smu fall assignment 2014 only 500 for whole subjects Mb0045 financial management

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Question1. When a firm follows wealth maximization goal, it achieves
maximization of market value of a share. Do you agree? Substantiate
your arguments.
Answer: Wealth maximization:
The term wealth means shareholder’s wealth or the wealth of the persons
Those who are involved in the business concern. Wealth maximization is
Also known as value maximization or net present worth maximization. This
Objective is an universally accepted concept in the field of business.
Wealth maximization is possible only when the company pursues policies
That would increase the market value of shares of the company. It has been
Accepted by the finance managers as it overcomes the limitations of profit
maximization.
The following arguments are in support of the superiority of wealth
maximization over profit maximization:
 Wealth maximisation is based on the concept of cash flows. Cash flows
are a reality and not based on any subjective interpretation. On the other
hand, profit maximisation is based on accounting profit and it also
contains many subjective elements.
 Wealth maximisation considers time value of money. Time value of
money translates cash flow occurring at different periods into a
comparable value at zero period. In this process, the quality of cash flow
is considered critical in all decisions as it incorporates the risk associated
with the cash flow stream. It finally crystallises into the rate of return that
will motivate investors to part with their hard earned savings. Maximizing
the wealth of the shareholders means positive net present value of the decisions
implemented.
Let us now look at some of the key definitions.
 Positive net present value can be defined as the excess of present value
of cash inflows of any decision implemented over the present value of
Cash out flow.
 Time value factor is known as the time preference rate; that is, the sum
of risk free rate and risk premium.
 Risk free rate is the rate that an investor can earn on any government
Security for the duration under consideration.
 Risk premium is the consideration for the risk perceived by the investor
In investing in that asset or security.
 Required rate of return is the return that the investors want for making
Investment in that sector.

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Only 500 for whole assignments
Last date of submission 30/6/2014