Goals of Financial

Management- Valuation
Approach
 Financial Management
● Financial Management is the managerial activity which is
concerned with planning and controlling of the firm’s financial
resources.

● Financial Management is concerned with the managerial

decisions that result in the acquisition and financing of short
term and long term credits for the firm.
 Valuation
● A valuation is the methodology used to determine the fair market
value of a business.

The most common valuation approaches are:

● The income approach
● The market approach
● The asset-based approach
 ?
If yielding the highest profit is not the primordial goal
of financial management or of the company, then what
is it?
 Goals of Financial
Categories: Management
➔ Maximization of the value of the firm
The value of the firm is maximized when the price of the stock is increased.
➔ Maximization of Shareholder Wealth
The management seek to maximize the present value of the expected
returns to the owners of the firm.
➔ Social Responsibility and Ethical Behavior
The organization is responsible not only for creating strategies that produce
financial results that satisfy shareholders but also to serve other
stakeholders.
➔ Profit maximization is very important, but this is not
primordial
 Valuation Approach
➔ The definitive gauge of performance is not the income yielded
but more so how the yield are VALUED by the owner of the
company.
● Therefore, in considering investment proposals or decisions,
the financial manager should not only consider profit, he/she
must also consider among other things the:
● Risk attached to the investment proposal or the
company’s operation.
● Time design as to when and how profits will flow into the
company.
● The quality and reliability of the profits reported by the
firm.
 Valuation Approach
● Considered to be expansive goal of the firm.
● Managers have no direct control of the market
value of the firm’s stock.
● The market value of stocks may not be necessarily
be high even if the company proves to be profitable
and stable.
 Illustration
Shares Outstanding Year-end income

Year 2010 100,000 P500,000

Year 2011 200,000 P600,000

You own 100 shares of Nico Corp.

EPS= net income/shares outstanding

Year % ownership Share of net income EPS

2010 100 shares/100,000 shares 1% X P500,000 = P5,000 P500,000/100,000 shares= P5

2011 100 shares/200,000 shares 0.5% X P600,000= P3,000 P600,000/200,000 shares= P3

Thanks!