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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 thecompanys stock?

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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:-

UnrealisticDifficult

Inappropriate

Immoral

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Eps maximization as the objective

of financial management

MaximizingE

PS implies that the total earnings areretained and re-invested in the business of the firmand no portion of the earnings is distributed asdividend among the share holders so long as earningscan be re-invested or return higher that the opportunity

cost of retained earnings.Objections to EPS maximization:-

Investors who prefer current dividend as against thefuture uncertain capital gains would not like such apolicy.

EPS lacks time value of money and the risk factor.

Since market value is not a function ofEPS, maximizingEPS will not result in highest price for companysshare.

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Cost minimization as financial

objectiveCost minimization implies making the product orservice available at minimum cost. Such a

policy may not always result in highest sales

revenue or highest profit. Since market value isnot a function of cost, minimizing cost will not

result in highest price for companys share.

Hence, such a policy may not always work asprimary goal of financial management.

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Value maximization as the

objective of financial managementValue maximization implies:-Maximizing the value of the firm

Maximizing Shareholders value

Maximizing Share priceThese three may be considered as equivalent

goals of financial management.

The goal is to maximize shareholders wealth.

Wealth maximization means maximizing theNPV or wealth of the firm. The wealth of ownersof a company is reflected by the market value ofcompanys shares in the long run.

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Wealth maximization: As financial goal of the firm

The primary objective of financial management is wealthmaximisation, refers to the shareholders wealth as

reflected by the price of their shares in the sharemarket. The maximization of the price of companysequity sharess should be in the long run by makingefficient decision which are desirable for the growh of

a company and are valued positively by the investorsat large and not by manipulating the share prices inthe short run.

The financial manager must identify those avenues of

investment, modes of financing, ways of handdlingvarious components of working capital whichultimately will lead to an increase in the priice of equityshare. If share holders are gaining, it implies that allother stakeholders are also gaining