NAME: OYEWOLE PHILIP

MATRIC NO: AUL/SMS/21/00911

COURSE CODE: ACC 321
                       ASSIGNMENT
1.Is Finance an Art or Science

2. Discuss the objectives of Financial Management

3. What are the demerits of shareholders wealth maximization and profit maximization

Answer
1. Financial management is both a science and an art. Its nature is nearer to applied
sciences as it envisages use of classified and tested knowledge as a help in practical
affairs and solving business. Financial management is both a science and an art. Its nature
is nearer to applied sciences as it envisages use of classified and tested knowledge as a help
in practical affairs and solving business.
 
Theory of financial management is based on certain systematic principles, some of which
can be tested in mathematical equations like the law of physics and chemistry. Financial
management contains a much larger body of rules or tendencies that hold true in general
and on the average. The use of computers, operations research, statistical techniques and
econometric models find wide application in financial management as tools for solving
corporate financial problems like budgeting, choice of investments, acquisition or mergers
etc. This takes the financial management nearer to treatment as a subject of science.
 
Most practical problems of finance have no hard and fast answers that can be worked out
mathematically or programmed on a computer. They must be solved by judgment, intuition
and the “feel” of experience. Thus, despite its frequent acceptance as an applied science,
finance remains largely an art. Because, according to George A. Christy and Feyton Foster
Roden (Finance: Environment and Decisions) knowledge of facts, principles and concepts is
necessary for making decisions but personal involvement of the manager through his
intuitive capacities and power of judgment becomes essential. As the application of human
judgement and skills is also required for effective financial management, financial
management is also an art.

2. The financial management is generally concerned with procurement, allocation and control
of financial resources of a concern. The objectives can be:
 1. To ensure adequate returns to the shareholders which will depend upon the earning capacity,
market price of the share, expectations of the shareholders.
2. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in
maximum possible way at least cost.
3. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate
of return can be achieved.
4. To plan a sound capital structure-There should be sound and fair composition of capital so that a
balance is maintained between debt and equity capital.

3. Profit Maximization is necessary for the survival and growth of the enterprise.
Conversely, Wealth Maximization accelerates the growth rate of the enterprise and
aims at attaining the maximum market share of the economy

The disadvantages of Profit Maximization are as follows: –

 Ambiguity of Benefit Concept: – The concept of profit is uncertain as different people may
have a different idea about profit, such as profit may be EPS, gross profit, net profit, profit
before interest and tax, profit ratio etc. In particular, no fixed profit-maximizing rule or
method actually exists.
 Does Not Consider Time Value of Money: – The profit maximization principle simply
states that the higher the profit, the better the performance of the business. The theory
considers only profit without considering the time value of money. The concept of time value
of money states that a certain unit of money today will not be equal to the same unit of money
a year later.
 Does Not Consider the Risk: – Any business decision considering only the profit
maximization model ignores the risk factor involved which may be detrimental to the survival
of the business in the long run. Because if the business is unable to handle the high risk, its
existence will be in question.
 Ignoring The Quality: – Intangible benefits eg. Image, technological advancement, quality,
etc. are not considered in profit maximization approach which is considered as one of the
biggest drawbacks. These intangible assets have a remarkable role in creating value for the
business which cannot be ignored. Profit maximization theory is based on a traditional
approach, but modern business and financial concepts give more importance to profit than to
maximizing wealth

Some of the demerits of shareholders wealth maximization are as

follows:

 It is more based on an idea that is prospective and not descriptive.

 The objectives laid in such a technique are not clear.
 Wealth maximization is largely dependent on the business’s
profitability as only after the business is profitable can it think of
enhancing the wealth of the shareholders.
 It is based on the generation of cash flows and not on the accounting
profit.