MB00-45-FINANCIAL MANAGEMENT Q1.

Ans. What are the goals of financial management? Financial Management means maximization of economic welfare of its shareholders. Maximization of economic welfare means of wealth of its shareholders. Shareholders Wealth maximization is reflected in the market value of the firms shares. Experts believe that, the goal of financial management is attained when it maximizes the market value of shares. There are two versions of the goals of financial management of the firm profit Maximization and wealth maximization. Goals of financial management Profit maximization: - It is based on the cardinal rule of efficiency. Its goal is to maximize the returns with the best output and price levels. A firms performance is evaluated in terms of profitability. Profit maximization is the traditional and narrow approach, which aims at maximizing the profit of the concern. The concept of profit lacks clarity. What does profit mean? Is a profit after tax or before tax? Is it operating profit or net profit available to shareholders? In the sense, profit is neither defined precisely nor correctly. It creates unnecessary conflicts regarding the earning habits of the business concern. Differences in interpretation of the concept of profit thus expose the weakness of profit maximization. Profit maximization neither considers the time value of money nor the net present value of the cash inflow. It does not differentiate between profits of current year with the profits to be earned in later years. The concept of profit maximization apprehends to be either accounting profit or economic normal profit or economic supernormal profit. Wealth maximization:-The term wealth means shareholders wealth or the wealth of the persons those who are involved in the business concern. Wealth maximization is also known as value maximization or net present worth maximization. This objective is a universally accepted concept in the field of business. Wealth maximization is based on the concept of cash flows. Cash flows are a reality and not based on any subjective interpretation. On the other hand, profit maximization is based on accounting profit and it also contains subjective elements. Wealth maximization considers time value of money. Time value of money translates cash flow occurring at different period into a comparable value at zero periods. I finally crystallize into the rate of return that will motivate investors to part with their hard earned savings. Maximizing the wealth of the shareholders means positive net present value of the decisions implemented.