The wealth maximization objective is almost universally accepted goal of a firm. According to this objective, the managers should take decisions that maximize the shareholders’ wealth. In other words, it is to make the shareholders as rich as possible. Shareholders’ wealth is maximized when a decision generates net present value. The net present value is the difference between present value of the benefits of a project and present value of its costs. A decision that has a positive net present value creates wealth for shareholders and a decision that has a negative net present value destroys wealth of shareholders. Therefore, only those projects which have positive net present value should be accepted.… Read the rest
Business Finance Concepts
Why Firms not Consider Profit Maximization as their Financial Objective?
Profitability objective may be stated in terms of profits, return on investment, or profit to-sales ratios. According to profit maximization objective, all actions such as increase income and cut down costs should be undertaken and those that are likely to have adverse impact on profitability of the enterprise should be avoided. Advocates of the profit maximization objective are of the view that this objective is simple and has the in-built advantage of judging economic performance of the enterprise. Further, it will direct the resources in those channels that promise maximum return. This, in turn, would help in optimal utilization of society’s economic resources.… Read the rest
Methods of Raising Finance for Business
The methods of financing should be adjusted to the stage or phase of the trade cycle. The total capital shall be raised by different means, or what is sometimes called “geared”, according to the phase of the cycle.
Different types of securities may be issued in certain proportions, an what ratio will each type bear to the total capital will depend upon the particular phase. For example, in the beginning of an optimistic expansion, debentures may be offered to good advantage. At a later time, when speculative enthusiasm is strong, shares will yield better returns. During depression short time borrowing can be resorted to, if the credit of the company is good.… Read the rest
Bonds and Debentures
Definition of Debentures
A company may not with to possess itself of the use of more share capital or ownership securities, and yet desire more available money. It may invite persons to kind their money as a loan, instead of contributing it as a part of the capital.
Money so lent must also be recorded and acknowledged. The document which the lender receives is called a debenture. The holder of this debenture is a creditor of the company, while the shareholder is one of the proprietors of the capital of the company and so responsible for its liabilities. The debenture holder is one of the liabilities for which the shareholder is responsible.… Read the rest
Capital Budgeting- Definition, Nature and Procedure
Meaning of Capital Budgeting
Capital expenditure budget or capital budgeting is a process of making decisions regarding investments in fixed assets which are not meant for sale such as land, building, machinery or furniture.
The word investment refers to the expenditure which is required to be made in connection with the acquisition and the development of long-term facilities including fixed assets. It refers to process by which management selects those investment proposals which are worthwhile for investing available funds. For this purpose, management is to decide whether or not to acquire, or add to or replace fixed assets in the light of overall objectives of the firm.… Read the rest
Areas and Scope of Financial Management
Financial management, at present is not confined to raising and allocating funds. The study of financial institutions like stock exchange, capital, market, etc. is also emphasized because they influenced under writing of securities & corporate promotion. Company finance was considered to be the major domain of financial management. The scope of this subject has widened to cover capital structure, dividend policies, profit planning and control, depreciation policies. Some of the functional areas covered in financial management are discussed as such-
- Determining financial needs:- A finance manager is supposed to meet financial needs of the enterprise. For this purpose, he should determine financial needs of the concern.