The objective of financial management in business is to make decisions that enhance the company's financial health, ultimately leading to an increase in the shareholders' wealth.
This is accomplished by:
Evaluating investment opportunities to ensure that they have positive future returns, aligning with the company's long-term objectives.
Choosing financing alternatives that minimize costs and risks while supporting business growth.
Ensuring efficient allocation of resources to maximize returns on investments.
Maintaining adequate liquidity for operations, enabling the company to meet obligations and capitalize on growth opportunities.
The best investment and financing decisions lead to an increase in market value relative to the shareholders' investment, which aligns with the correct answer: Increase the shareholders’ wealth.
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Approach Solution -2
To determine the objective of financial management in choosing the best investment and financing alternatives, let's analyze each option in detail:
Options Analysis
Increase the shareholders’ wealth (1)
Definition: Increasing shareholders' wealth means enhancing the overall value of the company for its owners. This is typically measured by the market value of the company's shares and the dividends paid to shareholders.
Why Correct: Financial management aims to maximize the value of the company by making optimal investment and financing decisions. This directly translates to increasing shareholders' wealth.
Decrease the shareholders’ wealth (2)
Definition: Decreasing shareholders' wealth means reducing the overall value of the company for its owners.
Why Not: This is contrary to the goals of financial management. Financial managers aim to enhance, not diminish, the value of the company for its shareholders.
Increase the shareholders’ capital (3)
Definition: Increasing shareholders' capital refers to raising more funds from shareholders, typically through additional share issues.
Why Not: While raising capital can be a part of financial management, the primary objective is not merely to increase the amount of capital but to enhance the overall wealth of shareholders.
Decrease the shareholders’ capital (4)
Definition: Decreasing shareholders' capital refers to reducing the amount of funds invested by shareholders.
Why Not: This is not a goal of financial management. Financial managers aim to use capital efficiently to maximize returns, not to reduce the amount of capital.
Conclusion
The correct answer is: (1) Increase the shareholders’ wealth
Financial management aims to maximize the value of the company for its owners by making optimal investment and financing decisions, thereby increasing shareholders' wealth.
