Net Present Value and Optimum Credit Policy
Master of Business Administration - MBA Semester 2
MB 0045 FINANCIAL MANAGEMENT
Name: Manybhushan Tiwary
Roll : 1205003226
Q1. What are the goals of financial management?
A1. The experts in the field of finance believe that if the market value of the firm’s equity is maximized; the goal of the financial management is attained. There are two versions of the goals of the financial Management: Profit Maximization and Wealth maximization.
Profit maximization: This is a goal wherein, the returns are maximized with the best output and price levels. A firm’s performance is evaluated in terms of profitability. The target of maximization of profit is very traditional and narrow approach. Allocation of resources and investor’s perception of the firm’s performance can be traced to the goal of profit maximization. Some criticism of the profit maximization goal is as stated below:
O The concept lacks clarity. Basic question is – What does profit mean? After tax or before tax profit? Whether it is operating profit or it is the net profit?
O With such un-clarity, Profit is neither defined precisely or correctly. Such differences in the interpretation of the profit concept thus expose the weakness of profit maximization.
O It doesn’t consider the time value of money or NPV of cash inflow.
O It fails to consider the fluctuation of profit.
O Despite this lacuna, Profit does matter for any kind of business. Ensuring continual profit ensures maximization of the shareholder’s wealth.
Wealth Maximization: It is also known as value maximization or NPV maximization. This is possible only when, the firm pursues policies which would add the market value of the shares of the company.
O This concept is based on the concept of cash flows. Cash flows are not based on any interpretation, but, it is a reality. On the other hand, profit maximization is based on accounting profit. It involves certain subjective elements.
O Wealth maximization considers time value of money. It
MB 0045 FINANCIAL MANAGEMENT
Name: Manybhushan Tiwary
Roll : 1205003226
Q1. What are the goals of financial management?
A1. The experts in the field of finance believe that if the market value of the firm’s equity is maximized; the goal of the financial management is attained. There are two versions of the goals of the financial Management: Profit Maximization and Wealth maximization.
Profit maximization: This is a goal wherein, the returns are maximized with the best output and price levels. A firm’s performance is evaluated in terms of profitability. The target of maximization of profit is very traditional and narrow approach. Allocation of resources and investor’s perception of the firm’s performance can be traced to the goal of profit maximization. Some criticism of the profit maximization goal is as stated below:
O The concept lacks clarity. Basic question is – What does profit mean? After tax or before tax profit? Whether it is operating profit or it is the net profit?
O With such un-clarity, Profit is neither defined precisely or correctly. Such differences in the interpretation of the profit concept thus expose the weakness of profit maximization.
O It doesn’t consider the time value of money or NPV of cash inflow.
O It fails to consider the fluctuation of profit.
O Despite this lacuna, Profit does matter for any kind of business. Ensuring continual profit ensures maximization of the shareholder’s wealth.
Wealth Maximization: It is also known as value maximization or NPV maximization. This is possible only when, the firm pursues policies which would add the market value of the shares of the company.
O This concept is based on the concept of cash flows. Cash flows are not based on any interpretation, but, it is a reality. On the other hand, profit maximization is based on accounting profit. It involves certain subjective elements.
O Wealth maximization considers time value of money. It