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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 fiancé 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 policy


Policies 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

1. 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.
8. 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 objective
Project 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 project

Overview 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 mishandled
Less 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.