question_answer 25)

Paragraph 'S' Limited is manufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7%-8% and the demand for steel is growing. It is planning to set up a new steel plant to cash on the increased demand it is facing. It is estimated that it will require about? 5,000 crores to set up and about? 500 crores of working capital to start the new plant.   What is the role and objectives of financial management for this company?

Answer:

Role of Financial Management Financial management is concerned with the proper management of funds. It involves (i) Managerial decisions relating to procurement of long term and short term funds. (ii) Keeping the risk associated with respect to procured funds under control. (iii) Utilization of funds in the most productive and effective manner. (iv) Fixed debt equity ratio in capital. Objective of Financial Management The objective of financial management is maximization of shareholder's wealth. The investment decision, financial decision and dividend decision helps an organization to achieve this objective. In the given situation, S limited envisages growth prospects of steel industry due to the growing demand. To expand the production capacity, the company needs to invest. However investment decision will depend on the availability of funds, the financing decision and the dividend decision. However, the company will take those financial decisions which result in value addition, i.e., the benefits are more than the cost. This leads to an increase in the market value of the shares of the company.