Q.2: What are the goals of Financial Management needs to be highlighted? What is Wealth maximization needs to be explained? Distinguish between profits Maximization and Wealth maximization. In what respect wealth maximization is superior to profit maximization needs to be analyzed?

Goals Of Financial Management:

The goal of the financial management should be to achieve the objective of the business’s owners, who are the suppliers of capital. In the case of company, the owners are shareholders. The financial manager’s function is not to fulfill his own objectives, which may include higher salaries earning reputation or maintaining and advancing his personal power and prestige. It is rather to manager is successful in this endeavour, he will also achieve his personal objectives. It is generally agreed that the financial objectives of the firm should be the maximisation of owner’s wealth

From the above clarification, on thing is certain that the wealth maximisation is a long term strategy that emphasizes raising the present value of the owner’s investment in a company and the implementation of projects that will increase the market value of the firm’s securities. This criterion, if applied, meets the objections raised against earlier criterion of profit maximisation. The financial manager also deals with problem of uncertainty by taking into account the trade- off between the various returns and associated levels of risks. It also takes into account the payment of dividends to shareholders. All these ingredients of the wealth maximisation.

Need Of Wealth Maximization:

This is also known as value maximization or net present worth maximization. Net present value is the difference between the gross present value of benefits from an investment proposal and the investment required achieving these benefits. The gross present value of a course of action is found out by discounting or capitalizing its benefits at a rate, which

reflects their timing or uncertainty. Any financial action with a positive net present worth should be undertaken otherwise it should be rejected.

The need of Wealth Maximization includes;

1. It considers time value of money.

2. It takes care of uncertainty of expected benefits and the benefits are measured in terms of cash flows and not accounting profits.

The wealth maximization objective is consistent with the objective of maximization of economic welfare of shareholders. The wealth of shareholders id reflected by the market value of the company shares. Hence, wealth maximization implies the maximization of the market value of the company’s shares, which is the fundamental objective of the firm.

Wealth Maximization V/s Profit Maximization:

1) The traditional approach of financial management was all about profit maximization.

2) Profit maximization refers to how much dollar profit the company makes.

Wealth maximisation refers to the value of the company generally expressed in the value of the stock.

Conclusion:

Wealth maximisation is superior to profit maximisation because:

(i) Profit cannot be ascertained well in advance to express the probability of return as future is uncertain. It is not at possible to maximize what cannot be known.

(ii) The executive or the decision maker may not have enough confidence in the estimates of future returns so that he does not attempt future to maximize. It is argued that firm's goal cannot be to maximize profits but to attain a certain level or rate of profit holding certain share of the market or certain level of sales. Firms should try to 'satisfy' r