Page 11 - DMGT409Basic Financial Management

Basic Financial Management

Notes (c) Wealth Maximization: Wealth- maximization is also called value- maximization. The
wealth or ‘net present worth’ of a course of action is the difference between gross
present worth and the amount of capital investment required to achieve the benefits.
Gross Present-worth represents the present value of expected cash benefits.
Wealth- maximization is also called value-maximization. The wealth or ‘net present
worth’ of a course of action is the difference between gross present worth and the
amount of capital investment required to achieve the benefits. Gross Present-worth

represents the present value of expected cash benefi ts.

Significance of Wealth- Maximization

The company, although it-cares more for the economic welfare of the shareholders, cannot forget
the others who directly or indirectly work for the over-all development of the company. Thus,
Wealth- Maximization takes care of.
1. Lenders or creditors
2. Workers or Employees
3. Public or Society
4. Management or Employer

Note Wealth-maximization means maximizing the present value of a course of action (i.e.
NPV = GPW of benefits – Investment). Any financial action which results in positive NPV,

creates and adds to the existing wealth of the organization and the course of action which
has a negative NPV, reduces the existing wealth and hence be given up. All positive actions
can be adopted, as they add to the existing wealth and help in wealth maximization.

2. Other goals: Besides the above basic goals, the following are the other goals of financial
management.

(a) Ensuring a fair return to shareholders
(b) Building up reserves for growth and expansion

(c) Ensuring maximum operational efficiency by efficient and effective utilization of
fi nance

(d) Ensuring financial discipline in the management
1.3 Scope of Financial Management

Study of the changes that have taken place over the years is known as “scope of fi nancial
management.” In order to have an easy understanding and better exposition to the changes, it is
necessary to divide the scope into two approaches.
1. Traditional Approach: The traditional approach, which was popular in the early stage,
limited the role of financial management to raising and administering of funds needed by
the corporate enterprises to meet their financial needs. It deals with the following aspects.
(a) Arrangement of funds from fi nancial institutions.
(b) Arrangement of funds through financial instruments like share, bonds etc.

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