‘Wealth Maximisation’ is an important objective of financial management. Explain briefly.

Wealth Maximisation is an important decision of financial management. It means to increase the capital invested in the business by the shareholders. Market price of the shares is the index of the capital invested. If the market price of the shares increases, it can be said that capital (wealth) invested by the shareholders has been appreciating. On the contrary, fall in the market price of the shares has an adverse effect on their wealth. Wealth of the shareholders can be computed by the following formula:

Shareholder’s Current Wealth in a Company = Number of Shares × Market Price Per Share

For example, a person buys 100 shares of XYZ Co. at the rate of र 100 per share. It means that his wealth in the company is worth र 10,000 (100 ×100). After some time, market price of the share rises to र 120 per share. It means that his wealth in the company has gone up to र 12,000 (100 × 120). In other words, his wealth has increased by र 2,000. On the contrary, if the market price of the share falls to र 80 per share, then his wealth in the company will be reduced to र8,000 (100 × 80).

It is, therefore, clear that wealth maximisation is possible only when market price of the shares rises. Question arises what steps should be taken by the financial manager to raise the market price of his company’s shares? Answer to this question is that he should take all the three main financial decisions as under:

(i) Optimum Investment Decision: It means he should take such decisions regarding investment as are relatively more profitable.

(ii) Optimum Financing Decision: It means that he should make such a mix of debt capital and share capital as has the minimum cost of capital.

(iii) Optimum Dividend Decision: It means that total profits of the company should be distributed among the shareholders in such a manner that they feel satisfied and at the same time company also has sufficient reserve to meet its future requirements.