Financial Goal:- objective of Financial management

The objective of financial management may be ‡ to maximize profit? ‡To maximize earning per share? ‡To minimize costs? ‡To maximize market share? ‡To maximize the current value of the company¶s stock?

Profit maximization
Aguments in favor of profit maximization:Profit is essential to cover the costs and provide funds for growth. No business can survive without earning profit. Thus, profit maximization is considered as the main objective of business, which can be proved by the following points i. When profit-earning is the aim of business then profit maximization should be the obvious objective. ii. Profitability is a barometer for measuring efficiency and economic prosperity of a business enterprise. iii. There may be adverse business conditions like recession, depression, severe competition etc. A business will be able to survive under unfavourable situation, only if it has some past earnings to rely upon. iv. 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. v. Profitability is essential for fulfilling social goals also. A firm by pursuing the objective of profit maximization also maximize socio-economic welfare.

Objections of profit maximization
‡ ‡ ‡ ‡ ‡ It is vague It is ignores the timing of returns It ignores risk It assumes perfect competition. In new business environment profit maximization is regarded as:Unrealistic Difficult Inappropriate Immoral

Maximizing EPS implies that the total earnings are retained and re-invested in the business of the firm and no portion of the earnings is distributed as dividend among the share holders so long as earnings can be re-invested or return higher that the opportunity cost of retained earnings. Objections to EPS maximization:Investors who prefer current dividend as against the future uncertain capital gains would not like such a policy. EPS lacks time value of money and the risk factor. Since market value is not a function of EPS, maximizing EPS will not result in highest price for company¶s share.

Eps maximization as the objective of financial management

Cost minimization as financial objective
Cost minimization implies making the product or service available at minimum cost. Such a policy may not always result in highest sales revenue or highest profit. Since market value is not a function of cost, minimizing cost will not result in highest price for company¶s share. Hence, such a policy may not always work as primary goal of financial management.

Market Share maximization as the objective of financial management
Market share maximization implies maximizing sales revenue by serving maximum number of customers. Such a policy may not always result in highest profit. Since market value is not a function of market share, maximizing market share will not result in highest price for company¶s shares.

Value maximization as the objective of financial management
Value maximization implies:Maximizing the value of the firm Maximizing Shareholder¶s value Maximizing Share price These three may be considered as equivalent goals of financial management. The goal is to maximize shareholder¶s wealth. Wealth maximization means maximizing the NPV or wealth of the firm. The wealth of owners of a company is reflected by the market value of company¶s shares in the long run.

Wealth maximization: As financial goal of the firm The primary objective of financial management is wealth maximisation, refers to the shareholders wealth as reflected by the price of their shares in the share market. The maximization of the price of company¶s equity sharess should be in the long run by making efficient decision which are desirable for the growh of a company and are valued positively by the investors at large and not by manipulating the share prices in the short run. The financial manager must identify those avenues of investment, modes of financing, ways of handdling various components of working capital which ultimately will lead to an increase in the priice of equity share. If share holders are gaining, it implies that all other stakeholders are also gaining

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