Read the following passage and answer the question.

Rajan is working to coordinate the operations of different departments, such as production and sales, using principles of financial management. He often brings together people from both departments, encouraging them to work within their allocated budgets. Through careful analysis, he links current decisions with their future outcomes, particularly in key areas like investment and financing. By connecting these two decisions, he is able to make informed choices. At the end of the year, Rajan evaluates the performance of various departments, assessing revenue generated and expenses incurred. While he understands that no business is entirely risk-free, he focuses on minimizing potential risks, thereby setting the foundation for a more secure future. His ability to stay less involved in day-to-day operations is also a positive aspect of his management style.

What is the primary aim of financial management?

Wealth-maximisation

The correct answer is option 1- Wealth-maximisation.

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.