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(^10) Financial Management
Therefore, the long-term survival of the company should not be sacrificed for the short-
term benefits.
Wealth Maximisation
Shareholders' wealth can be defined as the total market value of all the equity shares of
the company. So when we talk about maximising wealth we talk about maximising the
value of each share. How the decisions taken by the organisation affects the value of
the organisation is reflected in the figure 1.1.
Figure 1.1: How Financial Decisions affect the Value of the Organisation
The shareholders' wealth maximisation goal gives us the best results because effects
of all the decisions taken by the company and its managers are reflected in it. In order
to employee use this goal, we do not have to consider every price change of our shares
in the market as an interpretation of the worth of the decisions that the company has
taken. What the company needs to focus on is the affect that its decision should have
on the share price if everything else was held constant. This conflict of the decisions by
the managers and the decisions required by the owners is known as the agency problem.
How are companies solving this problem will be discussed later.
Scope of Financial Management
The approach to the scope and functions of financial management is divided, for
purposes of exposition, into two broad categories: (a) The Traditional Approach, and
(b) The Modern Approach.