Objectives of financial management- profitability vs shareholder’s wealth.pptx

Objectives of financial management- profitability vs shareholder’s wealth.pptx

1. Objectives of financial management- profitability vs shareholder’s wealth maximization

2. What is financial management ? Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. It refers to the process of efficient acquisition, utilization, and distribution of finance and then disposal of surplus or profit to run the organization smoothly.

3. Objectives of financial management Maintenance of liquid assets . Profit maximization Shareholder’s wealth maximization Proper utilization of financial resources Meeting financial commitments Survival of business

4. Profit maximization Profit maximization is the capability of a business or company to earn the maximum profit with low cost which is considered as the chief target of any business and also one of the objectives of financial management. According to financial management, profit maximization is the traditional approach or process which increases the profit or Earnings per Share (EPS) of the business.

5. Favorable arguments for profit maximization It is a true measure of financial stability. A business’s ultimate aim is to earn profit. It reduces risks and uncertainty in business decisions and operations. Retained earnings act as a major source of long terms finance. Profitability meets all needs .

6. Unfavorable arguments for profit maximization It encourages unsocial and bad earning habits and may give rise to corrupt practices and unfair trade. It ignores time value of money i.e. it does not consider return benefits received different period of time. It ignores uncertainty of returns and internal/external risks that may affect the overall operations of business. It leads to inequalities among shareholders .

7. Shareholders wealth maximization The term wealth means shareholder’s wealth or the wealth of the business firm. It is also known as net present value maximization. NVP is the difference between the present value of benefits realized and present value of the cost incurred by a business. Shareholder wealth maximization (SWM) means when managers of the business attempt to maximize their firm’s wealth. Actually, they are attempting to increase the stock price of the company. The firm’s value and the shareholders’ wealth both increase with the increase of its stock’s price.

8. Favorable arguments for wealth maximization It considers time value of money and risks of the business concerned. It considers the quality and quantity of benefits received by the firm. Shareholders wealth is maximized when the price per share is maximized. It promotes and improves optimum and efficient utilization of resources. It ensures economic interest of its stakeholders.

9. Unfavorable arguments for wealth maximization It ignores short term economic benefits . It ignores an unstable share market i.e. there may be extensive fluctuations in share price. It is indirect profit maximization

10. Conclusion Profit is the basic building block of a company to accrue capital in the shareholder’s equity. Profit maximization helps the company in surviving against all the odds of the business and requires some short-term perspective to achieve the same. Though in the short term, the company can ignore the risk factor, it can not do the same in the long-term as shareholders have invested their money in the company with expectations of getting high returns on their investment. Wealth Maximization takes into account the interest concerning shareholders, creditors or lenders, employees, and other stakeholders. Hence, it ensures building up reserves for future growth and expansion, maintaining the market price of the company’s share, and recognizes the value of regular dividends. So, a company can take any number of decisions for maximizing profit, but when it comes to decisions concerning shareholders, then Wealth Maximization is the way to go.

11. THANK YOU … Submitted by – Kartik Pal Khushi Kumari Lalit Bisht Mehardeep Singh