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Monday, June 8, 2009

MBA assignments of Financial Management for MB0029:

Offer your arguments in favor of wealth maximization of one of the goals of financial Management and Functions of Finance.

Wealth Maximization:

Wealth maximization has been accepted by the finance managers, because it overcomes the limitations of profit maximization. Wealth maximization means maximizing the net wealth of the company’s share holders. Wealth maximization is possible only when the company pursues policies that would increase the market value of shares of the company.

There are some arguments which are superior in wealth maximization:

Wealth maximization is based on the concept of cash flows. Cash flows are a reality and not based on any subjective interpretation. On the other hand there are many subjective elements in the concept of profit maximization.

It considers time value of money translates cash flows occurring of different periods into a comparable value of cash flows is considered critically in all decisions as it incorporates the risk associated with the cash flow stream.

An example of Wealth maximization:

X LTD is listed company engaged in the business of FMCG (fast moving consumer goods). Listed means the company’s share are allowed to be traded the officially on the portals of the stock exchange, the board of directors of X LTD.

Take a decision in one of the bond meeting to enter into the business of power generation. When the company informs the stock exchange of the conclusion of the meeting of the decision taken the stock market reacts unfavorably with result that the next days’ closing of quotation was 30% less than of the previous day.

The question now is why the market reacted in this manner. Investors in this FMCG Company might have thought that the risk profile of the new business (power) that the company wants to take up is higher compared to the risk profile of the existing FMCG business as X LTD. when they want a higher return, market value of company’s share declines. Therefore the risk profile of the company gets translated into a time value factor. The time value factor so translated becomes the required rate of return. Required rate of return is the return that the investors want for making investment in that sector.

Any project which generates positive net present value creates wealth to the company. When a company creates wealth from a course of action it has initiated the share holders benefit because such a course of action will increase the market value of the company’s share.

Goals of financial Management:

Goals means - financial objective of a firm. Experts in financial management have endorsed the view that the goal of financial management of a firm is maximization of economic welfare of its shareholders. Maximization of economics welfare means - maximization of wealth of its shareholders. Shareholders’ wealth maximization is reflected in the market value of the firms’ shares. A firm’s contribution to the society is maximized when it maximizes its value. There are two versions of the goals of financial management of the firm which are profit maximization and wealth maximization.

Functions of finance:

Finance functions are closely related to financial decisions. The functions performed by a finance manager are known of finance functions. In the course of performing these functions finance manager takes the following decisions:

Financial decision:

To survive and grow, all organizations must be innovative. Innovation demands managerial proactive actions. Projective organizations continuously search for innovative ways of performing the activities of the organization. Innovation is wider in nature.

Investment decision:

Investment decisions are also know as capital budgeting decisions. Capital budgeting decisions lead to investment in real assets.

Dividend Decisions:

Dividend yield is an important of an investor’s attitude towards the security (stock) in his portfolio management decisions. But dividend decision is a major decision made by a fiancé manager. Dividend policy influences the dividend yield on shares. Since company’s range in the capital market have a major impact on its ability to procure funds by issuing securities in the capital markets, dividend policy.

Liquidity Decision:

Liquidity decisions are concerned with working capital management. It is concerned with the day-to-day financial operation that involves current assets and current liabilities.

The important element of liquidity decisions are:

Formulation of inventory policy
Policies an receivable management
Formulation of cash management strategies
Policies on utilization of spontaneous finance effectively

Thus, wealth maximizations are primary goal of any firm.

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