, the manager should ask himself/herself the Key Question: Will the proposal create value? The Key Question also applies to current operations. Basic thoughts on this idea? What is a Shareholder? What is a Debt Holder? What is Value add? Try to post early in the week, so we can have a discussion DURING the week.

Paper For Above instruction

Financial management is a critical domain within the corporate governance framework, focusing on the strategic allocation of financial resources to maximize shareholder value. Ethical behavior in financial management is fundamental to maintaining trust, transparency, and integrity within firms. When ethical standards are compromised, it can lead to significant repercussions, including legal penalties, reputation damage, and financial losses. This paper explores ethical malfeasance in financial management through real-world examples, discusses strategies for raising capital in a responsible manner, and reflects on the core concepts of value creation, shareholders, and debt holders.

Ethical Malfeasance in Financial Management

Two prominent cases exemplify the detrimental impacts of unethical behavior within financial management. The first case involves Enron Corporation, which engaged in extensive accounting fraud to hide debt and inflate profits during the late 1990s and early 2000s. Enron's executives manipulated financial statements and exploited accounting loopholes to present a misleading picture of the company's health. Their malfeasance was driven by a desire to maintain high stock prices and executive bonuses, but it ultimately led to the company's collapse in 2001. The comeuppance was well-deserved, as the deception caused thousands of employees to lose retirement savings and investors to suffer billions in losses, eroding trust in corporate governance (Healy & Palepu, 2003).

A second example is the case of Lehman Brothers, whose excessive risk-taking and lack of transparency in its financial disclosures precipitated the 2008 global financial crisis. Lehman’s management engaged in risky mortgage-backed securities investments while failing to disclose the true extent of its liabilities. When the risks materialized, Lehman filed for bankruptcy—a move that was highly scrutinized and widely condemned. The downfall was a direct consequence of neglecting ethical standards and ignoring the broader impacts of their actions, which caused widespread economic instability. Their comeuppance was deserved because it underscored the systemic failures and unethical practices that contributed to a global financial meltdown (Srinivasan, 2010).

Raising Capital Responsibly: TFC’s Strategies

For Trevose Fitness Center (TFC), raising capital is a vital step toward achieving its expansion goals. Two effective strategies include equity financing and convertible debt issuance. Equity financing involves issuing new shares to investors; this method dilutes ownership but does not require immediate repayment and reduces financial risk. For example, in 2021, Peloton raised substantial capital through equity offerings to fund its expansion, demonstrating how equity financing can support growth while sharing risk with investors (Peloton, 2021).

Another strategy is issuing convertible debt, which provides initial debt financing that can later be converted into equity at predetermined terms. This approach attracts investors seeking fixed income with the potential for upside if the company's value increases. Tesla famously used convertible bonds to fund its growth phases, leveraging debt in a way that aligns with long-term value creation for shareholders (Tesla, 2022). These strategies can help TFC secure capital while minimizing immediate financial strain, thereby supporting its expansion plans responsibly.

Will Your Decision Create Value?

The fundamental criterion for evaluating any financial decision is whether it creates value for the firm’s shareholders. Value is typically measured by increases in stock price, dividends, or overall firm worth. Managers should continually assess whether each project or capitalraising decision exceeds its cost of capital, thus adding economic value. This aligns with the core principle that profitable investments should generate returns above their financing costs, contributing to sustainable growth and shareholder wealth.

Basic Concepts: Shareholders, Debt Holders, and Value Addition

Shareholders are individuals or entities that own shares in a company and thus have residual claims on its earnings and assets. They are interested in maximizing share price and dividends. On the other hand, debt holders are creditors who lend capital to the firm and seek regular interest payments and principal repayment at agreed terms. Both stakeholders are essential in capital structure considerations, and their interests can sometimes conflict, underscoring the importance of ethical and transparent financial management.

Value addition refers to the increase in worth generated by a company through its operations and strategic decisions. It results from profitable investments, operational efficiencies, and effective capital management. Creating value involves making informed decisions that enhance a firm’s competitive advantage, market position, and financial health over time.

Conclusion

In summary, ethical behavior in financial management is crucial for long-term sustainability and trust. Companies like Enron and Lehman Brothers serve as cautionary tales of how unethical practices can lead to severe consequences. For firms like TFC, raising capital responsibly through strategies such as equity financing and convertible debt can facilitate growth while preserving stakeholder value. Ultimately, the key to successful financial management lies in making decisions that create value for shareholders, align with ethical standards, and support sustainable business expansion.

References

• Healy, P. M., & Palepu, K. G. (2003). The Fall of Enron. Journal of Economic Perspectives, 17(2), 3-26.
• Srinivasan, R. (2010). The Financial Crisis of 2008: Causes, Impact, and Policy Responses. Economic and Political Weekly, 45(50), 45-52.
• Peloton. (2021). Peloton raises $1 billion in equity financing to fund growth. Business Insider. https://www.businessinsider.com/peloton-raises-1-billion-in-equity-financing
• Tesla. (2022). Tesla’s use of convertible bonds to fuel growth. Financial Times. https://www.ft.com/content/tesla-convertible-bonds
• Healy, P. M., & Palepu, K. G. (2003). The Fall of Enron. Journal of Economic Perspectives, 17(2), 3-26.
• Lehman Brothers. (2008). Official Bankruptcy Filing. Reuters. https://www.reuters.com/article/us-lehman-bankruptcy
• Jensen, M. C. (2001). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14(3), 8-21.
• Brealey, R. A., Myers, S. C., & Allen, F. (2019). Principles of Corporate Finance. McGraw-Hill Education.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
• Damodaran, A. (2010). Applied Corporate Finance. John Wiley & Sons.