Q1. Why wealth maximization is superior to profit maximization in today¶s context?Justify you answer?Answer:
Superiority of Wealth Maximization over Profit Maximization:1.
It is based on cash flow, not based on accounting profit.
hrough the process of discounting it takes care of the quality of cash flows. Distantuncertain cash flows into comparable values at base period facilitates better comparison of projects.
here are various ways of dealing with risk associate withcash flows.
hese risk are adequately considered when present values of cash of any project.
In today¶s competitive business scenario corporate play a key role. In company fromof organization, shareholders own the company but the management of the companyrests with the board of directors. Directors are elected by shareholders and henceagents of the shareholders. Company management procures funds for expansion anddiversification from Capital Markets. In the liberalized set up-, the society expectscorporate to tap the capital market effectively for their capital requirements.
hereforeto keep the investors happy through the performance of value of shares in the market,management of the company must meet the wealth maximization criterion.
hen a firm follows wealth maximization goal, it achieve maximization of marketvalue of share.
hen a firm pact wealth maximization goal, it is possible only when procedures quality goods at low cost. On this account society gains became of thesociety welfare.
Maximization of wealth demands on the part of corporate to develop new products or render new services in the most effective and efficient manner.
his helps theconsumers all it will bring to the market the products and services that consumer¶sneed.
nother notable features of the firms committed to the maximization of wealth is thatto achieve this goal they are forced to render efficient service to their customers withcourtesy.
his enhance consumer and hence the benefit to the society.
rom the point of evaluation of performance of listed firms, the most remarkablemeasure is that of performance of the company in the share market. Every corporateaction finds its reflection on the market value of shares of the company.
herefore,shareholders wealth maximization could be considered a superior goal compared to profit maximization.
ince listing ensures liquidity to the shares help by the investors shareholders can reapthe benefits arising from the performance of company only when they sell their shares.
herefore, it is clear that maximization of the net wealth of shareholders.
herefore we can conclude that maximization of wealth is the appropriate of goal of financialmanagement in today¶s context.
Master of Business Administration- Semester 2
MB 004/MB5F 201
(Book ID: B1628)
ASSIGNMENT- Set 1
Marks 60Note: Each Question carries 10 marks. Answer all the questions.
Q1. What are the goals of financial management?(10 Marks) (350-400 words)Q2. Calculate the PV of an annuity of Rs. 500 received annually for four years whendiscounting factor is 10%.(10 Marks) (350-400 words)
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Q3. Suraj Metals are expected to declare a dividend of Rs. 5 per share and the growth ratein dividends is expected to grow @ 10% p.a. The price of one share is currently at Rs. 110in the market. What is the cost of equity capital to the company?(10 Marks) (350-400 words)Q4. What are the assumptions of MM approach?(10 Marks) (350-400 words)Q5. An investment will have an initial outlay of Rs 100,000. It is expected to generate cashinflows. Table 1.2 highlights the cash inflow for four years. (Spring 2013)
1 400002 500003 15000