Objectives of financial management fix the target of finance manager.

Under the scope of financial management, he has to achieve different objective of financial management. We can make the list of these objectives: 1. To Reduce the Misuse of Funds It is the objective of financial management to reduce the misuse of funds. I can take my own example. I hate misusing of my hard earned money. Last month, I have bought DVD writer for starting business of CD and DVD of educational tutorials. But, after spending one month, DVD writer is being used for production or business purposes; I think this is misuse of my fund. If I deposited it in bank, I can earn interest on saving account on daily basis. Like me, company also misuses his funds in bad projects. We should learn from objective of financial management and reduce the misuse of even one rupee. 2. To Maximize the Profit in Long Run If a businessman invests his money and wants to earn high profit, it means, it is taking high risk according to risk theory of financial management. This is not objective of financial management, but to maximize the profit in long run is real aim of financial management. 3. To Maximize the Wealth of Company An investor only purchases shares, if he hopes that he will earn high profit on it, otherwise, he can deposit his money in saving account of bank. So, it is the objective of financial management to maximize the value of share. It can be possible by following way. a) To Increase Dividend per share b) To Increase Earning per share c) To Analyze the value of share in market 4. To Fulfill the Social Responsibility Company uses the natural resources and earns money and funds. Suppose Xyz Company started a plant in F place and use water, land and machines, it earned 10 million dollars from that plant. According to my view, Xyz Company takes his all natural resources from society in the form of land, water, metal and minerals. God has made these things for whole society not a particular Xyz company. If Xyz Company has used these resources, then it is the duty of xyz Company to fulfill his responsibility toward society. This is the main objective of financial management. Companys reputation can be calculated with how many employees are working in it. What facilities are given by company to his employees? If company only shows his balance sheet of dead plants, machinery and other assets but there is not provision of any social activity or donation, that company will not get any goodwill. Some companies are being operated on the basis of public deposits instead of share capital. Why? And answer is security and that company can give only the security who wants to benefit of society like a social worker. Ok

2This objective can be achieved by;

1. Profit Maximization, and 2. Wealth Maximization. 1. Profit Maximisation. Profit earning is the main aim of every economic activity. A business being an economic institution must earn profit to cover its costs and provide funds for growth. No business can survive without earning profit. Profit is a measure of efficiency of a business enterprise. Profits also serve as a protection against risks which cannot be ensured. The accumulated profits enable a business to face risks like fall in prices, competition from other units, adverse government policies etc. Thus, profit maximization is considered as the main objective of business. The following arguments are advanced in favour of profit maximization as the objective of business: 1. When profit-earning is the aim of business then profit maximization should be the obvious objective. 2. Profitability is a barometer for measuring efficiency and economic prosperity of a business enterprise 3. Economic and business conditions do not remain same at all times. There may be adverse business conditions like recession, depression, severe competition etc. A business will be able to survive under unfavorable situation, only if it has some past earnings to rely upon. Therefore, a business should try to earn more and more when situation is favorable. 4. Profits are the main sources of finance for the growth of a business. So, a business should aim at maximization of profits for enabling its growth and development. 5. Profitability is essential for fulfilling social goals also. A firm by pursuing the objective of profit maximization also maximizes socio-economic welfare. However, profit maximization objective has been criticized on many grounds. They are: A firm pursuing the objective of profit maximization starts exploiting workers and the consumers. Hence, it is immoral and leads to a number of corrupt practices. It is also argued that profit maximization should be the objective in the conditions of perfect competition and in the wake of imperfect competition today, it cannot be the legitimate objective of a firm One has to reconcile the conflicting interests of all the parties connected with the firm. Thus, profit maximization as an objective of financial management has been considered inadequate. Even as an operational criterion for maximizing owners economic welfare, profit maximization has been rejected because of the following drawbacks; 1. The term profit is vague and it cannot be precisely defined. It means different things for different people. Should we consider short-term profits or long-term profits? Does it mean total profits or earnings per share? Even if, we take the meaning of profits as earnings per share and maximize the earnings per share, it does not necessarily mean increase in the market value of share and the owners economic welfare.

