Financial Management

Agricultural Finance THE ECONOMIC STUDY OF THE ACQUISITION AND USE OF CAPITAL IN AGRICULTURE TWO TYPES OF CAPITAL: EQUITY BORROWED

Goal Identification To evaluate performance we need to have identified goals or objectives associated with that performance. Goal identification leads to the development of measures of goal attainment, targets for these measures, and analytical procedures for relating plans and expectations to the measures and targets.

MANAGERIAL GOALS PROFITABILITY: GOAL OF MAXIMIZATION OF PROFITS IN A MICROECONOMIC CONTEXT THIS IS WHERE MVP=MIC FOR ALL INPUTS AND ALL ENTERPRISES GENERALLY A SHORT - TERM OBJECTIVE

GROWTH: GENERALLY A LONG - TERM OBJECTIVE. SHORT - TERM PROFITS MAY NEED TO BE TRADED FOR LONG - TERM GROWTH. TO ACCOUNT FOR THIS TRADE - OFF, WE MUST USE THE CONCEPT OF PRESENT VALUE WHERE FUTURE PROFITS ARE DISCOUNTED FOR TIME.

RISK RISK CAN CHANGE THE LEVEL OF RESOURCE ALLOCATION DEPENDING ON THE LEVEL OF RISK AVERSION. RISK AVERSION MEANS THAT INDIVIDUALS MUST BE COMPENSATED FOR RISK TAKING. RISK/RETURN TRADE OFF MEANS THAT AS THE LEVEL OF RISK INCREASES, THE EXPECTED RETURN WILL INCREASE. RISK PREMIUM IS THE REQUIRED COMPENSATION OVER THE RISK- FREE RATE OF RETURN. RISK DOMINANCE MEANS THAT A RISK AVERSE INDIVIDUAL WILL CHOOSE INVESTMENTS THAT GIVE THE SAME EXPECTED RETURN WITH A LOWER LEVEL OF RISK.

Risk – Return Relationship Return Risk Risk Free Rate Risk Premium

Trade-Offs in Risk and Returns Return Risk AB C D E

Life Cycle of the Firm Manager’s objectives change over time which will change the financial needs and structure of the firm.