MB 0045- FINANCIAL MANAGEMENT
Assignment Set -1
Q.1 . What are the goals of financial management?
Goals of Financial Management
Financial management means maximisation of economic welfare of its shareholders. Maximisation of economic welfare means maximisation of wealth of its shareholders. Shareholder’s wealth maximisation is reflected in the market value of the firm’s shares. Experts believe that, the goal of financial management is attained when it maximises the market value of shares. There are two versions of the goals of financial management of the firm – Profit Maximisation and Wealth Maximisation.
Profit maximisation is based on the cardinal rule of efficiency. Its goal is to maximise the returns with the best output and price levels. A firm’s performance is evaluated in terms of profitability. Profit maximisation is the traditional and narrow approach, which aims at maximising the profit of the concern. Allocation of resources and investor’s perception of the company’s performance can be traced to the goal of profit maximisation.
The term wealth means shareholder’s wealth or the wealth of the persons those who are involved in the business concern. Wealth maximisation is also known as value maximisation or net present worth maximisation. This objective is an universally accepted concept in the field of business. Wealth maximisation 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 maximisation.
Q , 2 . Explain the factors affecting Financial Plan.
Factors Affecting Financial Planning :
1. Nature of the industry – The first factor affecting the financial plan is the nature of the industry. Here, we must check whether the industry is a capital-intensive or labour-intensive industry. This will have a major impact on the total assets that a firm owns.
2. Size of the company – The size of the company greatly influences the availability of funds from different sources. A small company normally finds it difficult to raise funds from long-term sources at competitive terms. On the other hand, large companies like Reliance enjoy the privilege of obtaining funds both short-term and long-term at attractive rates.
3. Status of the company in the industry – A well-established company enjoys a good market share, because its products normally commandinvestor’s confidence. Such a company can tap the capital market for raising funds in competitive terms for implementing new projects to exploit the new opportunities emerging from changing business environment.
4. Sources of finance available – Sources of finance could be grouped into debt and equity. Debt is cheap but risky whereas equity is costly. A firm should aim at optimum capital structure that would achieve the least cost capital structure. A large firm with a diversified product mix may manage higher quantum of debt because the firm may manage higher financial risk with a lower business risk. Selection of sources of finance is closely linked to the firm’s capability to manage the risk exposure.
5. The capital structure of a company – The capital structure of a company is influenced by the desire of the existing management (promoters) of the company to retain control over the affairs of the company. The promoters who do not like to lose their grip over the affairs of the company normally obtain extra funds for growth by issuing preference shares and debentures to outsiders.
6. Matching the sources with utilisation – The prudent policy of any good financial plan is to match the term of the source with the term of the investment. To finance fluctuating working capital needs, the firm resorts to...