The View That Shareholder Wealth Maximization Should Always Be th...

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The View That Shareholder Wealth Maximization Should Always Be the Preferred Objective of a Firm.

By | March 2013
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INTRODUCTION

A financial management system is the methodology and software that an organization uses to oversee and govern its income, expenses, and assets with the objective of maximizing profits and ensuring sustainability. It is concerned with the procurement and use of funds with an aim to use business funds in such a way that the firm’s value and earnings are maximized. It also provides a frame work for selecting a proper course of action and deciding a viable commercial strategy which helps to maximize the owner’s economic welfare. Financial management Concerns the acquisition, financing, and management of assets with some overall goal in mind. Assets that can no longer be economically justified may need to be reduced, eliminated, or replaced. It requires the existence of some objective or goal, because judgment as to whether or not a financial decision is efficient must be made in light of some standard. Although various objectives are possible, we assume that the goal of the firm is to maximize the wealth of the firm’s present owners. Shares of common stock give evidence of ownership in a corporation. Shareholder wealth is represented by the market price per share of the firm’s common stock, which, in turn, is a reflection of the firm’s investment, financing, and asset management decisions. The idea is that the success of a business decision should be judged by the effect that it ultimately has on share price. Frequently, profit maximization is offered as the proper objective of the firm. However, under this goal a manager could continue to show profit increases by merely issuing stock and using the proceeds to invest in Treasury bills. For most firms, this would result in a decrease in each owner’s share of profits – that is, earnings per share would fall. Maximizing earnings per share, therefore, is often advocated as an improved version of profit maximization.

SHAREHOLDER
A shareholder is any person, company, or other...