IGNOU : M.COM : MCO 7 : UNIT 1 : Q - 1. Critically evaluate the goals of financial management.

Ans. GOALS OF FINANCIAL MANAGEMENT

 A good goal must be clear, timely measurable and consistent. So must be the goal of financial management. A firm  may have different goals e.g., production goals, sales goal, and financial management goal.

But what is the main goal of financial management ? The main goal of financial management should be such that is directed to achieve the ultimate goal of a firm. The ultimate goal, as a good consensus, of a film is to maximize the shareholders' wealth. This in operational terms means:

a) Maximization of profit

b) Maximization of Return on capital employed

c) Growth in earning per share or market value of a share or dividends

d) Optimum  level of leverage

e) Minimization of costs of capital.

Let us examine in detail maximization of shareholders wealth as an ultimate goal of financial management.

 Maximization of Shareholders Wealth

The separation of ownership from management and the increase in intensity of competition has lead to the redefinition of profit maximization objective of a firm. Financial theory, in general rests upon the promise that the objective of the firm should be maximization of the value of the firm to the equity shareholders. It means maximizing the market value of its equity shares. the justification of this objective is that it provides a rational guide for business decision making and helps in efficient allocation of resources. A second reason in favour of this objective is that equity shareholders provide risk (venture) capital for starting a company. They appoint the board of management. So this objective brings a responsibility on management to promote the welfare of equity shareholders.

The shareholders wealth can be maximized by maximizing value of shares of a firm. The economic value of the shareholders' wealth is the market price of the share which is the present value of all future dividends and benefits expected from the firm. The underlying assumption in this approach is that shares arc traded in efficient capital  market where the effect of a decision is reflected in market price of a share. With this objective is view the management will allocate the available economic resources in the best possible way keeping in view the risk involved. This objective timely guides three functions of financial management (investment, financing and dividend decision). The main problem of this objective is that an efficient capital market must exist which can really discover and reflect time market price. Thus, wealth maximization of shareholders is the main objective, though profit maximization can be considered as a part of wealth maximization objective.