Question

In 3-4 paragraphs, respond to each prompted question.

In finance theory, what is the most widely accepted goal of the firm?

How does the net present value of a project relate to this goal?

Discuss the relationships between the firm’s goal, financial management and capital budgeting.

Answer 1

In the finance theory, the most widely accepted goal of the firm is increase the shareholders value. The shareholders are the owners of the firm and the management of the firm should strive to run the firm in the manner or take decisions with the ultimate goal of increasing the shareholder’s value.

The net present value the projects undertaken by the firm largely drives the shareholder value of the firm. The firm should be accepting only the projects with the highest net present value which in turn would increase the shareholder value.

Financial Management is the application of general principles of management to the financial possessions of an enterprise while the capital budgeting is the financial analysis/evaluation of different projects which should be undertaken by the firm. In simple words, capital budgeting enables the crucial decision of whether to enter the project or not.

The financial management and capital budgeting are critical to both, the availability and the path of the use of the financial resources. the financial management determines the sources of the funds required to carry out the firm's goal. The budgeting exercise helps ensure the step wise use of the funds in the plan implementation and ensures that it is achieved without a shortfall of the financial resources.