2. Profit maximization objective ignores the time value of money and does not consider the magnitude and timing of earnings. It treats all earnings as equal when they occur in different periods. It ignores the fact that cash received today is more important than the same amount of cash received after, three years. 3. It does not take into consideration the risk of the prospective earnings stream. Some projects are more risky than other. 4. The effect of dividend policy on the market price of shares is also not considered in the objective of profit maximization. 2. Wealth Maximization. Wealth maximization is the appropriate objective of an enterprise. When the firm maximizes the stockholders wealth, the individual stockholder can use this wealth to maximize his individual utility. It means that by maximizing stockholders wealth the firm is operating consistently towards maximizing stockholders utility. A stockholders current wealth in the firm is the product of the number of shares owned, multiplied with the current stock price per share. This objective helps in increasing the value of shares in the market. The shares market price serves as a performance index or report card of its progress. It also indicates how well management is doing on behalf of the shareholder. However, the maximization of the market price of the shares should be in the long run. Every financial decision should be based on cost-benefit analysis. If the benefit is more than the cost, the decision will help in maximizing the wealth. Implications of Wealth maximization. There is a rationale in applying wealth maximizing policy as an operating financial management policy. It serves the interests of suppliers of loaned capital, employees, management and society. Besides shareholders, there are short-term and long-term suppliers of funds who have financial interests in the concern. Short-term lenders are primarily interested in liquidity position so that they get their payments in time. The long-term lenders get a fixed rate of interest from the earnings and also have a priority over shareholders in return of their funds. Wealth maximization objective not only serves shareholders interests by increasing the value of holdings but ensures security to lenders also. The economic interest of society is served if various resources are put to economical and efficient use. Criticism of Wealth Maximization. The wealth maximization objective has also been criticized by certain financial theorists mainly on following accounts; 1. It is a prescriptive idea. The objective is not descriptive of what the firms actually do. 2. The objective of wealth maximization is not necessarily socially desirable. 3. There is some controversy as to whether the objective is to maximize the stockholders wealth or the wealth of the firm which includes other financial claimholders such as debenture holders, preferred stockholders, etc., 4. The objective of wealth maximization may also face difficulties when ownership and management are separated as is the case in most of the large corporate form of organizations.

In spite of all the criticism, we are of the opinion that wealth maximization is the most appropriate objective of a firm and the side costs in the form of conflicts between the stockholders and debenture holders, firm and society and stock holders and managers can be minimized.

3..
The objectives or goals or financial management are- (a) Profit maximization, (b) Return maximization, and (c) Wealth maximization. We shall explain these three goals of financial management as under:

(1) Goal of Profit maximization. Maximization of profits is generally regarded as the main objective of a business enterprise. Each company collects its finance by way of issue of shares to the public. Investors in shares purchase these shares in the hope of getting medium profits from the company as dividend It is possible only when the company's goal is to earn maximum profits out of its available resources. If company fails to distribute higher dividend, the people will not be keen to invest their money in such firm and persons who have already invested will like to sell their stocks. On the other hand, higher profits are the barometer of its efficiency on all fronts, i.e., production, sales an management. A few replace the goal of 'maximization of profits' to 'fair profits'. 'Fair Profits' means general rate of profit earned by similar organisation in a particular area.

(2) Goal of Return Maximization. The second goal of financial management is to safeguard the economic interest of the persons who are directly or indirectly connected with the company, i.e.,shareholders, creditors and employees. The all such interested parties must get the maximum return for their contributions. But this is possible only when the company earns higher profits or sufficient profits to discharge its obligations to them. Therefore, the goal of maximization of returns are inter-related.

3. Goal of Wealth Maximization. Frequently, Maximization of profits is regarded a the proper objective of the firm but it is not as inclusive a goal as that of maximising it value to its shareholders. Value is represented by the market price of the ordinary share of the company over the long run which is certainly a reflection of company's investment and financing decisions. The log run means a considerably long period in order to work out a normalized market price. The management ca make decision to maximize the value of its shares on the basis of day-today fluctuations in the market price in order t raise the market price of shares over the short run at the expense of the long fun by temporarily diverting some of its funds to some other accounts or by cutting some of its expenditure to the minimum at the cost of future profits. This does not reflect the true wort of the share because it will result in the fall of the share price in the market in the long run. It is, therefore, the goal of the financial management to ensure its shareholders that the value of their shares will be maximized in the long-run. In fact, the performances of the company can well be evaluated by the value of its share.

Three broad area of financial decision

1)Invesment 2)Financing 3)Dividend)

Capital investment decisions

Capital investment decisions
[3]

are long-term corporate finance decisions relating to fixed

assets and capital structure. Decisions are based on several inter-related criteria. (1) Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk. (2) These projects must also be financed appropriately. (3) If no such opportunities exist, maximizing shareholder value dictates that management must return excess cash to shareholders (i.e., distribution via dividends). Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision. [edit]The

investment decision

Main article: Capital budgeting Management must allocate limited resources between competing opportunities (projects) in a process known as capital budgeting. Making this investment, or capital allocation, decision requires estimating the value of each opportunity or project, which is a function of the size, timing and predictability of future cash flows. [edit]Project valuation Further information: Business valuation, stock valuation, fundamental analysis, and Due diligence In general , each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (applied to Corporate Finance by Joel Dean in 1951; see also Fisher separation theorem, John Burr Williams: theory). This requires estimating the size and timing of all of the incremental cash flows resulting from the project. Such future cash flows are thendiscounted to determine their present value (see Time value of money). These present values are then summed, and this sum net of the initial investment outlay is the NPV. See Financial modeling. The NPV is greatly affected by the discount rate. Thus, identifying the proper discount rate - often termed, the project "hurdle rate"
[6] [5] [4]

