Wealth Maximization & Functions of Finance – Financial Management Assignment of MB0029 MBA assignments of Financial Management for MB0029: Offer your arguments in favor of wealth maximization of one of the goals of financial Management and Functions of Finance. Wealth Maximization: Wealth maximization has been accepted by the finance managers, because it overcomes the limitations of profit maximization.
Wealth maximization means maximizing the net wealth of the company’s share holders. Wealth maximization is possible only when the company pursues policies that would increase the market value of shares of the company.There are some arguments which are superior in wealth maximization: Wealth maximization is based on the concept of cash flows.
Cash flows are a reality and not based on any subjective interpretation. On the other hand there are many subjective elements in the concept of profit maximization. It considers time value of money translates cash flows occurring of different periods into a comparable value of cash flows is considered critically in all decisions as it incorporates the risk associated with the cash flow stream. An example of Wealth maximization:X LTD is listed company engaged in the business of FMCG (fast moving consumer goods). Listed means the company’s share are allowed to be traded the officially on the portals of the stock exchange, the board of directors of X LTD. Take a decision in one of the bond meeting to enter into the business of power generation.
When the company informs the stock exchange of the conclusion of the meeting of the decision taken the stock market reacts unfavorably with result that the next days’ closing of quotation was 30% less than of the previous day.The question now is why the market reacted in this manner. Investors in this FMCG Company might have thought that the risk profile of the new business (power) that the company wants to take up is higher compared to the risk profile of the existing FMCG business as X LTD. when they want a higher return, market value of company’s share declines. Therefore the risk profile of the company gets translated into a time value factor. The time value factor so translated becomes the required rate of return. Required rate of return is the return that the investors want for making investment in that sector.
Any project which generates positive net present value creates wealth to the company. When a company creates wealth from a course of action it has initiated the share holders benefit because such a course of action will increase the market value of the company’s share. Goals of financial Management: Goals means – financial objective of a firm. Experts in financial management have endorsed the view that the goal of financial management of a firm is maximization of economic welfare of its shareholders.
Maximization of economics welfare means – maximization of wealth of its shareholders.Shareholders’ wealth maximization is reflected in the market value of the firms’ shares. A firm’s contribution to the society is maximized when it maximizes its value. There are two versions of the goals of financial management of the firm which are profit maximization and wealth maximization.
Functions of finance: Finance functions are closely related to financial decisions. The functions performed by a finance manager are known of finance functions. In the course of performing these functions finance manager takes the following decisions: Financial decision:To survive and grow, all organizations must be innovative. Innovation demands managerial proactive actions. Projective organizations continuously search for innovative ways of performing the activities of the organization. Innovation is wider in nature. Investment decision: Investment decisions are also know as capital budgeting decisions. Capital budgeting decisions lead to investment in real assets.
Dividend Decisions: Dividend yield is an important of an investor’s attitude towards the security (stock) in his portfolio management decisions.But dividend decision is a major decision made by a fiance manager. Dividend policy influences the dividend yield on shares.
Since company’s range in the capital market have a major impact on its ability to procure funds by issuing securities in the capital markets, dividend policy. Liquidity Decision: Liquidity decisions are concerned with working capital management. It is concerned with the day-to-day financial operation that involves current assets and current liabilities. The important element of liquidity decisions are: Formulation of inventory policyPolicies an receivable management Formulation of cash management strategies Policies on utilization of spontaneous finance effectively Thus, wealth maximizations are primary goal of any firm. What are the causes and remedies for over capitalization and under capitalization? – MB0029 Assignment Financial Management MBA Assignments for SMU MB0029 Question – What are the causes and remedies for over capitalization and under capitalization? Answer – Overcapitalization A company is said to be overcapitalized, when its total capital (both equity and debt) exceeds the true value of its assets.It is wrong to identify overcapitalization with exess of capital because most of the overcapitalized firms suffer from the problems of liquidity. Causes of overcapitalization: 1.
Decline in the earnings of the company. 2. Fall in dividend rates. 3. Market value of company’s share falls, and company loses investors confidence. 4. Company may collapse at any time because of anemic financial conditions – it will affect its employees, society, consumers and its shareholders.
Remedies for overcapitalization Restructuring the firm is to be executed avoid the situation of company becoming sick. It involves . Reduction of debt burden 2. Negotiation with term lending institutions for reduction in interest obligation.
3. Redemption of preference share through a scheme of capital reduction. 4. Reducing the face value and paid-up value of equity shares. 5. Initiating merger with well managed profit making companies interested in talking over ailing company.
Undercapitalization Under-capitalization is just the reverse of over-capitalization. A company is considered to be under-capitalized when its actual capitalization is lower than its proper capitalization as warranted by its earning capacity.Causes of under- capitalization 1. Under estimation of future earnings of the time of promotion of the company. 2. Abnormal increase in earnings from new economic and business environment. 3. Under estimation of total funds requirements.
4. Maintaining very high efficiency through improved means of production of goods or rendering of services. 5. Companies which are set up during recession start making higher earning capacity as soon as the recession is over.
6. Use of low capitalized rate. 7. Companies which follow conservative dividend policy will achieve a process of gradually rising profits. .
Purchase of assets at exceptionally low prices during recession. Remedies of undercapitalization 1. Splitting up at the shares – This will reduce the dividend per share 2. Issue of bonus share: this will reduce both the dividend per share and earning per share. 3. Both over-capitalization and under – capitalization are detrimental to the interests of the society. What are the Reasons for Failure of a Project? – Assignment 2 of MB 00228 The assignment is also from the Production and operations Management MBA book (MB 0028). It is for 2nd semester also.
The chapter has great importance from examination point of view also like material flow chapter which has been already mentioned previously. Question. 2.
what are the reasons for failure of a project? Give suitable examples. Answer: Before knowing the reasons of failure we have to know about project. Project is a set of activities which are networked in order and aimed towards achieving goal of a project. Now, the reasons are project failure: Incidence of Project failure Projects being initiated of random at all levels Project objective not in line with business objectiveProject management not observed Project manager with no prior experience in the related project Non- dedicated team Lack of complete support from clients Factors contributing to project success not emphasized: Project objective in alignment with business objective Working within the framework of project management methodology Effective scoping planning, estimation, execution, controls and reviews, project bottlenecks Communication and managing expectations effectively with clients, team merits and stake holders Prior expectance of PM in a similar projectOverview of information and communication Technologies (ICT) project: Involve information and communication technologies such as the word wide web, e-mail, fiber-optics satellites Enable societies to produce, access, adapt and apply information in greater amount, more rapidly and at reduce casts Offer enormous opportunities for enhancing business and economic viability Common problems encountered during projects No prioritization of project activity from an organizational position One or more of the stages in the project mishandledLess qualified non-dedicated manpower Absence of smooth flow of communication between the involved parties These basic reasons lead a project to failures. In the project failures business management and project management is directly involved.
From the management point of view it is basic things to care above topics to success of a project. Project is the core business of a company. In the MBA assignment its role has been defined from the management prospective.