Consider the following statements about the objective of financial management:
(A) The market price of a company’s shares is linked to the three basic financial decisions.
(B) The market price of an equity share increases if the cost involved in a decision exceeds its benefit.
(C) When finance is procured, the aim is to reduce the cost so that the value addition is even higher.
(D) The objective of financial management is to maximise the current price of the preference shares of the company.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A) and (C) only
(A) The market price of a company’s shares is linked to the three basic financial decisions. — Correct. How funds are invested, how they are raised and how profit is paid out decide the return to shareholders. So the share price is linked to the investment, financing and dividend decisions.
(B) The market price of an equity share increases if the cost involved in a decision exceeds its benefit. — Incorrect. The price rises when the benefit from a decision exceeds its cost. A decision that costs more than it brings adds no value.
(C) When finance is procured, the aim is to reduce the cost so that the value addition is even higher. — Correct. A cheaper source of funds leaves more of the benefit for shareholders. So the aim is to reduce the cost of finance and add more value.
(D) The objective of financial management is to maximise the current price of the preference shares of the company. — Incorrect. The objective is to maximise the current price of equity shares. The company’s funds belong to its equity shareholders, so their wealth is the aim.
NCERT (2026-27 Edition): “Objectives The primary aim of financial management is to maximise shareholders’ wealth, which is referred to as the wealth-maximisation concept. The market price of a company’s shares is linked to the three basic financial decisions which you will study a little later. This is because a company funds belong to the shareholders and the manner in which they are invested and the return earned by them determines their market value and price. It means maximisation of the market value of equity shares. The market price of equity share increases, if the benefit from a decision exceeds the cost involved. …” “Objectives … Therefore, when a decision is taken about investment in a new machine, the aim of financial management is to ensure that benefits from the investment exceed the cost so that some value addition takes place. Similarly, when finance is procured, the aim is to reduce the cost so that the value addition is even higher. …” |