Q1. What are the goals of financial management? 10 marks
The financial management has to take three important decision viz. (i) Investment decision i.e., where to invest fund and in what amount, (ii) Financing decision i.e., from where to raise funds and in what amount, and (iii) Dividend i.e., how much to pay dividend and how much to retain for future expansion. In order to make these decisions the management must have a clear understanding of the objective sought to be achieved. It is generally agreed that the financial objective of the firm should be maximization of owner’s economic welfare. There are two widely discussed approaches or criterion of maximizing owners’ welfare -(i) Profit maximization, and (ii) Wealth maximization. It should be noted here that objective is used in the sense of goal or goals or decision criterion for the three decisions involved
Profit Maximization: Maximization of profits is very often considered as the mainobjective of a business enterprise. The shareholders, the owners of the business, invest their funds in the business with the hope of getting higher dividend on their investment. Moreover, the profitability of the business is an indicator of the sound health of the organisation, because, it safeguards the economic interests of various social groups which are directly or indirectly connected with the company e.g. shareholders, creditors and employees. All these parties must get reasonable return for their contributions and it is possible only when company earns higher profits or sufficient profits to discharge the obligations to them.
Wealth Maximization: The wealth maximization (also known as value maximization or Net Present Worth Maximization) is also universally accepted criterion for financial decision making. The value of an asset should be viewed in terms of benefits it can produce over the cost of capital investment.
Prof. Era Solomon has defined the concept of wealth maximization as follows- “The gross present worth of a course of action is equal to the capitalized value of the flow of future expected benefits, discounted (or as capitalized) at a rate which reflects their certainty or uncertainty. Wealth or net amount of capital investment required to achieve the benefits being discussed. Any financial action which creates wealth or which has a net present worth above zero is a desirable one and should be undertaken. Any financial action which does not meet this test should be rejected. If two or more desirable courses of action are mutually exclusive (i.e., if only one can be undertaken) then the decision should be to do that which creates most wealth or shows the greatest amount of net present worth. In short, the operating objective for financial management is to maximize wealth or net present worth. Thus, the concept of wealth maximization is based on cash flows (inflows and outflows) generated by the decision. If inflows are greater than outflows, the decision is good because it maximizes the wealth of the owners.
We have discussed above the two goals of financial management. Now the question is which one is the best or which goal should be followed in decision making. Certain objections have been raised against the profit maximization goal which strengthen the case for wealth maximization as the goal of financial decisions.
| Dear Students,
Get your assignments from Our ESTEEMED ORGANIZATION smumbaassignment.com Just email to kvsude@gmail.com or S M S to +91 9995105420. message Format – SMU MBA <Name> <E-MAIL ID> <SEM ? > To +91 9995105420 , we will reach back you with in 24H Or Directly call our Middle East Office +974 55702886 . More Info, Kindly visit smumbaassignment.com Best Regards, Admin smumbaassignment.com |
Q2. Explain the factors affecting Financial Plan. 10 marks
Q3. Explain the time value of money. 10 marks
Q4. XYZ India Ltd’s share is expected to touch Rs. 450 one year from
now. The company is expected to declare a dividend of Rs. 25 per
share. What is the price at which an investor would be willing to buy if
his or her required rate of return is 15%?
Q5. Below Table depicts the statistics of a firm and its sales requirements.
Compute the DOL according to the values given in the table.
Q6. What are the assumptions of MM approach?
