1.2 objectives of financial management/ cf

1. 10-1
1
An Introduction to Financial
Management

2. 10-2
What is the goal of the firm?
 Profit maximization?
 EPS maximization?
 Revenue maximization?
 Value maximization?

3. 10-3
Objectives of Financial Management
Objectives provide a framework with in which various
decisions relationg to investment, Financing and dividend
are to be taken.

4. 10-4
Profit Maximization
 Barometer for measuring the efficiency and
economic prosperity of a business
 Efficient allocation and utilization of scarce
resources.
 Source of finance for the growth and development
of the business.
 Fulfilling goal of social welfare.
 Survival under unfavorable economic and business
condition

5. 10-5
 Term ‘Profit’ is Ambiguous and vague
Ignores the time value of money
Ignores risk Factor of the prospective earning
stream of projects
Do not consider effect of the dividend policy
on the market price of the shares

6. 10-6
The objective of the firm: value
maximization
 Profit maximization- not as inclusive, subject to manipulation, no
time component
 EPS maximization- does not consider timing of returns, does not
consider risk, does not consider effect of dividend policy
 Objective of the firm: to maximize its value to the shareholders
 What is so good about wealth maximization?
 Represents focal judgment of market participants as to what the
value is of a particular firm
 Takes into account present + future earnings, timing, risk,
dividend policy
 Serves as performance index or report card- how well is the
management doing on behalf of the shareholders

7. 10-7
What about the society?
 Value maximization is good for the society too
 Owners of the stock are the society
 Consumers benefit: keeping customers happy is the
route to value maximization
 Employees benefit: employees are many times
stockholders too + firms that maximize stock price
generally are profitable firms that can afford to treat
employees well
 Companies that consistently flout social norms will
find themselves losing business and facing
regulation/targeted taxes

8. 10-8
How can financial managers
increase the value of the firm?
 Invest in assets that earn a return greater than the minimum
acceptable hurdle rate: Investment decisions
 Find the right kind of debt for your firm and the right mix of debt and
equity to fund your operations: Financing decision
 If you cannot find investments that make your minimum acceptable
rate, return the cash to owners of the business: Dividend decision