Objectives of Financial Management
The objectives provide a framework for optimum financial decision making. The term objective is used in the sense of a goal or decision criterion for the three decisions involved in FM. It implies that what is relevant is not the overall objective of a business but an operationally useful criterion by which to judge a specific set of mutually interrelated business decisions namely investment, financing and dividend policy. The two main objectives of FM are:
1. Profit/EPS Maximisation:
In this approach, the profit maximization criterion implies the firm’s decision should be oriented to maximisation of profits/EPS. Profit is a test of economic efficiency that leads to efficient allocation of resources namely capital. The profit maximisation criterion has however been questioned and criticized on several grounds. Some of them are: a. Ambiguity: It states that the term profit is a vague and ambiguous. It conveys to different interpretations by different people. To illustrate, profit may be short-term or long-term, or it may be total profit or rate of profit, it may be before tax or after-tax.
b. Timing of Benefits: This concept of profit maximisation is not useful to evaluate projects of long-term nature. The benefits of which are spread over the period of time. The fact that Rupee received today is more valuable than the rupee received later.
c. Quality of Benefits: The most important technical limitation in this approach is that it ignores the quality aspect of benefits. The term quality refers to the degree of certainty with which benefits can be expected. As a rule, the higher is the quality of benefits conversely the more uncertain/fluctuating is the expected benefits; the lower is the quality of the benefits. In uncertainty or fluctuating refers to risk to the investors. It is assumed that the investors are risk-averters, i.e. they want to avoid or at least minimize risk. It means that it expected...
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