- is critical to making an appropriate decision. The hurdle rate is the minimum

acceptable return on an investmenti.e. the project appropriate discount rate. The hurdle rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and must take into account the financing mix. Managers use models such as the CAPM or the APT to estimate a discount

rate appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. (A common error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.) In order to undertake a proper valuation (including a net present value analysis) in a specific corporate finance transaction, it is essential to understand all potential sources of cash flows and identify all risks. . Undertaking an intergrated intensive Due Diligence process (which is a process whereby risks and cash flows identified in the financial, marketing, macro-economic, legal, information system, production, management areas are bought together) is an ideal mechanism to enhance the valuation and ultimately to test whether shareholder value will be added by undertaking a specific transaction.
[8] [7]

In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance. These are visible from the DCF and include discounted payback period, IRR,Modified IRR, equivalent annuity, capital efficiency, and ROI. Alternatives (complements) to NPV include MVA / EVA (Joel Stern, Stern Stewart & Co) and APV (Stewart Myers). See list of valuation topics. [edit]Valuing flexibility Main articles: Real options analysis and decision tree In many cases, for example R&D projects, a project may open (or close) the paths of action to the company, but this reality will not typically be captured in a strict NPV approach.
[9]

Management will

therefore (sometimes) employ tools which place an explicit value on these options. So, whereas in a DCF valuation the most likely or average or scenario specific cash flows are discounted, here the flexibile and staged nature of the investment is modelled, and hence "all" potential payoffs are considered. The difference between the two valuations is the "value of flexibility" inherent in the project. The two most common tools are Decision Tree Analysis (DTA) analysis (ROA);
[12] [10][11]

and Real options

they may often be used interchangeably:

DTA values flexibility by incorporating possible events (or states) and consequent management decisions. (For example, a company would build a factory given that demand for its product exceeded a certain level during the pilot-phase, and outsource production otherwise. In turn, given further demand, it would similarly expand the factory, and maintain it otherwise. In a DCF model, by contrast, there is no "branching" - each scenario must be modelled separately.) In the decision tree, each management decision in response to an "event" generates a "branch" or "path" which the company could follow; the probabilities of each event are determined or specified by management. Once the tree is constructed: (1) "all" possible events and their resultant paths are visible to management; (2)

given this knowledge of the events that could follow, and assuming rational decision making, management chooses the actions corresponding to the highest value path probability weighted; (3) this path is then taken as representative of project value. See Decision theory: Choice under uncertainty. ROA is usually used when the value of a project is contingent on the value of some other asset or underlying variable. (For example, the viability of a mining project is contingent on the price of gold; if the price is too low, management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.) Here: (1) using financial option theory as a framework, the decision to be taken is identified as corresponding to either a call option or a put option; (2) an appropriate valuation technique is then employed - usually a variant on the Binomial options model or a bespoke simulation model, while Black Scholes type formulae are used less often; see Contingent claim valuation. (3) The "true" value of the project is then the NPV of the "most likely" scenario plus the option value. (Real options in corporate finance were first discussed by Stewart Myers in 1977; viewing corporate strategy as a series of options was originally per Timothy Luehrman, in the late 1990s.) [edit]Quantifying uncertainty Further information: Sensitivity analysis, Scenario planning, and Monte Carlo methods in finance Given the uncertainty inherent in project forecasting and valuation,
[13][11]

analysts will wish to assess

the sensitivity of project NPV to the various inputs (i.e. assumptions) to the DCF model. In a typicalsensitivity analysis the analyst will vary one key factor while holding all other inputs constant, ceteris paribus. The sensitivity of NPV to a change in that factor is then observed, and is calculated as a "slope": NPV / factor. For example, the analyst will determine NPV at various growth rates in annual revenue as specified (usually at set increments, e.g. -10%, -5%, 0%, 5%....), and then determine the sensitivity using this formula. Often, several variables may be of interest, and their various combinations produce a "value-surface" (or even a "value-space"), where NPV is then a function of several variables. See also Stress testing. Using a related technique, analysts also run scenario based forecasts of NPV. Here, a scenario comprises a particular outcome for economy-wide, "global" factors (demand for the product, exchange rates, commodity prices, etc...) as well as for company-specific factors (unit costs, etc...). As an example, the analyst may specify various revenue growth scenarios (e.g. 5% for "Worst Case", 10% for "Likely Case" and 25% for "Best Case"), where all key inputs are adjusted so as to be consistent with the growth assumptions, and calculate the NPV for each. Note that for scenario based analysis, the various combinations of inputs must be internally consistent, whereas for the sensitivity approach these need not be so. An application of this methodology is to determine an "unbiased" NPV, where management

determines a (subjective) probability for each scenario the NPV for the project is then the probabilityweighted average of the various scenarios. A further advancement is to construct stochastic
[14]

or probabilistic financial models as opposed to the

[13]

traditional static and deterministic models as above.

