Financial management aims at choosing the best investment and financing alternatives. Its objective is to:
- Increase the shareholders’ wealth
- Decrease the shareholders’ wealth
- Increase the shareholders’ capital
- Decrease the shareholders’ capital
The Correct Option is A
Solution and Explanation
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.
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