Financial Management 2
Financial Management 2
Financial Management 2
Sound financial management is necessary for the survival of the firm and for
its growth. Therefore all of these stakeholders, to some extent, have an interest
in seeing sensible financial decisions being taken.
However, there are occasions when someone has to decide which claimants
are to have their objectives maximised, and which are merely to be satisficed.
At the opposite end of the political or philosophical spectrum are the advocates
of the primacy of workers’ rights and rewards. The belief here is that labour
should have its rewards maximised.
• Maximisation of profit
The following two are often considered as the objectives of the financial
management :
1. Maximization of the profits of the firm, and
2. Maximization of the shareholders’ wealth.
1. Maximization of the Profits of the Firm : For any business firm,
the maximization of the profits is often considered as the implied objective, and
therefore, it is natural to retain the maximization of profit as the goal of the
financial management also.
It ignores the risk. The profit maximization does not take into account the
amount of risk which the firm undertakes in attempting to increase the profits.
It ignores the timings of costs and returns and thereby ignores the time
value of money.
The profit maximization borrows the concept of profit from the field of
accounting and thus tends to concentrate on the immediate effect of a
financial decision as reflected in the increase in the profit of that year or in
near future.
MAXIMIZING EPS
• Ignores timing and risk of the expected benefit
• Market value is not a function of EPS. Hence maximizing EPS will not result in
highest price for company's shares
• Maximizing EPS implies that the firm should make no dividend payment so
long as funds can be invested at positive rate of return—such a policy may not
always work
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2. Maximization of Shareholders’ Wealth : In the theory of financial
management, it is well accepted that the objective of financial
management is the maximization of shareholders’ wealth. This objective is
generally expressed in term of maximization of the value of a share of a firm.
This goal directly affects the policy decision of a firm about what to invest
in and how to finance these investments.
The main problem is the assumption underlying this goal i.e. there is an
efficient capital market wherein the effect of a decision is truly reflected in
the market of share. In practice, the share price in the market is subject to
the influence of so many extraneous factors.
Pandey,I.M,Financial Management