Page 22 - Corporate Finance PDF Final new link

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22 Corporate Finance BRILLIANT’S

composition of assets. The financial decisions h¡Ÿ& \$m`Z|{e`b {S>grOZ {ZaÝVa coZo n‹S>Vo h¢Ÿ& `h VÏ`
are continuous. It is agreed that the firm must gd©{d{XV h¡ {H$ àË`oH$ \$_© H$m EH$ cú` hmoVm h¡Ÿ& `h ^r
have a goal. It is also assumed that the financial
_mZm OmVm h¡ {H EH$ \$_© H$m \$m`ZoÝg g§~§Yr CÔoí`
goal of a firm should be maximization of
owner's economic welfare. The economic ì`dgm` Ho$ ñdm_r Ho$ Am{W©H$ cm^ H$mo A{YH$V_ H$aZm
welfare can be maximized by maximizing h¡Ÿ& Am{W©H$ cm^ A{YH$V_ Cg g_` hmoJm O~{H$ eo`a
shareholder's wealth. hmoëS>a H$s d¡ëW A{YH$V_ hmoJrŸ&
There are two widely discussed approa- Bg gå~ÝY _| Xmo EàmoMog àM{cV h¢:
ches:
1. Profit Maximization 1. àm°{\$Q> _¡[ŠO_mBOoeZ
2. Wealth Maximization 2. doëW _¡[ŠO_mBOoeZ
1. Profit Maximization 1. àm°{\$Q> _¡[ŠO_mBOoeZ

Profit maximization simply means àm°{\$Q> _¡[ŠO_mBOoeZ H$m AW© h¡, \$_© H$s Am` H$mo
increasing income of the firm. According to A{YH$V_ H$aZmŸ& Bg EàmoM Ho$ AZwgma {OZ EpŠQ>{dQ>rO
this approach, activities that increase profit go cm^ ~‹T>Vm h¡ CÝh| AnZmZm Mm{h`o d {OZgo cm^ Zht
should be undertaken and which decrease
hmoVm `m cm^ KQ>Vm h¡ CZgo ~MZm Mm{h`oŸ& BgHo$ {c`o
profits are to be avoided. It is expected that Amdí`H$ h¡ {H$ dñVwAm| Am¡a godmAm| H$m CËnmXZ
goods and services should be produced as
Hw$ecVmnyd©H$ {H$`m Om`o Vm{H$ A{YH$V_ cm^ hmo gHo$Ÿ&
efficiently as possible. The results will be higher
profit for firms. If a firm is earning higher profits, `{X H$moB© \$_© gm_mÝ` go A{YH$ cm^ A{O©V H$a ahr h¡
other firms would attract to produce such Vmo AÝ` à{V`moJr \$_] ^r Cgr ì`dgm` _| AmH$a g_mZ
goods and services. Ultimately, the profit àmoS>ŠQ> `m g{d©g àXmZ H$aZo cJ|oJrŸ& à{V`mo{JVm ~‹T>Zo go
opportunity will come to an average level. nwZ: Am¡gV cm^ H$s {ñW{V {Z{_©V hmo Om`oJrŸ&
It is generally held that in case of free ñdV§Ì à{V`mo{JVm H$s pñW{V _| ì`dgm`r Z {g\©$
competition, businessman not only tries to AnZo {ZOr {hV ~pëH$ gm_m{OH$ {hVm| H$s ny{V© H$aZo H$m
achieve his personal interest, but he also ^r à`mg H$aVm h¡Ÿ& {H$gr ^r \$_© H$m CÔoí` àm°{\$Q>
satisfies interest of society. A firm should be _¡ŠµOr_mBOoeZ hmoZm Mm{h`oŸ& A{YH$V_ cm^ Ho$ CÔoí`
guided by the aim of profit maximization.
Those assets and projects should be selected, H$s ny{V© Ho$ {c`o do hr àmoOoŠQ> hmW _| {c`o OmVo h¢ Omo
which are profitable and those which are not cm^Xm`H$ hm| VWm Omo bm^Xm`H$ Z hmo CZgo ~MZm
should be rejected. Mm{hEŸ&
The logic behind profit maximization is àm°{\$Q> _¡[ŠO_mBOoeZ H$s AdYmaUm H$m CÔoí`
very simple. Profit is the test of efficiency. It {~ëHw$c ñnï> h¡Ÿ& cm^ H$m`©Hw$ecVm H$m _mnXÊS> hmoVm
provides a measurement by which economic h¡Ÿ& cm^ go Z {g\©$ {~OZog Ho$ ñd`§ H$s àJ{V hmoVr h¡
performance can be judged. It is also helpful in ~pëH$ `h gm_m{OH$ H$ë`mU _| ^r ghm`H$ hmoVm h¡Ÿ&
social welfare. Financial management is helpful
in best utilisation of economic resources. It is, \$m`ZopÝe`c _¡ZoO_|Q> go Am{W©H$ òmoVm| H$m Cn`moJ
therefore argued that profit maximization is loð> VarHo$ go hmoVm h¡Ÿ& `hr H$maU h¡ {H$ àm°{\$Q>
the basic criteria for the financial management _¡[ŠO_mBOoeZ AÀN>o \$m`ZopÝe`c _¡ZoO_|Q> H$m _mnXÊS>
decisions. g_Pm OmVm h¡Ÿ&