A shareholder may not find investment in the company as an attractive option taking into consideration the time value of money. Thus, profit maximisation does not provide any assurance with regard to the timing and risk associated with the cash flow either. It can be concluded that profit maximisation does not help in improving the value placed on the company by the shareholders. It is needless to say that it is the funds from the shareholder that mainly supports the operations of a company and shortage in such funds could affect the survival of the company in the long run. Therefore, profit maximisation should not be the ultimate goal of a financial manager.
Just like profit maximisation, sales maximisation would not bear an impact on the market value of the company. Sales maximisation does not even assure profit maximisation, leave alone enhancing the company's value. Sometimes, the cost involved in maximising the sales may even cancel out the benefit derived from it.
In today's world, it is extremely important for every company to be socially responsible. Social responsibility includes maximising benefits to the employees and the society at large. In the long run, socially responsible actions taken by a company would also benefit the shareholders indirectly. However, social responsibility cannot be viewed as the main purpose of running a company. The company cannot put its social responsibility ahead of its own survival. Therefore, maximisation of benefit to employees and local community would not be the main goal of a financial manager.
(d) Maximisation of shareholder wealth -
Shareholders are the actual owners of a company. Shareholders investment is crucial for the survival of the company. The shareholders choose to invest in the company that can give highest returns on the investment made. Therefore maximisation of shareholder wealth should be the main goal of a financial manager. The financial manager should ensure that the resources are allocated in such a way that it results in maximisation of shareholders wealth.
(a) Net Present Value (NPV):
Conversion of uncertain cash flow to certain cash flow
Uncertain Cash Flow()
Certain Cash Flow ()
(Uncertain CF x 0.75)
Computation of Net Present Value (NPV):
[NPV = Present Value of Cash Inflow - Present Value of Cash Outflow]
Certain Cash Flow ()
Present Value of C