Objectives of financial Management.pptx

Financial Management

1. Course: Financial Management for NTA UGC-NET Lesson 2: Objectives of Financial Management Description: In this lesson we will learn how the interest of shareholders can be best served. What should be the upper most in mind of the financial manager while taking financial decisions. By : Dr. Preeti Jindal M.Com , Ph.D , UGC-NET and JRF

2. Objectives of Financial Management Objectives serves as yardstick against which financial manager can evaluate financial decisions taken by him in the interest of business. There are two approaches in the respect of objectives of Financial management : Profit Maximization Wealth Maximization

3. Profit Maximization Profit Maximization: Profit maximization simply means maximizing the income of firm. Economists are of the view that profits can be maximized when the difference of total revenue and total cost is maximum, or in other words it implies maximization of profit after tax.

4. Profit Maximization Arguments in favor of this approach: Maximizing the rupee income of the firm Appropriate measure of firm performance Profit is needed to meet out the future uncertainties.

5. Profit Maximization Arguments against this approach: It ignores timing of returns which means it doesn’t tell about the fact that cash received today is important than the same after. It doesn’t make any difference between short-term and long-term profit. It ignores the interest of all parties other than owners.

6. Wealth Maximization This objective is concerned with maximization of shareholder’s wealth which can be achieved by maximizing market value of firm’s shares. Example : If Mr. X purchases 100 shares@ Rs. 100 /- of ABC Ltd. His wealth in company is Rs. 10,000/-. After some time the market price of the share increases to Rs. 130/-. Therefore, his wealth would be Rs. 13,000. His wealth increases by Rs. 3,000/-. If the market price of the share decreases to Rs. 90/- he loses his wealth by Rs. 1000/-. Wealth of shareholders= Number of shares x market price per share

7. Wealth Maximization Importance of this Approach: It is based on cash flow (i.e. profit after tax but before depreciation) and not on accounting profit. Profits can be manipulated by changing accounting assumption for example there is change in the method of depreciation, there is change in profit.

8. Wealth Maximization Wealth maximization considers time value of money i.e. a rupee received today is important to a rupee received after a year. In wealth maximization the future cash flows are discounted at an appropriate discounted rate to represent their present value. It considers the  risk and uncertainty factor  while considering the discounting rate. The discounting rate reflects both time and risk. Higher the uncertainty, the discounting rate is higher and vice-versa.

9. Conclusion It can be concluded that interest of shareholders are well served by the wealth maximization as a decision criterion for business.

10. Thank You