Welcome to Scribd. Sign in or start your free trial to enjoy unlimited e-books, audiobooks & documents.Find out more
Standard view
Full view
of .
Look up keyword
Like this
0 of .
Results for:
No results containing your search query
P. 1




|Views: 103,256|Likes:
Published by Siddharth Singh

More info:

Published by: Siddharth Singh on May 28, 2009
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as DOC, PDF, TXT or read online from Scribd
See more
See less





Financial management is an academic discipline which is concerned withdecision-making. This decision is concerned with the size and composition of assets and the level and structure of financing. In order to make rightdecision, it is necessary to have a clear understanding of the objectives. Suchan objective provides a framework for right kind of financial decision making.The objectives are concerned with designing a method of operating theInternal Investment and financing of a firm. There are two widely appliedapproaches, viz.(a) profit maximization and(b) wealth maximization.The term '
is used in the sense of an object, a goal or decisioncriterion. The three decisions - Investment decision, financing decision anddividend policy decision are guided by the objective. Therefore, what isrelevant - is not the over-all objective but an operationally useful criterion: Itshould also be noted that the term objective provides a normative framework.Therefore, a firm should try to achieve and on policies which should befollowed so that certain goals are to be achieved. It should be noted that thefirms do not necessarily follow them.
Profit Maximization as a Decision Criterion
Profit maximization is considered as the goal of financial management. In thisapproach, actions that Increase profits should be undertaken and the actionsthat decrease the profits are avoided. Thus, the Investment, financing anddividend also be noted that the term objective provides a normativeframework decisions should be oriented to the maximization of profits. Theterm 'profit' is used in two senses. In one sense it is used as an owner-oriented.In this concept it refers to the amount and share of national Income that ispaid to the owners of business. The second way is an operational concept i.e.profitability. This concept signifies economic efficiency. It means profitabilityrefers to a situation where output exceeds Input. It means, the value createdby the use of resources is greater that the Input resources. Thus in all thedecisions, one test is used I.e. select asset, projects and decisions that areprofitable and reject those which are not profitable.The profit maximization criterion is criticized on several grounds. Firstly, thereasons for the opposition that are based on misapprehensions about theworkability and fairness of the private enterprise itself. Secondly, profitmaximization suffers from the difficulty of applying this criterion in the actual
real-world situations. The term 'objective' refers to an explicit operationalguide for the internal investment and financing of a firm and not the overallbusiness operations. We shall now discuss the limitations of profitmaximization objective of financial management.
1) Ambiguity:
The term 'profit maximization' as a criterion for financial decision is vague andambiguous concept. It lacks precise connotation. The term 'profit' is amenableto different interpretations by different people. For example, profit may belong-term or short-term. It may be total profit or rate of profit. It may be netprofit before tax or net profit after tax. It may be return on total capitalemployed or total assets or shareholders equity and so on.
2) Timing of Benefits:
Another technical objection to the profit maximization criterion is that ItIgnores the differences in the time pattern of the benefits received fromInvestment proposals or courses of action. When the profitability is worked
the bigger the better principle
is adopted as the decision is based onthe total benefits received over the working life of the asset, Irrespective of when they were received. The following table can be considered to explain thislimitation.
3) Quality of Benefits
Another Important technical limitation of profit maximization criterion is thatit ignores the quality aspects of benefits which are associated with thefinancial course of action. The term 'quality' means the degree of certaintyassociated with which benefits can be expected. Therefore, the more certainthe expected return, the higher the quality of benefits. As against this, themore uncertain or fluctuating the expected benefits, the lower the quality of benefits.The profit maximization criterion is not appropriate and suitable as anoperational objective. It is unsuitable and inappropriate as an operationalobjective of Investment financing and dividend decisions of a firm. It is vagueand ambiguous. It ignores important dimensions of financial analysis viz. riskand time value of money.An appropriate operational decision criterion
financial management shouldpossess the following quality.a) It should be precise and exact.b) It should be based on bigger the better principle.c) It should consider both quantity and quality dimensions of benefits.d) It should recognize time value of money.

Activity (1,156)

You've already reviewed this. Edit your review.
Shilpi Chaudhary liked this
Vishal Sonwani liked this
Milandeep Sharma added this note
Well this page helps me on better understanding in my subject course .thank u
KARISHMAATA2 liked this
Aman Khanna liked this
Duma Moses added this note
I really need these notes to enable me prepare for my Examinations in Bsc. In Supply Chain Management. kindly send them to me at moses.duma@unza.zm. I will be grateful if you sent them at the earliest.
Saba Siddiqui liked this
mohanraokp2279 liked this

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->