Question

Statement I: The objective of financial management is to maximize the wealth of directors of the company.

Statement II: The financing decision of the company is unaffected by the extent of retained earnings.

In the light of the given statements, choose the correct alternative from the following:

Options

• Both the statements are true.

• Both the statements are false.

• Statement I is true; Statement II is false.

• Statement II is true; Statement I is false.

Answer 1

Both the statements are false.

Explanation:

• Statement I is false because the main objective of financial management is to maximize the wealth of shareholders, not directors.
• Statement II is also false because the financing decision is affected by the extent of retained earnings − companies with higher retained earnings may rely less on external borrowing or equity financing. Hence, both statements are incorrect.