In all financial decisions, major or minor, the ultimate objective that guides the decision-maker is that some ______ should take place.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → value addition
Option (1) reduction in risk — Incorrect. Financial management does aim at keeping risk under control. But lower risk is only one aim. A decision that cuts risk but adds no value to the shares does not help the owners.
Option (2) increase in earnings per share — Incorrect. A rise in EPS is not enough. If debt is used beyond a point, the cost of equity may go up, and the share price may fall even when EPS rises.
Option (3) increase in the size of assets — Incorrect. A capital budgeting decision may enlarge the fixed assets block. But a bigger asset base helps only if the benefits exceed the cost.
Option (4) value addition — Correct. Every financial decision, big or small, should add some value. Value is added when the benefit from a decision exceeds its cost. Such value additions raise the market price of the equity shares, and so the shareholders’ wealth.
NCERT (2026-27 Edition): “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. In fact, in all financial decisions, major or minor, the ultimate objective that guides the decision-maker is that some value addition should take place. All those avenues of investment, modes of financing, ways of handling various components of working capital must be identified which will ultimately lead to an increase in the price of equity share. It can happen through efficient decision-making. Decision-making is efficient if, out of the various available alternatives, the best is selected.” |