Read the following passage and answer the following questions.

A finance manager in an outlet raised ₹3.5 crore through a mix of debt and equity in a ratio of 4 : 3 to open a new outlet, but the actual amount required was ₹3 crore. The aim of the finance manager is to maximize the shareholder's wealth. Keeping this in mind, he reinvested the excess amount of ₹50 lakh in a fixed deposit carrying 6% interest p.a. while the cost of capital is 10% p.a.

"The aim of the finance manager is to maximize the shareholder wealth". It is reflected as an aim of:

Financial Management

The correct answer is Option (1) → Financial Management.

Wealth-maximisation is the primary aim of financial management.

The primary aim of financial management is to maximise shareholders’ wealth, which is referred to as the wealth-maximisation concept. 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. All financial decisions aim at ensuring that each decision is efficient and adds some value. Such value additions tend to increase the market price of shares. Therefore, those financial decisions are taken which will ultimately prove gainful from the point of view of the shareholders. The shareholders gain if the value of shares in the market increases. Those decisions which result in decline in the share price are poor financial decisions. Thus, we can say, the objective of financial management is to maximise the current price of equity shares of the company or to maximise the wealth of owners of the company, that is, the shareholders.