BUSINESS FINANCE
Financial Management refers to that part of the management activity which is concerned with the planning and controlling of firms financial resources.
OBJECTIVES OF FINANCIAL MANAGEMENT
The objectives of financial management can be achieved by:
PROFIT MAXIMATION
WEALTH MAXIMATION
PROFIT MAXIMATION: Profit earning is the main aim of every economic activity. A business being an economic institution must earn profits to cover its costs and provide funds for growth. No business can
survive without earning profit. Profit is a measure of efficiency of a business eEnterprise. Profits also serve as a protection against risks which cannot be ensured. The accumulated profits enable a business
to face risks like fall in prices, competition from other units, adverse government policies etc. Thus, profit maximization is considered as the main objective of business.
Drawbacks of profit maximization:
Ambiguity: the term ‘profit’ is vague and it cannot be precisely defined. It means different
things for different people. Should we consider short-term profit or long-term profits? Does it mean total profits or earning per share?
Ignores time value of money: profit maximization objective ignores the time value of money and does not consider the magnitude and timing of earnings. It treats all earnings as equal though they occur in different periods. It ignores the fact that cash received today is more important than the same amount of cash received tomorrow.
Ignores risk factor: it does not take into consideration the risk of the prospective earnings
stream. Some projects are more risky than others.
Dividend policy: the effect of dividend policy on the market price of shares is also not
considered in the objective of profit maximization.
WEALTH MAXIMIZATION: wealth maximization is the appropriate objective of an enterprise. Financial theory asserts that wealth maximization is the single substitute for a stockholders utility. When the firm maximizes the stockholders wealth, the individual stockholder can use this wealth to maximize his individual utility. It means that by maximizing stockholders wealth the firm is operating consistently towards maximizing stockholders utility.
Stockholders current wealth in the firm is the product of the number of shares owned, multiplied with the current stock price per share. Higher the stock price per share greater will be stockholders wealth.
ARGUMENTS IN FAVOR OF WEALTH MAXIMISATION
It serves the interests of owners as well as other stakeholders in the firm.
It takes into consideration the risk factor and the time value of money.
إرسال تعليق