bjectives

Of
inancial anagement


Presentation by Preetam
OBJECTIVES OF FINANCIAL MANAGEMENT

Broadly divided into four parts such
as:
1. Profit maximization
2. Wealth maximization.
3. Economic value added
4. Market value added

1. Profit maximization

The main aim of every business is to earn maximum
profit
Business is carried mainly for the purpose of
earning profit
Profit helps to measure the efficiency of the
business concern
Profit is the main source of finance
Profit maximization is also called as cashing per
share maximization
It leads to maximize the business operation for
profit maximization.
Profit maximization objective help to reduce the
risk of the business.

2. Wealth maximization

Wealth maximization means increasing the wealth of
shareholders or the wealth of the persons those who
are involved in the business concern. It is also known
as value maximization or net present worth
maximization. This objective is an universally accepted
concept in the field of business.

It is calculated by formula

NPV= PV of future cash inflow-Initial outlay
Favourable Arguments for Wealth Maximization

Wealth maximization considers both time and risk
of the Business concern.
Wealth maximization provides efficient allocation of
resources.
It ensures the economic interest of the society.

Unfavourable Arguments for Wealth Maximization

Wealth maximization is nothing, it is also profit
maximization, it is the indirect name of the profit
Wealth maximization creates ownership-
management controversy.
Management alone enjoy certain benefits.


3. Economic value added

The goal of the financial management is to
maximize the shareholders value.
The shareholders wealth is measured by returns
they receive on their investment .
The main aim of Economic Value Added is
shareholders must earn sufficient return for the
risk they have taken in investing the money in
companys capital .
The excess of returns over cost of capital is known
as Economic Value Added .

EVA can be calculated as follows:

EVA=NOPAT-(TCE *WACC)
Where,
NOPAT =Net operating profit after tax
TCE = Total Capital Employed
WACC = Weighted Average cost of capital


4. Market value added
A term closely related to EVA is Market
Value Added (MVA). It is the market value of
capital employed in the firm less the book
value of capital employed.MVA is calculated
by summing up the paid value of equity
and preference capital, retained earnings,
long term and short term debt and
subtracting this Sum from market value of
equity and debt. EVA drives MVA. Continuous
improvements in EVA year after year will lead
to increase in MVA.