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Profit Maximization
Profit = Earnings after Taxes (EAT) - measure of a company's net profitability.
Calculated by Revenues of the Business minus All Expenses And Income Taxes
Traditional approach
Primary objective of financial management
All the decisions relating to business are focused and evaluated on maximizing the profits
to optimum levels.
Also called as “cashing per share maximization”
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Drawbacks of Profit Maximization
1. It is vague - profit is not defined precisely or correctly
2. It ignores the time value of money – Ignores net present value of the cash inflow
3. It ignores risk - does not consider risk of the business
4. It ignores quality - it ignores the intangible benefits such as quality, image
Wealth Maximization
Modern approaches & a universally accepted concept
Wealth means Shareholder Wealth
Also known as ‘Value Maximization’ or ‘Net Present worth Maximization’
It refers maximizing Earnings per share (EPS)
EPS = Earnings after taxes (EAT) divided by the number of common shares outstanding
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Importance of Financial Management
1. Financial Planning
2. Acquisition of Funds
3. Proper Use of Funds
4. Financial Decision
5. Improve Profitability
6. Increase the Value of the Firm
7. Promoting Savings