What Is Finance?
BUSINESS FINANCE AND FINANCIAL ENVIRONMENT FOR BUSINESS
Business Finance
1. Business Finance is the act or process of accumulation and utilisation of funds in order to accomplish a firm's ultimate goal of maximisation of owners’ wealth.
Ultimate Goal of a Firm
2. Maximisation of the wealth of the owners or the shareholders of a firm is considered as the ultimate goal of financial management. The price of the stock in the securities market represents a shareholder's current wealth position for investing in to a particular company’s financial assets.
Why Wealth and not Profit Maximisation should be the Goal of a Firm
3. Because accounting profit can be manipulated in different ways. Adoption of different inventory valuation practice can result in different amount of profit. Credit sale in huge amount disregarding the credit worthiness of the customer can result in big volume of accounting profit for some time. But ultimately this will result in bankruptcy. A firm can also make huge profit by issuing large number of new shares and using the proceeds buying treasury bonds or other risk free investments. Thus maximisation of profit can not be goal of a firm.
The alternative objective can be maximisation of EPS. But the concept of EPS has the following limitations: a. The maximisation of EPS as a goal does not consider time value of money. The nominal value of a stream of EPS will be growing in future. But the real value or present value of that high nominal future EPS can be less than the current EPS. That is value of EPS in future can not be understood from current EPS. b. The concept of EPS maximisation does not consider the riskiness of a project. The future EPS stream can be very much volatile in nature; accordingly the risk adjusted cost of capital will be much higher for the firm. There by the discounted value of EPS may tell us a different story than a simple concept of EPS. As such EPS maximisation also can not be considered as
Business Finance
1. Business Finance is the act or process of accumulation and utilisation of funds in order to accomplish a firm's ultimate goal of maximisation of owners’ wealth.
Ultimate Goal of a Firm
2. Maximisation of the wealth of the owners or the shareholders of a firm is considered as the ultimate goal of financial management. The price of the stock in the securities market represents a shareholder's current wealth position for investing in to a particular company’s financial assets.
Why Wealth and not Profit Maximisation should be the Goal of a Firm
3. Because accounting profit can be manipulated in different ways. Adoption of different inventory valuation practice can result in different amount of profit. Credit sale in huge amount disregarding the credit worthiness of the customer can result in big volume of accounting profit for some time. But ultimately this will result in bankruptcy. A firm can also make huge profit by issuing large number of new shares and using the proceeds buying treasury bonds or other risk free investments. Thus maximisation of profit can not be goal of a firm.
The alternative objective can be maximisation of EPS. But the concept of EPS has the following limitations: a. The maximisation of EPS as a goal does not consider time value of money. The nominal value of a stream of EPS will be growing in future. But the real value or present value of that high nominal future EPS can be less than the current EPS. That is value of EPS in future can not be understood from current EPS. b. The concept of EPS maximisation does not consider the riskiness of a project. The future EPS stream can be very much volatile in nature; accordingly the risk adjusted cost of capital will be much higher for the firm. There by the discounted value of EPS may tell us a different story than a simple concept of EPS. As such EPS maximisation also can not be considered as