Page 24 - Corporate Finance PDF Final new link

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24 Corporate Finance BRILLIANT’S

(i) The future is uncertain. It is not possible (i) ^{dî` A{ZpíMV h¡ AV: Omo kmV Zht h¡ Cgo
to maximize what can not be known. A{YH$V_ H$aZo H$s YmaUm ì`mdhm[aH$ Zht h¡Ÿ&
(ii) Firm's goal can not be to maximize profit (ii) \$_© H$m CÔoí` bm^ H$mo A{YH$V_ H$aZm Zht hmo
but to maintain a certain level of sales. gH$Vm ~pëH$ {dH«$` Ho$ EH$ {ZYm©[aV ñVa H$mo ~Zm`o
aIZm hmo gH$Vm h¡Ÿ&
(iii)The goal of profit maximization fails to (iii)àm°{\$Q> _¡[ŠO_mBOoeZ AdYmaUm _| {~OZog go Ow‹S>o
consider the interest of government, AÝ` númm| O¡go J«mhH$, H$_©Mmar, g_mO d gaH$ma
workers and other persons in the Am{X na Ü`mZ Zht {X`m J`m h¡Ÿ&
enterprises.

There are two kinds of profit: bad profits and good profits. Bad profits come at the cost of
growth, reduce value to the customer and drain future shareholder value. Good profits aid
growth, add customer value and bequeath longevity.
àm°{\$Q> Xmo àH$ma Ho$ hmoVo h¢… ~¡S> àm°{\$Q> d JwS> àm°{\$Q>Ÿ& ~¡S> àm°{\$Q> h_mar J«moW na ~wam à^md S>mbVo h¢,
H$ñQ>_a d¡ë`y KQ>mVm h¡ Am¡a eo`ahmoëS>g© H$s â`yMa d¡ë`y H$mo ^r H$_ H$aVm h¡Ÿ& Xygar Amoa JwS> àm°{\$Q> h_mar
J«moW H$mo ~‹T>mVm h¡, H$ñQ>_a d¡ë`y ~‹T>mVm h¡ d XrK©H$mbrZ bm^ àXmZ H$aVm h¡Ÿ&

Thus, the proper goal of financial manage- AV:, `h ñnï> h¡ {H$ \$m`ZopÝe`c _¡ZoO_|Q> H$m
ment is wealth maximization. Prof. Solomon _w»` CÔoí` d¡ëW _¡[ŠO_mBOoeZ h¡Ÿ& àmo. gmocmo_Z Zo
has made a good case for the thesis that wealth
AnZo [agM© _| H$hm h¡ {H$ d¡ëW _¡[ŠO_mBOoeZ H$s ghm`Vm
maximization has also maximized the achieve- go AnZo CÔoí`m| H$mo ^r àmßV {H$`m Om gH$Vm h¡Ÿ& CÝhm|Zo
ment of these other objectives. He concludes
that maximization of wealth provides a useful `h ^r {ZîH$f© {ZH$mcm {H$ d¡ëW _¡[ŠO_mBOoeZ H$s
AdYmaUm Eogo AmYma àXmZ H$aVr h¡ {OZH$s ghm`Vm go
and meaningful objective as basic guideline by
which financial decisions should be evaluated. \$m`ZopÝe`c {S>{gOÝg H$m _yë`m§H$Z {H$`m Om gH$Vm h¡Ÿ&

Why the Wealth Maximization objec- d¡ëW _¡[ŠO_mBOoeZ H$s AdYmaUm àm°{\$Q>
tive is superior to Profit Maximiza- _¡[ŠO_mBOoeZ go ~ohVa Š`m| h¡?
tion?

The wealth maximization objective of a d¡ëW _¡[ŠO_mBOoeZ H$s AdYmaUm àm°{\$Q>
firm is superior to its profit maximization _¡[ŠO_mBOoeZ H$s VwcZm _| loð> hmoZo Ho$ à_wI H$maU
objective due to following reasons:
{ZåZ{c{IV h¢:
(i) The wealth maximization objective of a (i) d¡ëW _¡[ŠO_mBOoeZ H$s AdYmaUm {H$gr \$_© Ho$
firm considers all future cash flows, g^r Am{W©H$ nhcwAm| na {dMma H$aVr h¡ O¡go H¡$e
dividends, earning per share etc., while âcmo, {S>{dS>oÝS>, à{V eo`a A{ZªJ Am{XŸ& O~{H$
profit maximization objective does not
àm°{\$Q> _¡[ŠO_mBOoeZ CÔoí` eo`ahmoëS>a H$s doëW
consider the effect of EPS, dividend or any
other returns to shareholders on the na EPS, {S>{dS>oÝS> `m {H$gr AÝ` [aQ>Z© Ho$ à^md
wealth of the shareholders. H$mo Ü`mZ _| Zht aIVm h¡Ÿ&
(ii) A firm that wishes to maximize the (ii) `{X H$moB© \$_© AnZo eo`ahmoëS>g© H$s d¡ëW H$mo
shareholder's wealth may pay regular _¡[ŠO_mBO H$aZm MmhVr h¡ Vmo dh {S>{dS>oÝS> H$m