Explain objectives of Corporate Financial Management

Corporate financial management is concerned with procurement of funds and its effective utilization by corporates. The main aim of the corporates is to use funds in such a way that the corporate's or firm's value and earnings are maximized. The main objectives of corporates is to maximise the owner's welfare. This objective can be achieved by following two ways :

1. Profit Maximization : Profit earning is the main aim of business activity. Corporates want to earn profit to cover its costs and for providing funds for growth. Profit is the measure of efficiency of any business unit. Accumulated profits can save the business from fall in prices, depression, adverse government policies and many more.

Following are the arguments in favour of profit maximization :

A. Earning profit is the main reason for the existence of a firm so profit maximization is the obvious objective.

B. Profitability is the barometer for measuring efficiency and economic prosperity of a business.

C. Internal amd external environment of the business is not always remain same or favorable, so accumulated profits are helpful during hard days like recession, depression or in severe competition.

D. Ploughing back of profits are the main source of finance in case of expansion and diversification. So profit maximization is a main thing to be focused on.

E. Profitability is necessary for discharging social responsibility and profit maximization includes socio economic welfare also.

Arguments against profit maximization :

A. The main criticism of this fact is that it leads to the exploitation of workers and consumers. Hence, it is immoral and leads to corrupt practices. Workers are tested as machines and this concept leads to degradation of human values.

B. This concept holds good in case of perfect competition but today is the era of imperfect competition where for earning profits, corporates play with the lives of consumers by providing them low quality products and services at higher costs.

C. This concept doesn't provide good answer because it ignores time value of money.

D. The effect of dividend policy is not consider and objective of increase in the valuebkf shares is also considered in this concept.

2. Wealth Maximization : This is the appropriate and main objective of corporate financial management and overcome all the drawbacks of profit maximization. Financial theory asserts that maximization of wealth is the single substitute for a stockholder's utility.

Stockholder's current wealth in a firm = (Number of Shares Owned) X (Current Stock Price Per Share)

Maximum utility refers to maximum stockholder's wealth which again refers to maximum current stock price per share.

Arguments in favour of wealth maximization :

A. It serves the interest of shareholders as well as employees, consumers, creditors, society etc.

B. It is consistent with the owners economic welfare.

C. It implies long term survival and growth of the firm.

D. It also considers the time value of money.

E. It also considers the dividend and market price of the shares.

Arguments against wealth maximization :

A. This idea is prescriptive in nature not descriptive. It doesn't tell what a firm should do for achieving this objective.

B. This concept is also not socially desirable.

C. There is a controversy between firm's wealth and stockholder's wealth. Which is to be maximized?

D. Due to separation in ownership amd management, it is very difficult to achieve this objective because of agency problem.

So these are the main two objectives of corporate financial management and whole subject of financial management revolves aroud these two objectives mainly on the objective of wealth maximization.