For this purpose, the most common method is to

use Monte Carlo simulation to analyze the projects NPV. This method was introduced to finance by David B. Hertz in 1964, although has only recently become common: today analysts are even able to run simulations in spreadsheet based DCF models, typically using an add-in, such as Crystal Ball. Here, the cash flow components that are (heavily) impacted by uncertainty are simulated, mathematically reflecting their "random characteristics". In contrast to the scenario approach above, the simulation produces several thousand random but possible outcomes, or "trials"; seeMonte Carlo Simulation versus What If Scenarios. The output is then a histogram of project NPV, and the average NPV of the potential investment as well as its volatility and other sensitivities is then observed. This histogram provides information not visible from the static DCF: for example, it allows for an estimate of the probability that a project has a net present value greater than zero (or any other value). Continuing the above example: instead of assigning three discrete values to revenue growth, and to the other relevant variables, the analyst would assign an appropriate probability distribution to each variable (commonly triangular or beta), and, where possible, specify the observed or supposed correlation between the variables. These distributions would then be "sampled" repeatedly incorporating this correlation - so as to generate several thousand random but possible scenarios, with corresponding valuations, which are then used to generate the NPV histogram. The resultant statistics (averageNPV and standard deviation of NPV) will be a more accurate mirror of the project's "randomness" than the variance observed under the scenario based approach. These are often used as estimates of the underlying "spot price" and volatility for the real option valuation as above; see Real options valuation: Valuation inputs. A more robust Monte Carlo model would include the possible occurrence of risk events (e.g., a credit crunch) that drive variations in one or more of the DCF model inputs. [edit]The

financing decision

Main article: Capital structure Achieving the goals of corporate finance requires that any corporate investment be financed appropriately.
[15]

As above, since both hurdle rate and cash flows (and hence the riskiness of the firm) will

be affected, the financing mix can impact the valuation. Management must therefore identify the "optimal mix" of financingthe capital structure that results in maximum value. (See Balance sheet,WACC, Fisher separation theorem; but, see also the Modigliani-Miller theorem.)

The sources of financing will, generically, comprise some combination of debt and equity financing. Financing a project through debt results in a liability or obligation that must be serviced, thus entailing cash flow implications independent of the project's degree of success. Equity financing is less risky with respect to cash flow commitments, but results in a dilution of ownership, control and earnings. The cost of equity is also typically higher than the cost of debt (see CAPM and WACC), and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk. Management must also attempt to match the financing mix to the asset being financed as closely as possible, in terms of both timing and cash flows. One of the main theories of how firms make their financing decisions is the Pecking Order Theory, which suggests that firms avoid external financing while they have internal financing available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates. Another major theory is the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when making their decisions. An emerging area in finance theory is rightfinancing whereby investment banks and corporations can enhance investment return and company value over time by determining the right investment objectives, policy framework, institutional structure, source of financing (debt or equity) and expenditure framework within a given economy and under given market conditions. One last theory about this decision is the Market timing hypothesis which states that firms look for the cheaper type of financing regardless of their current levels of internal resources, debt and equity. [edit]The

dividend decision
[16]

Main article: The Dividend Decision Whether to issue dividends, and what amount, is calculated mainly on the basis of the company's

unappropriated profit and its earning prospects for the coming year. If there are no NPV positive opportunities, i.e. projects where returns exceed the hurdle rate, then management must return excess cash to investors. These free cash flows comprise cash remaining after all business expenses have been met. This is the general case, however there are exceptions. For example, investors in a "Growth stock", expect that the company will, almost by definition, retain earnings so as to fund growth internally. In other cases, even though an opportunity is currently NPV negative, management may consider investment flexibility / potential payoffs and decide to retain cash flows; see above and Real options. Management must also decide on the form of the dividend distribution, generally as cash dividends or via a share buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases increasing the

value of shares outstanding. Alternatively, some companies will pay "dividends" fromstock rather than in cash; see Corporate action. Today, it is generally accepted that dividend policy is value neutra