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

Shreya Textiles Ltd. is choosing between two projects. Project X gives a certain profit, while Project Y gives a higher expected profit but with very uncertain cash flows. The CFO rejects Project Y because the risk is too high relative to its return, even though it would raise accounting profit. Which objective of financial management is the CFO prioritising over simple profit maximisation?

The CFO is applying wealth maximisation. Unlike profit maximisation, it considers the risk of returns and the time value of money, so a project with higher but very uncertain profits may be rejected if it does not increase the value of shareholders' wealth.

  1. AMaximisation of earnings per share in the current year
  2. BWealth maximisation, which considers risk and the time value of moneyCorrect
  3. CMaximisation of sales turnover
  4. DMinimisation of the firm's tax liability

Explanation

Wealth maximisation takes into account the risk attached to returns and the timing of cash flows. Profit maximisation ignores both. The CFO rejects Y because its risk reduces its value to shareholders, so wealth maximisation is the guiding objective, not current-year EPS.

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