Gujarat BoardEnglish MediumSTD 12 CommerceOCMFINANCIAL MANAGEMENT5 Marks
Question
Explain the Objectives of Financial Management.
✓
Answer
Introduction :
Equity shareholder are the original owner of business unit.
They invest money in the company as share capital.
Their objective is to obtain maximum economic return.
Considering the view point the aim of financial management should be “Maximum economic welfare of the owner. “For this maximum utilization of company’s money is needed.
Objectives of Financial Management :
Consider two objectives for maximum economic welfare of the owner
Objective of maximization of profit.
Objective of maximization of wealth.
Objective of Profit Maximization :
Maximization of profit means to maximize company’s income.
Shareholder hope for the maximum dividend buy shares of the company and invest money.
So company should earn maximum profit throughout its financial resource.
Dividend policy should be based on profit maximization.
This concept suggests that company should accept only profit making projects.
Through the objective of maximization of profit company can raise earning per share.
As a result the aim of owner’s welfare is maintained.
Objectives of wealth maximization :
This objective is recognized as net present value.
Present value creates shareholders wealth.
Management should take decisions which increase not present value of wealth.
In this concept only cash only cash liquidity is the criteria and accounting profit is ignored.
This difference between present value of wealth and required capital investment means net present value of wealth.
In short, Net present value of wealth = present value of wealth – required capital investment for wealth.
Company’s wealth increases due to right decisions taken by financial management.
As a result the price of the share of the company increases and wealth of the shareholder maximizes.
Decisions taken for maximization of wealth have become universally accepted.
Prof. Solomon too favors the objective of maximization of wealth.
The objective of wealth maximization is superior to the objective of maximization of profit.
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