describe the goal of financial management

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Expert Solution

The goal of financial management is "maximization of shareholders' wealth".

Such maximization occurs when, any decision taken by the mangement results in increasing the shareholders' wealth to the maximum extent possible. Further, wealth is generated when the PV of cash inflows exceed the PV of cash outflows related to any decision; the difference termed as NPV [net present value].

Thus, increase in wealth occurs when present value of cash inflows > Cost.

Achievement of the goal of wealth [NPV] maximization is the focus when the three branches of decision making, namely,

*investing decisions,

*financing decisions and

*payout decisions,

are taken.

When investment decisions are taken the goal is achieved by going for the investments with higher positive NPV; when financing decisions are taken the goal is achieved by minimizing overall cost of capital which, in turn will increase and NPV and when dividend/repurchase decisions are taken, the availability of projects promising the minimum required return are considered.

jeff jeffy answered 1 year ago

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