Describing the goals of financial management. The description should include how earnings are valued, how shareholders wealth can be maximized, and how management decisions affect stockholder wealth.
I thought they all do the same thing so I don't quite understand what to do.
Financial management refers to the process of planning, organizing, and controlling the financial activities of an organization to achieve its objectives. The primary goals of financial management are to maximize shareholder wealth and enhance the value of the firm.
Valuation of earnings is an essential aspect of financial management. It involves determining the current and future worth of the earnings generated by a company. This is typically done using financial ratios, such as price-to-earnings ratio (P/E ratio) or earnings per share (EPS). By understanding the value of earnings, financial managers can make informed decisions regarding investments, capital allocation, and the overall financial health of the organization.
Maximizing shareholder wealth is another crucial goal of financial management. Shareholders are the owners of the company, and their wealth is directly linked to the performance and profitability of the firm. Financial managers aim to make decisions that positively impact the company's stock price, dividends, and overall financial performance to enhance shareholder wealth. This can be achieved through effective capital budgeting, capital structure decisions, and efficient operational management.
The decisions made by management significantly influence stockholder wealth. Management decisions affect various aspects of the company, including investment projects, financing options, dividend policies, and risk management practices. For instance, management decisions on which investment opportunities to pursue, when to issue new shares or debt, or how much cash to distribute as dividends, can directly impact the value of shares and, consequently, stockholder wealth.
In summary, financial management has distinct goals that include valuing earnings, maximizing shareholder wealth, and recognizing how management decisions impact stockholder wealth. To understand these goals better and their implications, it is recommended to study financial management principles, financial statements, financial ratios, and various financial models. Learning about investment decision-making, capital structure, and dividend policies will provide a comprehensive understanding of how financial management strategies are implemented to achieve these goals.