Shareholder wealth is maximised by dividend payments and a capital gain through higher share price.
Meet financial targets (e.g. satisfactory ROCE)
Meet productivity targets
Establish brands and quality standards
Establish effective communication with customers, suppliers, employees.
Why is Maximising Shareholder Wealth the Main Objective?
1. Wealth Maximisation Considers Cash Flows
Shareholders of a company can realize their wealth by selling their shares in the open market. They also get dividends which are paid to them in the form of cash. Thus the company has to ensure that cash is available and having shareholder wealth maximisation as the goal of the firm, will direct the financial manager to focus on cash flows, rather than on profit figure.
2.Wealth Maximisation Considers Timing of Returns
Maximisation of shareholder wealth also means that when evaluating cash flows of investments, the financial manager will have to take into consideration the time value of money. A financial manager using wealth maximisation as the goal of the firm will consider the timing of cash flows by discounting future cash flows of projects and compare them to the initial outlay of these projects, to determine whether they help to maximize wealth.
3. Wealth Maximisation Considers Risk of Returns It takes into consideration the risk differences of investments by applying higher discount rates to the cash flows of riskier projects and lower discount rates to the cash flows of less risky projects.
4. Wealth Maximisation Overcomes Manipulation of Figures
It focuses on cash flows which cannot be manipulated
Maximizing EPS (earnings after taxes divided by shares outstanding) may not be a good measurement due to the following reasons:
1. EPS does not specify timing or duration of expected returns.
2. EPS ignores changes in the risk level of the firm.
3. EPS calls for a zero payout