Finance - Theory

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Finance - Theory

Sealey, “Financial Planning with Multiple Objectives”, Financial Management, Vol. 7(4), (1978), Pp. 17-23

In this article, the author has highlighted the importance of financial planning in the decision making and firm maximizing the wealth instead of achievement of multiple objectives. The aim of this study is to talk about introducing the subjective preferences of decision makers in to multi objective model of programming and comparison that is based on the characteristics of goal programming and multi objective linear programming that deals with the multi objective problems.Multi-objective Problems and Programming Techniques

In this section, the author is talking about the utility maximization problem with the utility function being the managerial in nature. Furthermore, stating about the firm practice, that is a single objective of the firm which is related to the wealth maximization rather than multiple objectives. The objective of the firm is to increase profits, price of the stock, sales, and growth of the company, risk, liquidity and market share. The utility function was developed showing the variable objectives faced by decision-maker.

In order to achieve these objectives and maximizing the utility, embarrassed by a set of environmental conditions and between that the decision maker operates. These environmental conditions comprise of accounting constraints which has been, described as those forced by major income statement and balance sheet, market limitation, budget limitation which results from capital rationing and lastly the constraints from regulation which limits the firm activities. The model that was developed and presented by the financial planner shows two possible activities that arrived to the maximization of utility solution. The two solutions consist of firstly in explicit functional form that directly maximized in terms of decision variables subject that are significant constraints. However, there are possibilities of the utility function o be unstable. Second is indirect maximization of utility through exploring a set of efficient solutions. The financial planner stress that knowing the efficient set of solution permits decision maker to evade problems i.e. lacking particular information regarding the utility function. Financial planner tradeoffs from the efficient set of given solution, the decision maker can chose any optimal solution presented by him keeping in mind the spontaneous understanding of the utility function.Goal Programming

Goal programming is a program that has been developed by the financial planner. This program permits the explicit introduction of multiple objectives into a programming mode. Here, the decision maker initially chose the desire values for each objective that are involved in the problem. After that, the decisions maker decides the importance of the variation above or below these desired goals. Finally, he allocates certain weights to these variations which show priorities of the decision maker. The ultimate objective of this model is to gradually reduce the weighted sum of utter value of the variation from previously stated goals and values.

This model does allow the explicit, multiple objectives consideration also the tradeoffs among these objectives. Here, solution is based on the relative weights and goals values which selected by the decision maker. According to many writers, this model has been very successful in advising the ...
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