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Question
Answer the following question.
State the objective of ' Financial Management '.
Solution
The primary objective of financial management is ‘Wealth maximisation’ which refers to taking those financial decisions that aim at maximizing the shareholders’ wealth. That is, to opt for those financial decisions that prove gainful from the point of view of its shareholders. Herein, the shareholders are said to gain when the market value of the shares held by them rises, which in turn takes place when the benefits from the financial decisions made by the company exceed the cost involved. When the financial decisions successfully fulfill the objective of wealth maximisation, other objectives such as proper utilisation of funds, maintenance of liquidity, maximisation of profits, and meeting financial obligations are automatically fulfilled.
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Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores. To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax-deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr. Bose decided to raise funds from a financial institution.
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