Read the following statements and mark the correct answer.

Assertion: The primary objective of financial management is to maximize shareholders wealth.
Reasoning: All decisions relating to capital structure should emphasize on increasing the shareholders wealth.

Both Assertion (A) and reasoning (R) are correct and but R is not the correct explanation of A.

The correct answer is option 2- Both Assertion (A) and reasoning (R) are correct and but R is not the correct explanation of A.

Assertion (A): The primary objective of financial management is to maximize shareholders' wealth. THIS IS TRUE. The primary objective of financial management is indeed to maximize shareholders' wealth, which involves enhancing the value of the company’s stock and increasing the returns to shareholders.

Reasoning (R): All decisions relating to capital structure should emphasize increasing shareholders' wealth. THIS IS TRUE. Decisions related to capital structure (i.e., the mix of debt and equity financing) should aim to increase shareholders' wealth. An optimal capital structure minimizes the cost of capital and maximizes the firm's value, thereby enhancing shareholder returns.


Reasoning (R) supports the broader objective stated in Assertion (A) but does not fully encompass all aspects of financial management aimed at maximizing shareholders' wealth. Financial management encompasses more than just capital structure decisions; it also includes investment decisions, dividend policies, and overall strategic financial planning that contribute to shareholder value. So, Both Assertion (A) and reasoning (R) are correct and but R is not the correct explanation of A.