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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

Kaveri Textiles Ltd. has 5,00,000 equity shares. Its net profit after tax is Rs 60,00,000, and it retains 40% of earnings. Its management is evaluating two goals: maximising EPS and maximising wealth. Which statement about profit maximisation as a goal is CORRECT in this context?

Profit maximisation ignores the timing of benefits and the risk of earnings. EPS here is Rs 12 (Rs 60 lakh divided by 5 lakh shares); retention does not alter EPS. Wealth maximisation corrects the flaws by considering time value and risk.

  1. AIt ignores the timing of benefits and the risk attached to earnings, even though EPS here is Rs 12Correct
  2. BIt considers time value of money, so it is superior to wealth maximisation
  3. CIt values risk explicitly through a discount rate
  4. DIt is preferred because EPS here is Rs 7.20 after retention

Explanation

EPS = 60,00,000 / 5,00,000 = Rs 12; retention does not change EPS (Rs 7.20 is the retained amount per share, wrongly used as EPS in the last option). Profit maximisation ignores time value of money and risk, which wealth maximisation (NPV based) incorporates.

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